US Crypto Presidential Executive Order – What the US Can Learn From Swiss Cryptocurrency Laws
According to reports1, the US White House is currently drafting an executive order regarding cryptocurrencies (the “Executive Order”). The Executive Order is likely to task different US federal agencies with producing reports that evaluate risks and opportunities regarding digital assets and cryptocurrencies. There is currently no comprehensive US law establishing a legal framework for digital assets and cryptocurrencies.
Executive Orders:
An executive order is a published directive from the President of the United States that manages operations of the federal government, ie. the executive branch2. Executive orders are not legislation and do not require approval from Congress.
Although Congress cannot overturn an executive order, Congress can pass legislation which makes it difficult to carry out the executive order. Only a sitting US President can overturn an existing executive order by issuing another executive order.
Proposed Executive Order:
While the contents of the proposed Executive Order are not yet known, the Executive Order may direct US government agencies to study cryptocurrencies including a possible central bank digital currency (CBDC) and to formulate a strategy to regulate digital assets3. A number of federal agencies such as the Departments of Treasury, State, Justice and Homeland Security may produce a report on payment systems.
Other federal bodies including the Federal Reserve, Federal Trade Commission (FTC), Consumer Financial Protection Bureau, Securities and Exchange Commission (SEC), Commodities Futures Trading Commission (CFTC) and the Attorney General may also produce analysis and reports within the scope of their area of administration.
The US may also seek to coordinate with other countries in order to co-operate and produce a comprehensive system of standard rules and regulations regarding cryptocurrency. This may involve the Departments of State, Treasury and Commerce coordinating with their international counterparts.
Comprehensive Cryptocurrency Regulation – Bermuda, Malta and Switzerland:
Although some US states such as Wyoming4 have passed legislation regarding cryptocurrency, there is no comprehensive US federal legislative framework or regulation regarding cryptocurrency. Instead, there is a patchwork of oversight from various US federal agencies such as the SEC and CFTC. This has led to a lack of clarity regarding the regulation of cryptocurrency in the US.
Other countries including Bermuda, Malta and Switzerland have created a more comprehensive legislative framework for digital assets businesses and services to be operated within a regulated environment.
Crypto Valley – the Swiss Model:
Of the three jurisdictions mentioned above, Switzerland has the most outsize influence because of the size and history of its financial sector. Switzerland has long been regarded as a financial services and banking center.
Switzerland has developed a crypto related ecosystem centered around Zug (called Crypto Valley) with 960 crypto start-ups employing over 5000 people5. Part of the success of Crypto Valley can be attributed to the Swiss regulatory system which addresses cryptocurrency regulation.
Law on Distributed Ledger Technology – Ledger Based Securities:
On August 1, 2021, the Swiss government enacted into force the Law on Distributed Ledger Technology (the “DLT Law”).
The first part of the DLT Law enables the electronic registration of rights in the form of a token, ie. ledger-based securities, and transferring them without the need for further written documents over the blockchain. The second part of the DLT Act introduces a new DLT trading system license. Both of these have made tokenization of digital assets in Switzerland easier6.
What is a Security?
Perhaps the most important feature of Swiss cryptocurrency regulation is the clarity regarding whether a token is a security. This answer to this question in the US is still based on the test detailed in the 1946 Supreme Court case of SEC v. W.J. Howey Co.7
The “Howey Test” defined the criteria for an investment contract (and hence a security) as consisting of the following elements: i) an investment of money; ii) in a common enterprise; iii) with the expectation of profits; and iv) derived from the efforts of others.
If the determination is that a token is a security token, the token must be registered with the SEC. Consequently, it is critical to determine the nature of a token, ie. is it a utility token or a security token.
The Swiss Financial Market Supervisory Authority’s (FINMA) Guidelines for Initial Coin Offerings (FINMA ICO Guidelines) defines several categories of tokens8:
Payment Tokens: are intended to be used as a means of payment for acquiring goods or services or as a means of money or value transfer. Cryptocurrencies such as Bitcoin may fall in this category.
Utility Tokens: are intended to provide access digitally to an application or service pursuant to a DLT based infrastructure.
Asset Tokens: represents assets such as a debt or equity claim against the issuer, ie. a security token.
Hybrid Tokens: may have features of any of the above and may be determined on a case by case basis.
From a Swiss perspective above, the economic function and purpose of the token is the defining factor applying “substance over form”.
Lessons from Swiss Cryptocurrency Laws:
Switzerland has become a leading jurisdiction for cryptocurrency by advancing cryptocurrency related regulation.
Two key features of the Swiss cryptocurrency regulatory regime are particularly notable. The categories of tokens under the FINMA ICO Guidelines provide clarity under the law regarding how the token should be classified. The DLT Law provides a path forward for the tokenization of digital assets.
The proposed Executive Order represents a step towards regulatory clarity in the US although the specific promulgations need to be examined and the eventual regulations may still be some time away. The regulatory clarity that the above points above provide under Swiss law are features that could be approximated under US law and would provide some US regulatory certainty.
[1] BusinessInsider “The White House is Set to Release an Executive Order Regarding Cryptocurrencies”, January 24, 2022; https://markets.businessinsider.com/news/currencies/crypto-executive-order-white-house-digital-assets-regulation-biden-february-2022-1
[2] American Bar Association “What is an Executive Order”, January 25, 2021; https://www.americanbar.org/groups/public_education/publications/teaching-legal-docs/what-is-an-executive-order-/
[3] Yahoo!Finance “Biden Seen Issuing Crypto Oversight Executive Order”, February 17, 2022; https://finance.yahoo.com/news/biden-order-on-crypto-oversight-expected-next-week-source-says-173452499.html
[4] Slate “Wyoming Wants to be the Crypto Capital of the US”, June 28, 2021; https://slate.com/technology/2021/06/wyoming-cryptocurrency-laws.html
[5] Financial Times “Switzerland’s Crypto Valley Looks Past Cold Market Winds”, January 26, 2022; https://www.ft.com/content
[6] IFC Review “The New Swiss DLT Law”, July 14, 2021; https://www.ifcreview.com/articles/2021/july/the-new-swiss-dlt-law-curse-or-blessing/
[7] Securities and Exchange Commission v. W. J. Howey Co., 328 US 293 (1946)
[8] Mondaq “FINMA ICO Guidelines”, March 1, 2018; https://www.mondaq.com/fin-tech/678608/finma-ico-Lessons from Swiss Cryptocurrency Laws:
Author: This article was written by Shantanu Surpure who is a cross border corporate and securities lawyer admitted to practice law in the US, UK and India and member of the Crypto Valley Association. Shantanu has law degrees from Oxford and Columbia Law School and focuses on web3/crypto transactions.