How to use the opportunities that the Swiss regulatory system provides
for crypto projects wisely to speed up the launch of your product.
As the cryptocurrency world matures with more and more jurisdictions
legalizing it and ensuring crypto becomes an industry standard,
cryptocurrency receives a quality mark that proves that it can earn
users’ trust. Over the next four years, the European Union will introduce new rules that will allow the introduction of blockchain technologies and crypto assets into the traditional financial sector.
For
now, however, the need to obtain regulatory approval for financial
activities remains the main obstacle to entering the market, which is
also associated with a large waste of time and money for startups —
although this is not always the case. Additionally, each business model
requires a specific type of license.
Crypto regulators and types of authorization
The
Swiss Financial Market Supervisory Authority, or FINMA, regulates
banks, crypto and fintech projects. There are five types of
authorization for financial activities in the country — licensing,
recognition, authorization, approval and registration. Commonly, though,
only two of these are being used by fintechs — recognition and
authorization.
Types of authorization include: permitted
activities; client onboarding options; the jurisdictions in which you
can attract users; documents accepted for user identification; ways of
storing customer information; most of the Anti-Money Laundering
procedures; transaction limits; capital requirements; regularity and
methodology of audits, among others.
When you choose and apply for
the right type of authorization for your business, keep in mind that
this will determine your business opportunities and degree of
responsibility for many years ahead. At the beginning of the journey, it
all might seem so overwhelming and hard to understand that you will
feel like leaving everything up to your lawyers.
In practice,
however, delving into this and starting to closely interact with
specialists will help you create the most effective legal model and
forge the best strategy for its development without requiring huge
initial legal cost investments while speeding up the launch of the
product on the market.
Step one: Sandbox
You can start a crypto service in the so-called FINMA sandbox.
Depending on the project’s infrastructure, the startup can entirely
develop a product, accept customer money, sell financial services, issue
bank cards, and can carry out many other activities even before
obtaining authorization.
Fintechs that meet the following requirements qualify to get into the sandbox:
- The total amount of assets received from clients does not exceed 1 million Swiss francs, or $1.1 million.
- The
received funds are not invested, and interest is not paid (in this
case, you can use your own company assets, earn on them and, if your
model provides this, pay interest to clients). - Depositors must
be informed in advance that FINMA does not supervise fintechs, and the
safety of funds deposited is not guaranteed by the insurance (this rule
applies to all types of authorization, except for banking activities,
where supervision by FINMA and deposit insurance is mandatory).
If
a startup meets these requirements, the company can temporarily do
without authorization from the regulator. It is imperative to prepare a
legal memorandum about this, which professional lawyers will help with.
However,
when the company outgrows the sandbox restrictions, the issue of
obtaining authorization from FINMA will become the cornerstone for
further development of the fintech and is one of the decisive factors
for accelerating the commercial launch of the product.
Step two: Self-regulatory organizations
Most
startups do not have the millions of Swiss francs required to obtain a
full banking license from FINMA, including meeting the minimum capital
requirement. In this case, you can join
one of the 11 self-regulatory organizations, or SROs, operating in
Switzerland and receive the status of a financial intermediary.
A
financial intermediary requires regulatory approval for each individual
type of activity instead of all of them at once, as would be the case
with a bank. Only the services as part of the declared product structure
that have passed the authorization can be performed. If the product
structure changes, you need to get approval from FINMA or the relevant
SRO again.
SRO members can conduct more than 10 types of activities.
These include asset management, foreign exchange transactions, money
transfers, along with insurance and new payment methods, including
cryptocurrency operations and others. Companies can provide services to
clients located in Switzerland and abroad, and to both enterprises and
individuals.
To join an SRO costs several thousands of Swiss
francs, which includes a number of annual payments, audit fees, etc. For
example, in our case, with 60,000 users, the total cost of an SRO is
about 100,000 Swiss francs, or approximately $110,000, per year. This is
still much less than a banking license would cost.
If you decide
to join an SRO, be prepared to pay large legal support costs, which can
range from 150,000 to 400,000 Swiss francs, or $165,000 to $435,000.
