RZ_Bulletin_Regulatory Innovations_SB_Preview_Web

Swiss Federal Council publishes Report on Banking Stability

<h3>Overview</h3>
Under its regulations, SIX Swiss Exchange (SIX) permits the listing of derivatives (Derivatives) and exchange-traded products (ETPs) with crypto-assets as the underlying instrument.
Derivatives within the meaning of the SIX listing rules are listed financial instruments with standardized features that are characterized by their value being dependent on the relevant underlying instrument, including one or more crypto assets (Crypto-Linked Derivatives). ETPs are listed and non-interest-bearing debt instruments that track the performance of an underlying asset either on a delta-1 or leveraged basis. Whilst initially established for the trading of ETPs with commodities as underlying, since the first issuance of an ETP with a crypto asset as underlying (Crypto-Linked ETPs, and together with Crypto-Linked Derivatives, Crypto-Linked Products) on SIX in November 2018, the designated ETP-segment of SIX has become increasingly popular for the issuance of Crypto-Linked ETPs. As of the middle of 2023, 170 ETPs were listed on SIX, with the vast majority being Crypto-Linked ETPs.
ETPs and Derivatives qualify as structured products within the meaning of article 3(a)(4) of the Federal Act on Financial Services (FinSA). As structured products, ETPs and Derivatives are subject to the relevant provisions of FinSA, such as the applicable prospectus requirements for public offerings or an admission to a trading venue in Switzerland and the rules on the offering of structured products pursuant to article 70 FinSA. Additionally, Crypto-Linked Products must satisfy the applicable listing requirements of SIX in order to be eligible for listing.
On February 15, 2024, after a long period of discussions with market participants and the Swiss Financial Supervisory Authority FINMA (FINMA), SIX Exchange Regulation (SER) published the new Directive on Crypto-Assets as Underlying Instruments (DCA) and a revised version of the Additional Rules for the Listing of Exchange Traded Products (ARETP), the Additional Rules for the Listing of Derivatives (ARD) and the Directive on the Procedures for Exchange Traded Products (DPETP, collectively, the SIX Crypto Regulations), setting out revised listing requirements for Crypto-Linked Products listed on SIX. The revised SIX Crypto Regulations aim to expand the universe of crypto-assets that are eligible as underlyings of Crypto-Linked Products and to better protect investors in Crypto-Linked ETPs.
<h3>Expansion of Universe of Eligible Underlyings</h3>
The eligibility criteria for crypto-assets to qualify as a permitted underlying of a Crypto-Linked Product have been further specified in the new DCA, leading to more liberal rules for issuers of Crypto-Linked Products. Crypto-assets satisfying the following eligibility criteria, qualify as permitted underlyings:
<ul>
<li>Eligible Crypto-Assets: From a functional perspective, payment tokens, utility tokens and asset tokens (to the extent they do not economically represent an equity interest; see below) qualify as eligible underlyings for Crypto-Linked Products. The ARETP and the ARD refer to FINMA&#8217;s «Guidelines for enquiries regarding the regulatory framework for initial coin offerings» dated February 16, 2018 (the ICO Guidelines), for the definition of the terms asset token and hybrid asset token. In contrast, asset tokens or hybrid asset tokens that from an economic perspective represent an equity security (article 12a(2) ARETP and article 17a(3) ARD), such as a share (Aktie) or a participation certificate (Partizipationsschein), do not qualify as eligible underlyings for Crypto-Linked Products.</li>
</ul>
In addition, from a technical perspective, the underlying crypto-asset must be a coin that runs on the Distributed Ledger Technology (DLT) (article 12a(2) ARETP and article 17a(2) ARD). This means that the relevant crypto-assets must be based on open-source software (such as Ethereum) that functions on the principles of blockchain technology. Thereunder, a consensus protocol must be applied and transactions must be verified by network participants. Finally, the procedure and the requirements for the issuance of additional units of the relevant crypto asset must be clearly defined (article 2(1) DCA). As a consequence, so-called privacy coins that allow for and facilitate private and anonymous blockchain transactions are not permitted underlyings for Crypto-Linked Products (article 12a(3) ARETP and article 17a(3) ARD).
