Swiss Report Lays Foundation for Bitcoin to Become Legal Money

The new report by the country's Federal Council has been widely welcomed by the local bitcoin industry.

AccessTimeIconJun 26, 2014 at 4:55 p.m. UTC
Updated Sep 11, 2021 at 10:55 a.m. UTC

Switzerland's Federal Council, the nation's seven-member executive branch, issued a new 25-page report on digital currencies yesterday, which sought to broadly define how it believes specific bitcoin businesses should be regulated under existing law.

The news comes as a result of a September request by Swiss Socialist Party member Jean Christophe Schwaab for the organisation to pen the report, one which was formally accepted as an initiative by the Federal Council in December.

The Federal Council has the ability to create ordinances, but only the parliament is able to create legislation, meaning that whiles its ultimate recommendation – that no new regulation need be enacted – will set a significant and lengthy legal precedent, the report does not have the legal standing to determine whether bitcoin falls under specific regulation directly. Such decisions remain the responsibility of the Swiss Financial Market Supervisory Authority (FINMA).

Schwaab told CoinDesk: "The report is only the opinion of the government, but its not legally binding".

Community triumph

Still, the overall clarity provided by the report has been lauded by members of the local bitcoin ecosystem.

Alexis Roussel, CEO of Switzerland-based digital currency broker SBEX, indicated that the recommendations will do much to bring stability to the region's businesses, telling CoinDesk:

"We can now expect the following: no legislation change within the next two years [and] a good development of administrative doctrine around bitcoin."

(BAS), the local bitcoin trade association, was similarly positive in its review of the government's analysis, stating:

"The report concludes that bitcoin is covered by existing laws and that no new regulation is needed. This is excellent news and in full accordance with our views."

The BAS added that the report even suggests there is a clear path for bitcoin to one day be awarded the legal status of 'money' in Switzerland, noting "the report says the only thing bitcoin currently lacks to be money [...] is low volatility".

However, this was just one of the report's many takeaways for local operators, as well as international firms seeking guidance on how to best serve the international banking leader's domestic market.

VAT unlikely

Perhaps most notably for local users, the report suggests that bitcoins be treated as neither a good or a service when used as a means of payment. As such, its language suggests no value-added tax (VAT) should be applied during payments.

The recommendation represents a break from potential applications in German law that would seek to tax bitcoins that are exchanged between merchants and buyers during purchases.

Still, BAS president Luzius Meisser, suggests that such an interpretation is not quite clear.

"We have another strong clue that bitcoin is exempt from VAT. To be 100% sure, we need to wait for the pending report from the [Swiss Federal Tax Administration]."

When bitcoin is used as a means of payment in the sale or exchange of goods and services, the Federal Council report found that such activities should not be subject to financial market laws.

The report explains that "bitcoins are a means of payment which in turn can be used to acquire goods or services". This exempts bitcoin payments from the Banking Act, "since no monies or bitcoins are collected by a party".

Added rules for deposits

However, certain acts, such as the Federal Act on Banks and Savings Banks, the Federal Act on Stock Exchanges and the Securities Trading and the Federal Act on Combating Money Laundering and the Financing of Terrorism in the Financial Sector, should apply for businesses conducting bitcoin transactions that are considered deposits, the report says.

The report explains that transactions should be considered deposits "if a bitcoin dealer accepts credit balances in official currencies on the dealer's own accounts with a view to future currency transactions", or "if the dealer accepts bitcoins from clients for future exchanges transactions and the client is not able to dispose of the bitcoins at all times without the involvement of the dealer".

In the event that such a company went bankrupt, the report argues, bitcoins would be considered bankruptcy assets on an equal level as credit balances accepted in money.

Still, the report makes room for exceptions. For example, the report states "it is still possible in accordance with the practice of FINMA to prevent applicability of the Banking Act if a bank supervised by FINMA guarantees full repayment of the deposits".

Rules for trading platforms

Trading platforms, defined as those that both bring together and assign buyers and sellers, should be governed under existing Swiss market laws, the report says.

