On, November 2, 2016, during its weekly meeting, the Swiss Federal Council (the Council), the executive council which serves as the collective executive head of the government of Switzerland, requested an easing of the Swiss regulatory framework for providers of innovative financial technologies (FinTech). The Council stated that it desires forward thinking comprehensive solutions for the emerging FinTech industry and is thus recommending an approach with three elements: (1) provisions regarding holding money in settlement accounts, which is helpful to crowdfunding services; (2) a regulatory FinTech innovation sandbox, which would include the current money laundering provisions but otherwise would not (yet) require monitoring by the Swiss Financial Market Supervisory Authority (FINMA); and (3) a new fintech license granted by FINMA, for institutions restricted to the deposit-taking business (acceptance of public funds) and thus not operating in the lending business, allowing less stringent regulatory requirements to apply rather than heavier regulatory burdens imposed on classical banks, including lower capital requirements.
The Council has instructed the Swiss Federal Department of Finance (FDF) to draw up a consultation draft with the required legislative amendments by the start of 2017. The Council also requested that the FDF cooperate with interested authorities on further reducing the various barriers to market entry for FinTech firms, including those outside financial market regulation (e.g., legal treatment of virtual currencies and digital assets). The Swiss Finance Minister, Ueli Maurer, indicated to Reuters that the government’s hope is that the country’s supportive regulatory stance will encourage further innovative companies to join the blockchain startups already located in Switzerland: “We assume that with the steps we have prepared and the commitment we have to the overall financial services industry we can provide a solution that puts us among the top (countries) in the world that regulate this.”
FINMA also recently released redefined corporate governance guidelines for Swiss banks. It is proposing to streamline the banking regulatory framework by defining the revised requirements in terms of underlying principles and removing detailed application guidelines.
The recent actions taken by the Council, FDF and FINMA together indicate that Switzerland is seeking to be innovative and progressive in terms of regulation and supervision of FinTech companies, thus encouraging technology development and focusing on the opportunities it can provide, rather than being overly focused on risk. Crypto-banks likely will welcome regulation and supervision principles better suited to their unique attributes.
The devil will, as always, be in the details. If FINMA crafts its crypto-bank regulations with reasonable and flexible requirements and oversight, this path could result in more FinTech firms forming in, or moving to Switzerland, particularly those facing uncertainty due to BREXIT. But it is worth noting the lessons of the New York Department of Financial Services (NYDFS) BitLicense. NYDFS wanted to put New York State in the position to become a global hub for FinTech innovations like bitcoin and blockchain when it adopted its pioneering virtual currency rules last year. Instead, NYDFS lost that momentum when the BitLicense rules were criticized for being overly costly and burdensome for the types of start-up companies the state was trying to woo, and then the agency’s chief left. Since then, the NYDFS has issued just two BitLicenses, and granted two trust charters to virtual currency companies, treating them like traditional banks. At least another 15 BitLicense applications are still pending, with four others withdrawn and four denied, a spokesman said. The slow licensing process and strict requirements are driving some companies away, and New York may not become the U.S. FinTech market center after all.
For more information regarding the potential FinTech regulation, please contact Kari Larsen, Counsel, Reed Smith at 212-529-4258 or KLarsen@reedsmith.com.