<ul>
<li>Liquidity, Market Capitalization and Trading History: The SIX overcame its focus on the top 15 ranking on CoinMarketCap/coins. Pursuant to article 2(2) DCA, at the time of applying for provisional admission to trading of the Crypto-Linked Products in question, the underlying crypto-asset must cumulatively:
<ul>
<li>have a market capitalization of USD 500 million;</li>
<li>demonstrate an average daily liquidity of at least USD 50 million over the past 30 calendar days prior to submission of the listing application; and</li>
<li>have a trading history of at least 180 calendar days.</li>
</ul>
</li>
</ul>
In order to evidence that the requirements relating to liquidity, market capitalization and trading history are satisfied the information published on any of the following websites can be used: <a href="http://www.coinmarketcap.com">www.coinmarketcap.com</a>; <a href="http://www.coingecko.com/en">www.coingecko.com/en</a>, or <a href="http://www.cryptocompare.com">www.cryptocompare.com</a>.
The additional eligibility criteria remain substantially the same (but have been moved to article 2 DCA), meaning that it must be ensured (i) that the prices for the crypto asset are set regularly and are publicly available on the internet and (ii) the crypto-asset can be traded directly against an established fiat currency and that a price feed is available via a reputable information system, such as SIX Financial Information, Bloomberg or Reuters (article 2(3) DCA). Finally, the trading of the relevant crypto-asset must be possible on at least one trading venue satisfying certain minimum requirements (article 2(4) DCA).
The eligibility criteria for crypto-assets under the revised SIX Crypto Regulations will increase the number of crypto-assets qualifying as permitted underlyings and will, as a consequence, grant the issuers of Crypto-Linked Products more flexibility to include additional underlyings. Under the previous SIX regulations only the top 15 crypto-assets based on market capitalization on CoinMarketCap/coins qualified as eligible underlyings for Crypto-Linked Products. Under the revised SIX Crypto Regulations, more flexible and liberal criteria have been introduced. Based on information provided by SIX, 52 crypto-assets currently listed on <a href="http://www.coinmarketcap.com">www.coinmarketcap.com</a> would satisfy the requirements relating to liquidity, market capitalization and trading history under the revised SIX Crypto Regulations, leading to a considerable expansion of the universe of permitted underlyings for Crypto-Linked Products.
<h3>Collateralization and Regulatory Status of the Custodian</h3>
Since ETPs qualify as structured products within the meaning of article 3(a)(4) FinSA, the requirement that a structured product offered to retail investors in Switzerland and issued by a special purpose vehicle must be collateralized, if not guaranteed by a bank licensed under the Federal Act on Banks and Savings Institutions (FBA), a securities firm licensed under the Financial Institutions Act (FinIA) or insurance company licensed under the Federal Insurance Supervisory Act (ISA), generally applies to ETPs (article 70(2) FinSA). Therefore, the collateral set-up of ETPs will generally have to satisfy the requirements stipulated under article 70 FinSA and article 96 of the Swiss Financial Services Ordinance.
Additionally, the collateral set-up must satisfy the requirements under the SIX Crypto Regulations. The collateralization requirements for Crypto-Linked ETPs remain substantially the same under the revised ARETP, whereas it has been clarified under article 14 ARETP that Crypto-Linked ETPs, in line with past market practice, can be collateralized by granting an enforceable security interest over the claim (Herausgabeanspruch) relating to the underlying crypto-assets against the relevant custodian of the collateral, to the extent that (i) the relevant crypto-assets are held readily available for the issuer and (ii) the assets can either be allocated individually to the issuer or are allocated to a partnership and it is clear which share of the collective assets the issuer is entitled to.
