SWITZERLAND Law and Practice Contributed by: Lukas Morscher and Lukas Staub, Lenz & Staehelin
10.8 Cryptocurrency Derivatives As the Swiss financial market law is generally technol - ogy-neutral, cryptocurrency derivatives are regulated as derivatives under the applicable legislation, in par - ticular the FMIA and FinSA. 10.9 Decentralised Finance (DeFi) No specific rules on decentralised finance (DeFi) are in place. FINMA, according to its annual report, applies the existing financial market legislation, including any licensing requirements, in a technology-neutral way, including to DeFi projects. As a rule of thumb, truly decentralised projects would typically not trigger licensing requirements in Switzer - land, whereas for projects where an individual or legal entity in Switzerland either provides financial services in relation to any such DeFi project or actually con - trols the underlying assets – or even the DeFi project itself (eg, by way of governance tokens) – licensing requirements under Swiss financial market laws may be triggered. On this basis, Switzerland has recently become quite a popular hub for DeFi projects. 10.10 Regulation of Funds Funds may invest in crypto-assets in accordance with the applicable legislation, in particular the Col - lective Investment Scheme Act (CISA). Most types of funds under CISA have to be approved by FINMA, and FINMA has so far only approved a limited number of funds that invest in crypto-assets. One reason for this may be that funds must also have most of their assets in custody with a licensed bank, and only a handful of Swiss banks are licensed under CISA to provide cus - tody services to funds (which may not be the banks who have a crypto custody offering). Since 1 March 2024, it has been possible to set up so- called limited qualified investor funds (L-QIFs). Unlike all other Swiss fund types, L-QIFs may be set up and managed by duly licensed institutions without approv - al by FINMA of the specific fund. It is expected that the L-QIF may be a suitable vehicle for investments in crypto-assets. Note that the L-QIF can only be distrib - uted to qualified investors as defined in CISA.
10.11 Virtual Currencies Transactions in cryptocurrencies may be carried out on an anonymous basis, and related money launder- ing risks are accentuated by the speed and mobility of the transactions made possible by the underlying technology. KYC is the cornerstone of AML and CFT due diligence requirements, and is generally imposed on financial institutions whose AML/CFT legislation is aligned with international standards (see 2. Fintech Business Models and Regulation in General ). KYC requires that financial institutions duly identify and verify their contracting parties (ie, customers) and the beneficial owners (namely when their contracting par - ties are not natural persons) of such assets, as well as their origin. KYC, along with transaction monitoring, enables the tracing of assets and their source. This helps identify indications of money laundering and terrorist financing through the creation of a paper trail. With respect to DLT/blockchain applications, one of the challenges is that KYC and other AML/CFT requirements are designed for a centralised intermediated financial system in which regulatory requirements and sanc - tions can be imposed by each jurisdiction at the level of financial intermediaries operating on its territory (ie, acting as gatekeepers). In contrast, virtual currency payment products and services rely on a set of decentralised cross-border virtual protocols and infrastructure elements, neither of which has a sufficient degree of control over, or access to, the underlying value (asset) and/or infor - mation, meaning that identifying a touch-point for implementing and enforcing compliance with AML/ CFT requirements is challenging. 10.12 NFTs The Swiss approach to the regulation of crypto-assets is technology-neutral and prioritises substance over form. This means that if crypto-assets, such as non- fungible tokens (NFTs), perform a function similar to that of a traditional financial or payment instrument, the regulations governing such instruments would generally apply to the crypto-asset as well. There - fore, whether an NFT and/or an NFT platform triggers regulatory obligations for the parties involved depends on the underlying rights represented by such NFT (if
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