– How did you become a specialist in the legal support of blockchain projects at MME? How many successful projects have you conducted?
Historically being a corporate law firm, three years ago we have extended our services and opened tax and compliance departments. With that we can support the projects from the very beginning to the implementation with legal (incorporation, work permits, labour law), tax and regulatory services (financial or trade compliance like embargos, sanction lists, KYC). The leaders of our crypto team are Luka Müller as a compliance under-regulatory partner, Andreas Glarner as IP and IT lawyer, and myself as a tax partner.
In general, there are two types of projects we work with. The first one is a start-up looking for investments and planning to launch an ICO. We have implemented around 30-50 projects of a kind. The second type of our clients is infrastructure providers like wallet provider Xapo, as well as more traditional service providers such as banks or insurance companies willing to create blockchain-based technology. In general, we have supported around one hundred blockchain projects. Ethereum Foundation was the first well-known customer to request legal support in the field of blockchain transactions.
– How long does it take from the first contact with you until the implementation?
It depends on the type of project, but usually, it takes 3-4 month for a detailed analysis, legal implementation, discussion with authorities, and incorporation. If you want to launch an ICO, community building and marketing are very important as well. It takes 4-6 month to build up your network and provide information about the project to all important community members. Thus, at the moment successful implementation in a right legal structure for ICOs needs more time than usual.
– Switzerland now is the Mecca for crypto projects. Why is that? Are there any legal advantages of launching ICO in Switzerland comparing with other countries of Europe, China, Russia or USA?
The main practical advantage of Switzerland is that you have direct access to the authorities. You can contact the financial regulator and tax authorities in advance, present your project to them and receive their answer on whether your structure falls under regulations or not, and what the tax consequences are for the services you offer. It gives business legal certainty, which is unusual, compared with other countries where you cannot contact authorities directly and companies face a lot of bureaucracy.
Switzerland is quite liberal and has a business-friendly jurisdiction when it comes to financial regulations. Certainly, for specific activities, like banking, financial intermediation, or money exchange there are quite strict rules. However, if you are outside of these spheres you generally have a freedom to do whatever you want if it is lawful. The Swiss authorities need to prove if it is not. In many countries, on the contrary, you must prove that your business is legitimate and should therefore not be regulated.
Finally, Switzerland has always been one of the innovation leaders promoting technology very proactively. Federal and cantonal government is not afraid of the innovative technologies. For example, the city of Zug accepts bitcoin payments in the city hall. Tax authorities are open; as an example, they have concluded very fast that bitcoin is not subject to VAT, simply like other foreign currencies.
– Is it needed to register a company in Switzerland to make the full advantage of its legislation system?
In general, yes, you need to register a legal entity in Switzerland. There are two types of them. One is a non-for-profit foundation structure without shareholders. Its main purpose is to develop a specific open source protocol or project, and all the collected money are to be used accordingly in order to fulfill this purpose. The community can be sure that the funds are not misused, otherwise, you go to jail. The other type is a commercial entity, like the LLC: there are shareholders and commercial purpose, and you have more external influence on the project.
– How does bitcoin need to be declared for tax purposes? Are there any procedures?
If an individual owns a bitcoin or any other token, it is at least subject to net wealth tax, as we still have it in Switzerland. You have to include your digital assets in your annual tax declaration. As for selling them, the big advantage of Switzerland is that private capital gains are not a subject to tax. The same logic applies to the digital assets. However, if you sell crypto currency as a commercial crypto trader or any other business, your income is a subject to tax.
ICO in Switzerland
– From the legal point of view what are the main things oneshould consider before launching an ICO in Switzerland?
The most important things for you to have are an innovative business idea and a good team that can implement it. Then, you should be able to describe the functionality of a token and explain, why you need a specific token on the new platform you are building. If you issue a token, what are the expectations of the users supporting your project, what do they get in return? At MME, we have developed a legal framework to classify different tokens. Depending on their functionality, there are different risks associated, and it is important to evaluate them all ahead so that users really understand what the project is about.