In order to strengthen the collateralization structure, the revised SIX Crypto Regulations require that the custodian of the crypto-assets serving as collateral is subject to prudential supervision. This requirement will ensure that there is always a regulated institution involved in the issuance set up of Crypto-Linked ETPs, either as issuer, guarantor or custodian.
Pursuant to the revised ARETP, the following institutions qualify as eligible custodians for crypto-assets serving as collateral for Crypto-Linked ETPs:
<ul>
<li>custodians within the meaning of article 4(2) of the Federal Intermediated Securities Act (FISA), being in particular (i) banks within the meaning of the FBA, (ii) securities firms within the meaning of FinIA, (iii) fund management companies within the meaning of FinIA, and (iv) DLT trading facilities within the meaning of the Financial Market Infrastructure Act;</li>
<li>persons pursuant to article 1b FBA (FinTech-license): and</li>
<li>foreign institutions that are subject to equivalent supervision.</li>
</ul>
The revised ARETP provides that the Regulatory Board of SIX Exchange Regulation may demand that suitable documents are provided as evidence of the crypto asset custodian’s regulatory status.
<h3>Confirmation on Compliance with Article 70 FinSA</h3>
Since In connection with the collateralization set up an additional requirement has been introduced under article 15a ARETP as to compliance of the issuance and collateralization structure with article 70 FinSA. Thereunder, the issuer must include a declaration in the listing application in which the issuer affirms:
<ul>
<li>that (i) it or the guarantor is a bank pursuant to the FBA, an insurance company pursuant to the ISA or a securities firm within the meaning of the FinIA or a foreign institution subject to equivalent supervision, or (ii) that the collateralization structure of the ETP complies with article 70(2)(b) FinSA; and</li>
<li>if applicable, that the custodian holds the assets serving as collateral on behalf of the issuer and is an eligible custodian within the meaning of article 14(4) ARETP (see above); and;</li>
<li>if applicable, that the custodian keeps the assets serving as collateral for the ETPs available at all times and that the assets can either be allocated individually to the issuer or are allocated to a partnership (Gemeinschaft) and it is clear which share of the collective assets the issuer is entitled to.</li>
</ul>
The revised SIX Crypto Regulations explicitly specify that it is the issuer&#8217;s responsibility to properly assess the collaterization and ensure it complies with the regulations of SIX Swiss Exchange.
<h3>Additional Prospectus Requirements</h3>
The revised SIX Crypto Regulations introduce a number of additional requirements that will ultimately, if not already implemented, have to be reflected in the relevant (base) prospectus of the issuers and terms and conditions of Crypto-Linked Products:
<ul>
<li>Investor Put Option / Issuer Call Option: Pursuant article 6a ARETP, ETPs that do not provide for a fixed maturity (perpetual or open-ended products), must provide for an individual right of return in favor of the holders (Investor Put Option) and a right of termination for the issuer (Issuer Call Option). To the extent, the relevant (base) prospectus or terms and conditions, respectively, of an issuer does not already include such rights, the issuer will upon updating the (base) prospectus be required to add an Investor Put Option and an Issuer Call Option to the terms and conditions of the relevant ETPs. It is expected that an annual investor put right – analogous to articles 2 and 3 of the SIX Directive on Debt Securities with Specific Structures – is still sufficient.</li>
<li>Suspension of Trading: Under article 5 DCA, SIX Swiss Exchange and/or the SER may temporarily suspend trading of Crypto-Linked Products at the request of the issuer or upon its own initiative if this is deemed necessary in exceptional circumstances, in particular in the event of suspected price manipulation, falsification of liquidity or criminal activity. Further, for Crypto-Linked ETPs, SER may pursuant to article 28 ARETP, additionally order a suspension in trading, if the ongoing listing requirements are no longer fulfilled, in particular, if the custodian loses its regulatory status required under article 14(4) ARETP. If trading has been suspended for a continuous period of three months, the relevant Crypto-Linked Derivatives and/or Crypto-Linked ETPs, as applicable, can be delisted by SER.</li>
