How Switzerland’s New Law on Distributed Ledger Technology May Reshape Securitization
On 1 February 2021, the first part of the Federal Act on the Adaptation of Federal Law to Developments in Distributed Ledger Technology (DLT Act) entered into force. The new act requires changes to a variety of related federal laws. The upshot: ledger-based securities are now legally recognized in Switzerland under article 973d Swiss Code of Obligations.
Legal definition of “a ledger-based security”
All rights that were previously securitized in traditional securities can now be designed as digital, ledger-based securities. This includes any contractual claim.
Asset tokens, utility tokens as well as payment tokens can be designed as ledger-based securities, as far as they constitute a claim based on civil law.
For example, a company's share register can be kept as a digital ledger, and shares become transferable electronically. Pure cryptocurrencies (e.g. Bitcoin), which are not issued by an issuer, are not covered by the new law. Tokenization of rights in rem, such as ownership of movable property, is not yet possible either.
The ledger-based security (e.g. a share) must be entered in a ledger in accordance with the agreement between the parties involved. In the case of a public limited company (Aktiengesellschaft), such agreement can be embedded in the articles of association.
The ledger must be designed in a way that the ledger-based security can only be asserted and transferred to others via this ledger. The creditor (shareholder) must be able to access and dispose of the ledger-based security without the participation of the debtor (company).
Register integrity and liability
Regarding the integrity of the register, the law requires that it be protected against unauthorized modifications by appropriate technical and organizational measures. According to the law, this can be accomplished through joint management by independent stakeholders (distributed ledger). To maintain technological neutrality the law allows alternative solutions to ensure register integrity.
The law does not set any specific requirements for how the distributed data management is to be designed or what degree of decentralization is required. However, the Federal Council’s so called “dispatch” on the draft law lists some existing DLT systems which meet the legal requirements, including the Bitcoin blockchain, Ethereum, the Cardano blockchain and Algorand (so-called public blockchains).
According to the Federal Council, DLT systems with a limited number of participants, such as Corda and Hyperledger Fabric (so-called permissioned blockchains) may also meet the legal requirements.
The company that issues its shares as ledger-based securities, i.e. the abovementioned debtor, must ensure that the securities ledger is organized according to its purpose and guarantee the functional security of the ledger.
The company issuing ledger-based securities is liable for any damage caused by the non-functioning of the register, for example due to the unauthorized transfer of shares.
Thus, the issuer of ledger-based securities is well advised to contractually pass on this liability to the ledger operator.