– Are there any specific legal procedures and issues regarding the implementation of crypto projects, ICO, or cryptocurrency exchange?
For us, the most important step is to understand the technology and the functionality of a generated token. A token can have distinct functions: it can represent a right to use a specific network, a specific claim towards an entity, equity investment or a debt. Just the mere fact that there is a blockchain project or token generation event does not tell us what legal issues could arise. If the token is involved in financial transactions, all the financial regulations are relevant. If its functionality is limited to a usage right on a network (for example, a license right), then such financial regulations do not kick in. Certainly, in any case, we should also clarify if the token is a subject of VAT or not.
– How is the ICO process regulated in Switzerland? What are the main points of cooperation with Swiss government?
Switzerland government and FINMA communicated that they see ICO as an innovative technology that can be used in different spheres. There are no new specific regulations for it; however, a lot of already existing ones, primarily in the financial sphere, can be adopted. FINMA also stated that the project should pass the pre-approval process, presenting a request explaining the ICO project, the token functionality. The financial regulator studies this information and then decides whether the project falls under specific regulations or not.
The Swiss business ecosystem for the blockchain projects
– How is the company property protected in conditions of blockchain technology use?
The assets held and the data stored by the entity are under data protection. However, most of the blockchain projects are open source: they publish their source codes, and you can use it according to specific open source licenses. IP protection of the technology is usually not the focus of the project. On the other hand, trademark registration is very important if you want to use it all over the world. Projects like Xapo, one of the biggest bitcoin wallet providers, choose Switzerland because of its political stability, stable electric power, and physical security. Their server infrastructure is located in the mountains, in the old military bunkers now used as a data center. Swiss infrastructure and stability are crucial for secure operations attract many fintech companies from all over the world.
– What about the choice of canton? What things one should consider while looking for the location for his business?
The federal financial regulator, FINMA, works all around the country. However, from tax and corporate law point of view, the location can be very decisive. Cantonal tax authorities are responsible for income tax and the rulings. The tax rate varies quite substantially between different communities because each has a right to tax. Usually, smaller cantons like Zug, Schaffhausen or Nidwalden have lower taxes, because they want to attract business. In such cantons, it is also easier to access the authorities, and they are usually more flexible towards the startups.
– Do all Swiss banks welcome cryptocurrencies in their exchange?
It really depends on the bank, but at the moment the situation is a little bit cumbersome. In July 2017, at least Falcon Private Bank announced communicated that they would offer bitcoin accounts to customers. It was a very important step in the sphere, preceded by the discussion with FINMA whether bitcoin could be considered an asset class to be offered to customers. Unfortunately, some banks are still reluctant to be involved in cryptocurrency transactions or ICO. Although the crypto-blockchain community wants, in a way, to displace existing banking system, which is still needed to establish a company, run your business, pay the salaries and rental fee. It is a very important function and it is not that easy to find an appropriate bank now.
Blockchain technologies now and in the future: the legal point of view
– Where do you see the next trends in the blockchain, especially in Switzerland?
Regarding the ICO, the next trend will be KYC implementation, in order to get appropriate information about who is contributing to your project, so you could check sanctions, embargoes, and blacklists. It is going to make the whole procedure more transparent and secure. On the other hand, the key point of blockchain is that you can have control over digital information. If you digitally register your property rights on the blockchain, you will not need intermediates as banks and authorities anymore. You can carry out yourself any actions with your property, whether it is real estate or financial transactions. This is a reality we need to prepare our current legislation for.
We are working together with an infrastructure provider Swisscom on the rules of ICO for equity investments, so that not only your share in the company is represented by a digital token, but also your revenue and voting rights as well. Thus, you will be able to organize a digital IPO, and it is going to be very important for Switzerland.
In general, we think that the already established legal framework is sufficient to cover blockchain technology, so every industry using these technologies will be qualified under existing legislation.