</ul>
Pursuant to article 4 DCA, the relevant (base) prospectus of an issuer of Crypto-Linked Products must include an express reference to the suspension and termination rights introduced under the revised SIX Crypto Regulations.
<ul>
<li>Risk Disclosure: Finally, pursuant to article 4 DCA, and in line with past practice of SER and the Swiss prospectus review bodies, the relevant (base) prospectus of an issuer of Crypto-Linked Products must outline (i) the key differences and pertaining risks between traditional fiat currencies and the relevant underlying crypto-assets, in particular relating to the lack of an intrinsic value, the trading on unregulated exchanges, low trading volume and higher volatility and (ii) the specific risks inherent to Crypto-Linked Products, in particular, the fraud risks and risks arising from possible hacker attacks.</li>
</ul>
<h3>Transitional Provisions / Grandfathering</h3>
The revised SIX Crypto Regulations will enter into force on April 1, 2024. Crypto-Linked Products issued prior to the entry into force will remain listed, with the following transitional provisions applying. Within six months of the entry into force:
<ul>
<li>Issuers of Crypto-Linked Products must submit a revised prospectus to SER, satisfying the additional requirements set out under article 4 DCA (see above «Additional Prospectus Requirements») (article 8 DCA); and</li>
<li>Issuers of Crypto-Linked ETPs must additionally submit a declaration in accordance with article 15a (see above «Confirmation of compliance with article 70 FinSA»), and if applicable satisfy the requirements applicable to the utilized custodian pursuant to article 14(4) and (6) ARETP.</li>
</ul>
If these requirements are not satisfied by October 1, 2024, the relevant Crypto-Linked Products will be delisted extraordinarily by SER.
<h3>Next Steps for Issuers</h3>
Due to the limited transitional period, it is advisable that issuers of Crypto-Linked Products swiftly assess which changes need to be made in relation to their (base) prospectuses and more generally their issuance and collateralization set-up in order to ensure full compliance by October 1, 2024. In particular:
<ul>
<li>Issuers of Crypto-Linked Products should ensure that their (base) prospectuses include all required information stipulated under article 4 DCA (and for Crypto-Linked ETPs additionally article 6a ARETP). Whilst the relevant (base) prospectuses currently used by issuers of Crypto-Linked Products will typically already include a risk disclosure satisfying the requirements stipulated under the revised SIX Crypto Regulations, most issuers will need to include a reference to the newly introduced suspension rights of SER, and, if not already included an Investor Put Option under the terms and conditions. For issuers of Crypto-Linked Derivatives, ensuring compliance with article 4 DCA will satisfy the newly introduced requirements under the revised SIX Crypto Regulations.</li>
<li>Issuers of Crypto-Linked ETPs will additionally be required to ensure that their collateralization set-up satisfies the new requirements set out under the ARETP, in particular the inclusion of an adequately prudentially regulated custodian. The introduction of the requirement to utilize a custodian licensed and prudentially supervised by FINMA, such as a bank, a FinTech-license holder, a securities firm or a foreign financial institution subject to equivalent supervision is likely the most profound change introduced under the revised SIX Crypto Regulations. Considering that the majority of the issuers of Crypto-Linked ETPs currently use custodians domiciled outside of Switzerland, it will have to be assessed on a case-by-case basis, whether these custodians are subject to an equivalent supervision outside of Switzerland. Ultimately, this question will be determined by SER. As a consequence, issuers utilizing foreign custodians should as a matter of urgency submit a relevant application to SER seeking confirmation on the eligibility of the utilized custodian under the ARETP. To the extent the relevant custodians are not subject to an equivalent supervision outside of Switzerland, issuers should seek to effect a transfer of their collateralization set-up to a custodian satisfying the requirements of the ARETP or engage, for example, a bank acting as guarantor.</li>
</ul>