Here again, the report makes a distinction between bitcoin businesses that hold balances and those that do not, stating: "it matters whether the operator accepts credit balances in money for this purpose from users of the platform on the operator's own accounts, or whether the operator accepts bitcoins from users which the clients are not able to dispose of at all times without the involvement of the operator".

Deposits without this control are deemed to be deposits under the Banking Act, "if the operator maintains credit balances in money or bitcoins for the user on a commercial and permanent basis, and which can be employed by the user for the future purchase and sale of bitcoins via the platform".

Anti-money laundering laws should not apply to both types of bitcoin exchange platforms, however.

For example, the report reasons that operators who bring together parties for the buying and selling of bitcoin do not need to conduct AML due diligence.

Criminal code applications

When looking at bitcoin's applications to the existing Swiss criminal code, the Federal Council believes that bitcoin exchange operators "may be subject to punishment for money laundering" under Article 305.

The report suggested AML penalties would apply when a "person operates a trading platform for virtual currencies and thereby carries out an act that is aimed at frustrating the identification of the origin, the tracing, or the forfeiture of assets which the person knows or must assume originate from a felony".

Since digital currencies also qualify as property, the report noted that certain penalties for the misappropriation, fraud and unlawful use of financial assets may also apply in such instances.

The Anti-Money Laundering Act primarily applies to 'financial intermediaries', a term that the report deems to refer to bitcoin businesses that require a banking licence. Still, the AML regulations may apply to bitcoin businesses that fall outside this definition, extending to trading activities covered by the law.

Bitcoin businesses governed by the law must in turn conduct "due diligence requirements for the prevention of money laundering and terrorist financing". This includes filing reports with the Money Laundering Reporting Office Switzerland (MROS) if they believe individuals are laundering money or otherwise operating with criminal intent.

Individual bitcoin users who pay for goods and services in bitcoins should not be subject to any AML laws, the report suggests. Professional bitcoin traders, by comparison, should conduct some verification depending on the size of the transaction, even in some instances when they do not maintain a business relationship.

ATMs are money transmitters

The report further included echoes of the country's recent decision to allow bitcoin ATM operators to deploy machines, provided they applied for a money transmission licence.

The Financial Council indicated it believes that bitcoin exchange machines are not performing currency exchange, but rather money transmission, as it would be possible for the cash deposited in one machine to be withdrawn at another location.

Such a transfer abilities are indeed a cornerstone of Robocoin's efforts to become a global remittance service and bank, with a new set of features and hardware launched this month.

The report indicated that while a small difference, it is not insignificant, stating: "The distinction is relevant in that money transmitting is always deemed to be on a professional basis due to the associated higher risks of money laundering".

Bitcoin as foreign currency

The report also weighed in on the subject of whether bitcoins constitute money in the traditional sense. While the Federal Council deemed bitcoin does not meet this definition at present, it did say that it exhibits "key features of money", that in turn makes current regulations applicable in their exchange.

"They are units of value with which real goods and services can be acquired, which are accepted by a community as means of payment, and whose financial value doesn’t depend on their intrinsic value," the report said.

As a result, Switzerland seems to suggest that bitcoin should be treated as a foreign currency, an opinion increasingly being advocated for internationally.

The report stated: "If it is also taken into account that the exchange of bitcoins into official currencies is in principle possible at all times and without restrictions, there is no reason to treat such exchange activities differently from the exchange of foreign currencies".

Lingering questions

Meisser, while positive about the implications of the report, sees one area where the guidance falls short. He stated that, from a legal point of view, the Federal Council has not clearly given an opinion of how bitcoin miners should be treated under the law.

Meisser indicated that since bitcoin miners processes transactions, they could be considered financial intermediaries under the Federal Council's interpretation, and be subject to the suggested regulations for these entities.

Meisser said:

"[Calling bitcoin miners financial intermediaries] would, in my opinion, be wrong since. Unlike banks – bitcoin miners cannot embezzle the bitcoins they process."

As such, Meisser suggests Switzerland's government may need to make further announcements to provide full clarity to the local bitcoin ecosystem.

Of course, individual business models are likely to cause complications, matters that the report says will be determined by FINMA, as this falls "within the scope of its duties".

Swiss law image via Shutterstock


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