Artem Duvanov
Thoughts on the future Swiss DLT Federal Act
APRIL 24, 2019

On 22 March 2019, Swiss Federal Council presented a preliminary draft of a new Federal Act on the Amendment of Federal Laws in light of the Developments regarding DLT.

The document is recommended reading for everybody interested in the legal and regulatory implications of DLT. For those whose level of French is limited, there is a good overview by Bär & Karrer.

In this post, I want to focus on two critical choices made by the authors and elaborate on whether they are justified.
Identification of digital assets owners
First of all, I don't see any traces of mandatory identification of all DLT-based assets owners. It is an essential characteristic of the book-entry financial infrastructure, it is business driven, and not rooted in technology. I expected the regulators would insist on that whatever technology is used.

However, the Swiss Federal Council seems to choose another approach similar to the one adopted by the 5th AML Directive. It requires identification only for clients of crypto wallet providers and exchanges, which leaves a significant portion of the OTC market out of AML umbrella.

If anonymous owners of DLT-based assets are allowed, how is it not a reinstatement of bearer financial instruments? The regulators have pushed such instruments out of mainstream financial markets due to high money-laundering risks inherent to them. There is no reason to invite them to the main stage again.

There is nothing complicated in implementing mandatory identification services in DLT-based financial infrastructure. This approach would be entirely justified and would have many benefits.
Segregation of custody
Secondly, I don't understand why a new license type introduced for a DLT-based trading facility allows combining trading and custody functions in one company.

Segregation of these functions adopted on security markets is not a consequence of technological limitations corrected by the regulations, but a means to mitigate the conflict of interests.

Till the time these functions are implemented in 100% decentralized (i. e. trustless) manner there will be a conflict of interests, there will be corresponding risks, and the necessity to deal with them.

It is true that there are other non-custodial ways to ensure the safety of assets in the digital world, but the document refers to the "canonical" understanding of custody function as giving a trusted third party full control of your assets. Multisignature and other similar techniques blur the notion of custody and create an environment where segregation may not be an appropriate tool. But if we refer to "canonical" custody, there is no reason to give up the segregation requirement.
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About the author

Artem Duvanov is the leader of D3ledger project and Head of Innovation at National Settlement Depository, Moscow Exchange Group. Connect with Artem on Linkedin.
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