Homburger Bulletin SIX Crypto Rules Preview

SIX Publishes New Directive on Crypto-Assets as Underlying Instruments 

<h3>A. Controversial Origins</h3>
On December 20, 2023, the Swiss Financial Market Supervisory Authority (FINMA) issued guidance no. 08/2023 on the treatment of staking services under Swiss financial market regulatory laws (the Guidance). FINMA&#8217;s Guidance is the result of discussions initiated in connection with the so-called «DLT Act» (Federal Act on the Adaptation of Federal Law to Developments in Distributed Ledger Technology) which entered into force on August 1, 2021.
Under the DLT Act, the Swiss Debt Enforcement and Bankruptcy Act and the Federal Act on Banks and Savings Institutions (the Banking Act) were amended to provide a legal basis for the segregation of crypto assets held in custody for clients in the event of an insolvency of their custodian if certain requirements were met. Staking in particular led to a debate in connection with one of the relevant requirements.
That said, staking is not a legally defined term and is offered in different forms in practice. It generally consists of the blocking of native crypto assets in order to participate in a validation process of a blockchain that is based on a proof-of-stake protocol. While the holders of staked crypto assets typically receive rewards if the validation is performed correctly, their staked crypto assets may be partially or completely deleted in the case of improper transaction validations («slashing»). In addition, holders of staked crypto assets are subject to the risk of a delay in the return of the blocked crypto assets, as certain proof-of-stake blockchains provide for a lock-up/exit period in the case of an unstaking of the relevant crypto assets.
Earlier this year, FINMA indicated that it may not consider crypto assets held by a custodian on behalf of its clients under a staking set-up, which provides for a lock-up period or involves a slashing risk, to be kept immediately available to the clients at all times within the meaning of Swiss bankruptcy laws and, therefore, not deem them to be segregable in the event of the custodian&#8217;s insolvency. If this approach were followed, the custody of such staked crypto assets would require a banking license under the Banking Act or, if provided by a bank, would be «on-balance sheet» and thereby trigger the increased capital requirements applicable to crypto assets held on such bank&#8217;s balance sheet. FINMA&#8217;s initial position was therefore criticized by both regulated and unregulated market participants.
As a result of the market wide criticism, both FINMA and the newly established Swiss Financial Innovation Desk (FIND) held roundtable discussions with industry representatives to further explore the segregation of staked crypto assets in the event of a custodian&#8217;s insolvency and assess the practical consequences and/or need to clarify or amend the relevant legislative rules. In addition, FINMA conducted a survey among supervised institutions on their staking services.
FINMA&#8217;s Guidance is the result of these discussions and corresponding analyses. It aims to provide guidance on how FINMA will interpret the segregation requirements for staked crypto assets, as well as related issues such as the need for a banking license for staking providers and the impact of staked crypto assets on banks&#8217; capital requirements.
In the following, we provide a summary overview of the question addressed and the key requirements set out in FINMA&#8217;s Guidance and specifically discuss certain measures that regulated providers of staking services, such as licensed banks, should implement in order to avoid that the staked crypto assets held on behalf of their clients become subject to the applicable capital requirements.
<h3>B. What the Two Competing Analyses Entail</h3>
At the heart of FINMA&#8217;s new Guidance is the question of whether staking service providers act as deposit takers or as fiduciaries when staking crypto assets received from their clients.
One analysis is to treat staking service providers broadly as deposit takers, i.e.:
<ul>
<li>clients&#8217; claims for the return of staked crypto assets are merely contractual claims against the staking service provider, and as a result
<ul>
<li>such claims may be treated as deposits under the Banking Act, and the staking service provider may therefore be considered to be engaging in a regulated activity permitted only to licensed banks; and</li>
<li>in the event of the insolvency of the staking service provider, clients are treated as general unsecured creditors; and</li>
</ul>
</li>
<li>if the staking service provider is a licensed bank, the staked crypto assets would be counted as its risk-weighted assets for capital adequacy purposes and, according to the currently prevailing practice of FINMA, be attributed a risk weighting of 800%.</li>
</ul>
Another analysis is to treat staking service providers broadly as fiduciaries/custodians (for ease of reference, we will call this the «fiduciary analysis»), i.e.:
<ul>
<li>they may not be considered to be engaging in an activity permitted only to licensed banks (but may nevertheless become subject to anti-money laundering regulations);</li>
<li>in the event of the insolvency of the staking service provider, the staked crypto assets received from clients do not form part of the insolvency estate;<a href="#_ftn1" name="_ftnref1">[1]</a> and</li>
<li>if the staking service provider is a licensed bank, the staked crypto assets are not included in its risk-weighted assets for capital adequacy purposes (but may be subject to restrictions imposed by FINMA).</li>
</ul>
<h3>C. The Custodian&#8217;s Obligation to Ensure the Crypto Assets&#8217; «Immediate Availability» Remains Key</h3>
The new Guidance&#8217;s approach to determining which of the two analyses is applicable to staking service providers builds on the three tiers of crypto asset custody that were introduced under the DLT Act:
<ul>
<li>(1) If crypto assets are held in custody (i) individually segregated on a client level and (ii) subject to the custodian&#8217;s obligation to ensure their immediate availability, the fiduciary treatment analysis applies.</li>
<li>(2) If crypto assets are held in custody (i) in an omnibus account but with records of each client&#8217;s fractional share and (ii) subject to the custodian&#8217;s obligation to ensure their immediate availability, the fiduciary treatment analysis applies. If the crypto assets so held are payment tokens, this form of custody requires an «Article 1b» license (or fintech license) under the Banking Act.</li>
<li>(3) If crypto assets are held in custody (a) in an omnibus account and with no records of each client&#8217;s fractional share or (b) not subject to the custodian&#8217;s obligation to ensure their immediate availability, the crypto assets are treated as if they were held by the custodian acting as banker (i.e., for its own account).</li>
</ul>
As the key criterion for determining which of the two analyses applies to Swiss staking service providers, the Guidance focuses on the obligation to ensure the immediate availability of the crypto assets and how such an obligation may be affected by different staking arrangements in constellations under which staking involves the possibility of lock-ups or slashing.
<h3>D. What the New Guidance Sets out as Important Criteria</h3>
<h4>1. Direct Staking by Licensed and Unlicensed Staking Service Providers</h4>
For the fiduciary analysis to apply to a Swiss provider of staking services that controls the withdrawal keys, the following conditions must be met according to the new Guidance:
<ul>
<li>the client has provided specific instructions as to the type and number of crypto assets to be staked;</li>
<li>appropriate measures have been taken to ensure that the crypto assets staked to a particular validator address and, after staking, to a particular payout address can be unambiguously attributed to the client;</li>
<li>the client is transparently and clearly informed of all risks;</li>
<li>appropriate steps are taken to mitigate the operational risks of operating a validator node (including business continuity management) to avoid slashing and other penalties; and</li>
<li>a Digital Assets Resolution Package (DARP) is prepared to ensure appropriate risk management.</li>
</ul>
For the fiduciary analysis to apply to Swiss non-bank staking service providers engaged in direct staking of payment tokens, the Guidance requires that the staked payment tokens continue to be held in individual custody, with a separate and assignable blockchain address for each client (at the level of the original custody address, the staking address, and the withdrawal address).
<h4>2. Delegation by a Licensed Bank or Securities Firm to a Third-Party Provider of Staking Services</h4>
For the fiduciary analysis to apply with respect to a Swiss bank or securities firm that engages a third-party staking service provider to provide staking services to the institution&#8217;s clients, the following conditions must be met according to the Guidance:
The bank or securities firm must enter into a fiduciary agreement with the client that contains a specific fiduciary mandate from the client, including the selection of crypto assets and the amount. In FINMA&#8217;s view, the bank acquires a contractual claim against the third-party staking service provider for the return of the staked cryptoassets, and the fiduciary agreement is intended to ensure that the fiduciary analysis applies to this contractual claim.<a href="#_ftn2" name="_ftnref2">[2]</a>
The fiduciary arrangement must include a comprehensive risk disclosure to the client and adhere to requirements broadly analogous to those set out in the Swiss Bankers Association&#8217;s 2016 Directives on Fiduciary Investments. In particular, the bank or securities firm must
<ul>
<li>limit counterparty risks by selecting an institution subject to prudential supervision with a good credit rating;</li>
<li>ensure, by means of specific due diligence, that the third-party provider itself holds, inter alia, the relevant withdrawal keys; records the validator addresses and has taken all necessary measures to mitigate operational risks associated with the operation of the validator node; and is based in a jurisdiction offering equivalent protection to clients; and</li>
<li>establish a DARP to ensure appropriate risk management.</li>
</ul>
<h3>E. What Regulated Banks Need to Do Now</h3>
In light of the requirements set out under the Guidance, Swiss regulated banks engaging in staking services should consider taking the following steps.
<ul>
<li>Assessment of Third-Party Staking Providers: In order to ensure compliance with the Guidance, regulated banks offering their clients staking services under which a third-party service provider (staking chain) is appointed to operate the validator node will need to assess whether the appointed third-party staking service provider under their current set-up satisfies the relevant requirements under the Guidance. Pursuant to the Guidance, ultimately only third-party staking service providers which are subject to prudential supervision in Switzerland will be suitable counterparties to which the operation of the validator node can be delegated.</li>
</ul>