This will pay your lawyers to correctly describe the model of your
product and compile dozens of mandatory applications and forms, proving
to the SRO that this form of regulation is suitable for your crypto
service.
It takes three months from the date of application to
join an SRO. If you need to speed up the process, you can use the
fast-track processing option that takes just two weeks for 1,500 Swiss
francs, or $1,600.
Using “exceptions”
Another aid in
reducing the regulatory burden may be the “exceptions” that may apply
depending on the model of the fintech product.
Exception # 1:
A company is not considered to be banking if it meets the requirements
that apply to participants in the regulatory sandbox (in accordance with
the new edition of “Ordinance on Banks and Savings Banks (Bank Ordinance, BO)” article 6, paragraph 2, letter (a)).
Exception # 2:
A license for savings is not required for assets that arise in payment
systems and neobanks and are recognized as “non-deposits” if the
following conditions are met:
- Peer-to-peer operations are prohibited — i.e., transfers from card to card.
- The maximum balance per client does not exceed 3,000 Swiss francs ($3,299).
- No interest is paid on funds.
The
exception applies in accordance with article 5, paragraph 3, letter (e)
of the “Ordinance on Banks and Savings Banks (Banking Ordinance, BO)”
and subject to clarification No. 18 FINMA-Circular 2008/3.
Exception # 3:
Settlement accounts, which are opened for some non-bank companies
participating in SROs (dealers, asset managers and other financial
intermediaries) are also not deposits if:
- Companies hold a deposit to execute a client’s transaction.
- No interest is credited to the account.
- The duration of the transaction is limited.
The
exception applies in accordance with article 3, paragraph 3, letter (c)
of the “Ordinance on Banks and Savings Banks (Banking Ordinance, BO).”
A
wide variety of fintechs can take advantage of the regulatory sandbox,
get a membership in self-regulatory organizations, and participate in
legal exemptions. However, there are also a few points that concern only
crypto services.
Choose the right architecture
Since
crypto projects occupy a special place between the world of traditional
finance and the world of digital assets, there are additional
requirements for crypto companies in many countries, and Switzerland is
no exception.
When registering our crypto service with the
self-regulatory organization VFQ, we thoroughly studied the regulations
that govern the Swiss Federal Council and FINMA. If we sum up all the
important points
from the “Legal framework for distributed ledger technology and
blockchain in Switzerland” and the “FINMA-Fact Sheet / Virtual
Currencies” documents
and requirements, crypto services can accept fiat money without
obtaining a banking license when the following conditions are met:
- Settlements
for the purchase or sale of cryptocurrency and temporarily arising
obligations to fulfill them fall under one of the exceptions given
above. - The fact of ownership of cryptocurrency by each client is
reflected in the blockchain directly and separately from the company’s
funds. - Each cryptocurrency deposit can be attributed to a specific client at any given time.
All
this should be taken into account by crypto startups during the product
development stage. Moreover, the correct design of the cryptocurrency
storage architecture is another reason that will help to avoid the need
to obtain a banking license while remaining legal.
According to
the Swiss regulator’s general approach, a deposit is defined as a
service in which a client transfers funds and/or digital assets to an
organization and can then dispose of them only by interacting with its
representatives. If the functionality of the service allows you to
remove intermediaries from the decision-making chain for the disposal of
the client’s funds, this option is not considered a deposit.
In
practice, this means that the storage should be designed so that the
user, at all times, owns the private key, and the crypto service
receives this key only “on lease.” Simply put, it is necessary to
exclude the e-wallet provider from the process of managing the client’s
funds. However, such a solution can only be used for cryptocurrency due
to its technological features. For fiat deposits and accounts which we
do not yet have, it will not work.
The flexible approach of the
Swiss regulator to licensing fintechs once again proves that the path of
startups is not at all about copying what has already been done before.
For each business model, you need to look for your own optimal
authorization method that will allow you to bring the product to market
faster and at lower costs. Legal companies will certainly help with
this, but the result will largely depend on how well the founder
understands the issue.
This article is for general information purposes and is not intended to be and should not be taken as legal advice.
source link : https://cointelegraph.com/news/a-guide-to-setting-up-a-crypto-business-in-switzerland
