What is a DLT Trading System?

In the wake of the Distributed Ledger Technology (DLT) Act, a new authorization category, namely the DLT trading system, was created in the Swiss Financial Market Infrastructure Act on August 1, 2021. A DLT trading system is intended to enable multilateral trading – similar to conventional trading systems – i.e. the simultaneous exchange of offers among several participants as well as the conclusion of contracts according to non-discretionary rules. In contrast to the conventional trading venues, however, primarily DLT effects are to be traded there. DLT effects in this sense are in particular the newly introduced register value rights (security tokens). In addition, other digital assets such as payment tokens and usage tokens will be recorded.

Advantages of a DLT trading system

One of the most important differences, and thus advantages, compared to traditional trading venues is that in DLT trading systems, retail customers are allowed to trade as participants. Unlike traditional token exchanges, a DLT trading system also allows security tokens to be traded. In addition, it is possible for DLT trading systems to offer custody of DLT securities without requiring an additional license as a central securities depository.

No clearing

A DLT trading system cannot perform central clearing to mitigate risk. This is still left to central counterparties. However, clearing appears to be less important when settling a trade through a DLT trading system than it is for traditional trading venues. Unlike traditional trading venues, where trade settlement often takes two days, with a DLT trading system, trading and its settlement can occur simultaneously. In addition, the Swiss National Bank has announced that it will grant FINMA-approved DLT trading systems access to the Swiss Interbanking Clearing System, provided they operate a securities settlement system and settle payments in Swiss francs via the SIC system.

High licensing requirements

The requirements for authorization as a DLT trading system are similar to those for traditional trading venues. In particular, these include requirements for the organization, guarantors, ancillary services and business continuity. If custody services are offered, there are additional requirements that are similar to those for a central securities depository. These include requirements for the safekeeping, booking and transfer of securities, own funds, collateral and liquidity. Reliefs apply to so-called small DLT trading systems. Probably also due to the high licensing requirements, there is no DLT trading system approved by FINMA as of today (as of March 11, 2022).

Fintech permit

The Fintech Authorization was created by the Swiss legislator to promote digital innovations and to facilitate the market entry of Fintechs. The Fintech license can also be described as a “bank license light”. It represents an authorization from FINMA under simplified conditions. A Fintech license allows its holder to accept public deposits up to a maximum amount of CHF 100 million or certain crypto-based assets designated by the Federal Council.

Facilitations for a Fintech Permit

In contrast to a classic bank license, a company with a Fintech license does not have to meet quite as high requirements as a classic bank. This applies in particular with regard to minimum capital and organizational requirements. Also, the regulations on deposit insurance, such as the holding of privileged deposits and their immediate disbursement, do not apply. In addition, accounting is governed by the provisions of the Code of Obligations and not by the provisions of banking law.

Interest and investment not possible

A holder of a Fintech license is not permitted to pay interest on or invest the public deposits accepted or crypto-based assets designated by the Federal Council. The classic lending business of banks is thus reserved for companies that have a classic banking license. Due to the low requirements that a company must fulfill in order to obtain a Fintech license, market entry hurdles are reduced. However, if the planned business model also includes investing and earning interest on the collected public deposits or crypto-based assets, it is necessary to apply for a classic banking license, regardless of the volume of assets accepted. In this case, Fintechs cannot benefit from the Fintech authorization.