To the extent the third-party staking provider is domiciled outside of Switzerland, regulated Swiss banks will need to assess whether the third party is subject to prudential supervision in a jurisdiction with equivalent regulation. In addition, the Guidance requires that the bankruptcy laws in the home jurisdiction of the third-party staking provider provides the same level of legal certainty as in Switzerland in relation to the segregation (or equivalent treatment) of crypto assets in insolvency proceedings. The Guidance does not define which criteria the foreign bankruptcy laws must satisfy in order to be considered sufficient under the Guidance, however, we assume that at a minimum the foreign laws must provide a clear legal basis and/or regulatory guidance regarding the treatment of crypto assets in the bankruptcy of the foreign staking service provider. From the perspective of the Swiss regulated bank, it will likely be challenging to assesses the adequacy of the foreign bankruptcy laws in question. It may, therefore, be advisable for Swiss banks to request the delivery of a legal opinion from their relevant staking providers confirming the treatment of crypto assets under the bankruptcy laws in the relevant jurisdiction.
<ul>
<li>Review of Contractual Arrangements with Third-Party Staking Providers: Further, the Guidance stipulates a number of requirements which the relevant third-party staking service provider must satisfy from an operational perspective. As outlined above, such operational requirements namely include the holding of the relevant withdrawal keys, the adequate recording of validator addresses and the implementation of adequate measures to mitigate the staking related operational risks. Regulated banks will, in consequence, be required to perform a due diligence in relation to their contractual partners in order to ensure that the appointed third parties are capable of satisfying the requirements defined under the Guidance. In light of the requirements set out under the Guidance, it will be advisable for Swiss regulated banks to update the applicable contractual arrangements to ensure that relevant requirements set out under the Guidance are translated into clear contractual obligations of the relevant staking service providers under the applicable contractual arrangements. Due to the importance of compliance with the Guidance for Swiss regulated banks in view of the considerable risk weighting of crypto assets under the capital requirements, Swiss banks should be requesting that their third-party service providers under the applicable contractual arrangements give relevant representations as to the compliance with the requirements set out under the Guidance.</li>
<li>Review and Update of existing Risk Disclosure: The Guidance requires that the regulated Swiss banks, in particular engaging in direct staking on behalf of their clients, adequately and transparently inform the clients of the risks inherent to staking. Pursuant to the Guidance, the risk disclosure will at a minimum need to inform the client about the risks related to slashing, potential staking related lock-up periods (including the increased market risks due to the potentially delay in disposing over the staked crypto assets) and the legal uncertainties in the event of bankruptcy. In order to ensure compliance with the Guidance, regulated banks should review their existing risk disclosure in light of these requirements and make the necessary amendments to ensure an adequate disclosure of the relevant risks.</li>
<li>Digital Asset Resolution Package: The Guidance requires regulated banks engaging in staking activities on behalf of their clients to draw-up a DARP to ensure adequate risk management. FINMA has to date typically required regulated banks and other financial institutions engaging in crypto asset related activities to draw up a DARP which should in effect allow FINMA to efficiently segregate and deliver the relevant crypto assets to the entitled clients in the case of a bankruptcy of the regulated entity. In order to ensure such efficient segregation, the DARP should outline the relevant custody set-up and provide a brief legal analysis outlining the legal basis for the segregation of custody assets in bankruptcy proceedings. In addition, the DARP should include the necessary factual information to allow an efficient segregation from an operational perspective. The DARP should, therefore, include the details of the relevant employees with access to the private keys, and in case of staking the respective withdrawal keys, and all relevant information on third party custodians.</li>
</ul>
Pursuant to the Guidance and in the context of staking activities by Swiss regulated banks, the DARP will need to adequately describe the staking set-up employed by the relevant bank and ensure that, to the extent a third party has been appointed as the relevant node validator, the DARP includes the necessary information for FINMA to gain access to the withdrawal keys. In order to ensure compliance with the Guidance, Swiss banks will need to draw up a staking specific DARP or update their existing DARP to ensure that the relevant staking activities are adequately covered by the DARP.
The Guidance does not define a specific date until which Swiss regulated banks must ensure compliance and does not provide for applicable transitional periods. In consequence, the Guidance and the requirements set out thereunder will be immediately effective. To the extent necessary, Swiss banks should, therefore, promptly take the steps outlined above, to ensure that the staked crypto assets are not included in its risk-weighted assets for capital adequacy purposes as of the relevant dates for measuring and disclosing the capital adequacy.
<h5><a href="#_ftnref1" name="_ftn1">[1]</a> If the staking service provider is a licensed bank, such assets will qualify as custody assets within the meaning of art. 16(1bis) Banking Act. If the staking service provider is not a licensed financial institution, this follows from a corresponding provision in the Debt Enforcement and Bankruptcy Act (art. 242a). Both provisions have been inserted as part of the DLT Act.</h5>
<h5><a href="#_ftnref2" name="_ftn2">[2]</a> The fiduciary analysis of the claim against the third-party staking service provider is in line with the older art. 16(2) Banking Act, not the new art. 16(1bis), which the Guidance highlights.</h5>

