SWITZERLAND Law and Practice Contributed by: Lukas Morscher and Lukas Staub, Lenz & Staehelin
tech Business Models and Regulation in Gen- eral ). KYC requires that financial institutions duly identify and verify their contracting parties (ie, customers) and the beneficial owners (namely when their contracting parties are not natural persons) of such assets, as well as their origin. KYC, along with transaction monitoring, ena - bles 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 sanctions can be imposed by each jurisdiction at the level of financial intermediaries operating on its terri - tory (ie, acting as gatekeepers). In contrast, virtual currency payment products and services rely on a set of decentralised cross- border virtual protocols and infrastructure ele - ments, neither of which has a sufficient degree of control over, or access to, the underlying value (asset) and/or information, meaning that identify - ing a touch-point for implementing and enforc - ing compliance with AML/CFT requirements is challenging. 10.12Non-Fungible Tokens (NFTs) The Swiss approach to the regulation of cryp - to-assets is technology-neutral and prioritises substance over form. This means that if cryp - to-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. Therefore, whether an NFT and/or an NFT platform triggers regulatory obligations for the parties involved depends on the underlying rights represented
under Swiss financial market laws may be trig - gered. On this basis, Switzerland has recently become quite a popular hub for DeFi projects. 10.10Regulation of Funds Funds may invest in crypto-assets in accord - ance with the applicable legislation, in particular the Collective Investment Scheme Act (CISA). Most types of funds under the 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 cus - tody with a licensed bank, and only a handful of Swiss banks are licensed under the CISA to provide custody 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 approval by FIN - MA 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 distributed to qualified investors as defined in the CISA. 10.11Virtual Currencies Transactions in cryptocurrencies may be car - ried out on an anonymous basis, and related money laundering 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 finan - cial institutions whose AML/CFT legislation is aligned with international standards (see 2. Fin-
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