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FINMA Issues Guidance on Staking Services

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On March 27, 2024, Swiss special purpose issuance vehicle Xtrackers Digital Markets ETC AG simultaneously launched two series of crypto-linked Exchange Traded Products (ETPs) under its program for the issuance of cryptocurrency-focused ETPs for professional and retail investors in Europe. The Xtrackers Galaxy Physical Bitcoin ETC Securities (XXBT) and the Xtrackers Galaxy Physical Ethereum ETC Securities (XETH) are listed on Deutsche Börse Xetra since April 4, 2024. State Street acts as the issuing and paying agent as well as the administration agent on these ETPs. XXBT and XETH are physically backed, and the underlying collateral is held through two cryptocurrency custodians: Zodia Custody and Coinbase.
DWS Investments UK Limited (DWS), a UK based asset manager, is part of DWS Group (being part of Deutsche Bank group) with EUR 896 bn of assets under management as of December 31, 2023. DWS is acting as arranger under the program and have partnered with US-based digital assets manager Galaxy Digital as crypto advisor and execution agent under the program.
Homburger advised DWS in this transaction with respect to aspects of Swiss law and regulations, including listing regulations. The Homburger team comprised Benjamin Leisinger, Philipp Klein and Alexander Wherlock (all Capital Markets and Investment Products) as well as Stefan Oesterhelt and Philippe Gobet (Tax).

Homburger advised DWS on Crypto ETPs

Homburger News

Homburger and Stiftung PWC

On March 20, 2024, Stiftung PWG zur Erhaltung von preisgünstigen Wohn- und Gewerberäumen der Stadt Zürich (Stiftung PWG), successfully launched and priced its issuance of CHF 120 m total nominal amount of 1.55% Sustainability Bonds 2024-2032. Stiftung PWG is an institution under public law the purpose of which is to maintain or create affordable housing and affordable premises for small businesses in existing buildings and any new buildings that may be constructed. The bonds have been offered in full compliance with the Financial Services Act and will be admitted to trading, and be listed, on the SIX Swiss Exchange. Zürcher Kantonalbank acted as sole lead manager. Closing is expected on April 2, 2024.
Homburger advised Stiftung PWG with respect to aspects of Swiss law. The Homburger team was led by partner Benjamin Leisinger and included associate Sofiya Shavlak (both Capital Markets).

Homburger advised Stiftung PWG on its issuance of CHF 120 m total nominal amount of 1.55% Sustainability Bonds 2024-2032

Thermo Fischer

Homburger and Thermo Fisher

On March 7, 2024, Thermo Fisher Scientific Inc. successfully completed its issuance of its inaugural CHF bonds in excess of CHF 1 bn, being the largest foreign Swiss franc bond issuance in seven years. The issuance consisted of three tranches, the CHF 330 m 1.6525 per cent. bonds due 2028, CHF 415 m 1.8401 per cent. bonds due 2032 and the CHF 325 m 2.0375 per cent. bonds due 2036. The bonds are governed by Swiss law and have been provisionally admitted to trading, and application has been made for definitive admission to trading and listing of the bonds, on the SIX Swiss Exchange. UBS Investment Bank, BNP Paribas (Suisse) SA, and Deutsche Bank AG London Branch, acting through Deutsche Bank AG Zurich Branch, acted as lead managers.
Homburger advised Thermo Fisher Scientific Inc. with respect to all legal, transactional and tax aspects of Swiss law. The Homburger team was led by Benjamin Leisinger and included Daniel Hulmann (both Capital Markets), as well as Stefan Oesterhelt (Tax).

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Homburger advised DWS on Crypto ETPs

Homburger advised Stiftung PWG on its issuance of CHF 120 m total nominal amount of 1.55% Sustainability Bonds 2024-2032

Homburger advised Thermo Fisher on its CHF 1.070 bn inaugural bond issuance

Swiss Federal Council publishes Report on Banking Stability

SIX Publishes New Directive on Crypto-Assets as Underlying Instruments

FINMA Issues Guidance on Staking Services

Krypto- und Blockchain-basierte Finanzprodukte – Krypto ETPs

Banking & Finance: Switzerland (7th edition)

Banking Regulation Global Guide 2024

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BenjaminLeisinger

Homburger advised DWS on Crypto ETPs

Homburger advised Stiftung PWG on its issuance of CHF 120 m total nominal amount of 1.55% Sustainability Bonds 2024-2032

Homburger advised Thermo Fisher on its CHF 1.070 bn inaugural bond issuance

Swiss Federal Council publishes Report on Banking Stability

SIX Publishes New Directive on Crypto-Assets as Underlying Instruments

FINMA Issues Guidance on Staking Services

Krypto- und Blockchain-basierte Finanzprodukte – Krypto ETPs

Banking & Finance: Switzerland (7th edition)

Banking Regulation Global Guide 2024

Join the Team

Benjamin Leisinger

Karriere

Sprachen

Zulassung

Teams

Benjamin
Leisinger