ERA Forum (2019) 20:99–112

https://doi.org/10.1007/s12027-019-00561-1
A RT I C L E

Virtual and cryptocurrencies—regulatory

and anti-money laundering approaches in the European
Union and in Switzerland

Thomas A. Frick1

Published online: 8 May 2019

© Europäische Rechtsakademie (ERA) 2019

Abstract Cryptocurrencies and virtual currencies gained prominence in 2017 and

2018. The European Union has closely observed developments but has not been
proactive in regulating this new phenomenon. In the Fifth Anti-Money Laundering
Directive, a definition of virtual currencies was introduced to EU law for the first
time. Reports published by the European Securities and Markets Authority and by
the European Banking Authority, both in 2019, provide further clarification on the
approach being taken at EU level. Switzerland has been at the forefront of crypto
developments. The Swiss approach to regulating the crypto world is different from
the approach taken e.g., in Malta and Liechtenstein and may serve as an additional
inspiration for EU regulators.

Keywords Cryptocurrencies · Virtual currencies · AML · FinTech regulation

1 Virtual currencies and cryptocurrencies

1.1 Background

Virtual currencies and, in particular, cryptocurrencies already have a ten-year history

to look back on. The first successful and operative virtual currency created was the fa-
mous Bitcoin. In November 2008, a white paper was published under the pseudonym

The article is based on two presentations given by the author at the Academy of European Law ERA,
‘FinTech: Virtual and digital currencies: a closer look—The Swiss Approach’ in London on 15
March 2018, and ‘Implications of the 5th AMLD for third countries and the crypto space’ in Trier on
15 November 2018, but has been significantly amended due to recent developments, in particular
the various reports issued in the jurisdictions discussed.

B Dr T.A. Frick, LL.M. (EU law)

[email protected]
1 Niederer Kraft Frey Ltd., Bahnhofstrasse 53, 8001 Zurich, Switzerland
100 T.A. Frick

of Satoshi Nakamoto describing the Bitcoin payment system. In January 2009, an

open-source reference software was published and the Bitcoin network was created.
Right up to today, it is not known whether Satoshi Nakamoto is the pseudonym of one
person or of an entire group of developers: Bitcoins have no issuer but are mined ac-
cording to the rules set by the algorithm it is based on. Bitcoin was the first successful
attempt to establish a virtual currency. Initially, Bitcoins had no value that could be
stated in other currencies. From 2010, the first exchange rates to fiat currencies (cur-
rencies issued by states) were discussed in the relevant internet forums. The famous
first exchange of Bitcoins against real goods took place on 22 May 2010, when two
pizzas were bought for 10,000 Bitcoins.1 The exchange rate of Bitcoins to the Dollar
remained very low until 2011 and a Bitcoin could be bought for less than USD 10.
As of from 2012, the exchange rate increased dramatically to more than USD 200
in April 2012 and, with significant fluctuations, to USD 1,000 in November 2013. In
2015, the exchange rate was again at about USD 250 but began to rise. By the end of
2017, the exchange rate was nearly USD 20,000 per Bitcoin, but in January 2018, the
exchange rate crashed to lower than USD 4,000.2
Bitcoins are a blockchain-based cryptocurrency. Any falsification of units or trans-
actions is prevented by asymmetric cryptographic means. Any double-spending of
the same Bitcoin is not possible, unless an attacker could deploy more calculation
power than the majority of the Bitcoin participants. Bitcoin runs on a decentralised
network based on knots confirming transactions. As the transactions are confirmed
on a blockchain, they cannot be undone.
Contrary to the general perception, the holder of a Bitcoin is not anonymous but
pseudonymous. Each Bitcoin has a public key and a private key. While the public
key is visible to everybody participating in the network and network participants can
follow each transaction, the private key is known only to the holder of the Bitcoin.
Hence, the chain of transactions can always be followed, e.g., by investigators sus-
pecting criminal activities. If at one stage of the transaction a link has been made to
the physical world (e.g., by rendering or accepting a service or sending or accept-
ing goods) the transaction may be linked to a person in the physical world, even if
the private key is not disclosed. Therefore, Bitcoin is not a fully anonymous pay-
ment network.3 However, as the Swiss National Risk Assessment report noted, the
identification of tokens of criminal origin and of their beneficial owners is very com-
plicated.4

1.2 Definitions and scope

Various terms were used to describe the new type of currency. Among other names,
Bitcoin and its successors were called digital currencies, cryptocurrencies or virtual
currencies. While the term ‘cryptocurrency’ is frequently used, the Fifth Anti-Money
Laundering Directive of the EU uses the term ‘virtual currencies’ (which includes

1 Küfner [10], p. 49.

2 History of bitcoin [9], with further references.
3 Loc. cit.
4 Schweizerische Eidgenossenschaft [14], p. 47.
Virtual and cryptocurrencies—regulatory and anti-money laundering 101

currencies not based on cryptography). In Switzerland, the Swiss Financial Markets

Authority (FINMA) in its guidelines of February 2018 uses the term ‘payment to-
kens’, observing that this is deemed to be synonymous with cryptocurrencies.5
The first definition in EU law of virtual currencies was given in the Fifth Anti-
Money Laundering Directive. In Article 4 (18), the following definition is included:
“‘Virtual currencies’ means a digital representation of value that is not issued
or guaranteed by a central bank or a public authority, is not necessarily at-
tached to a legally established currency and does not possess a legal status of
currency or money, but is accepted by natural or legal persons as a means of
exchange and which can be transferred, stored and traded electronically.” 6
The definition is clearly broader than the definition used by FINMA which defines
payment tokens in its Guidelines as “tokens which are intended to be used, now or in
the future, as a means of payment for enquiring goods or services or as a means of
money or value transfer. Cryptocurrencies give raise to no claims on their issuer”.7
The main difference between the two definitions is that the EU definition can in-
clude stable coins, i.e., virtual currencies which are linked to an underlying deposit
of fiat money or e.g., gold, which should serve to stabilise the currency, whereas the
FINMA definition excludes coins (or tokens) that give raise to a claim against the is-
suer. Without stating the point expressly, the FINMA definition also excludes tokens
that may not give raise to a claim against the issuer but e.g., a right in rem, such as
a right in an underlying asset. Neither definition distinguishes between cryptocurren-
cies issued by an issuer nor cryptocurrencies that are mined in and through a network,
i.e., have no issuer (such as Bitcoin).
The crypto units (called tokens) are usually divided into three categories, which
are payment tokens, intended to be use as means of payment (i.e., currencies), utility
tokens, intended to provide access to an application or service (like a ‘voucher’) and
asset tokens, which represent an asset such as a debt or equity claim against an issuer.
Many tokens issued are in hybrid forms, i.e., they combine various functions. The
most famous hybrid token is the Ether of the well-known Etherum platform which is
both used as a payment token and for granting access to the smart contract applica-
tions on the Etherum platform (i.e., includes utility token functions).
The following article deals with cryptocurrencies and virtual currencies only and
not with utility tokens and asset tokens, both of which raise very different legal issues
and topics. From this point, the term ‘cryptocurrency’ will be used, as it seems to
be the most widely used term for what is being discussed. The definition and the
scope of what constitutes a virtual currency (the term used by the Fifth Anti-Money
Laundering Directive) is not always clear, but it certainly also includes currencies
that are not based on cryptographic methods. Furthermmore, the focus will be on the
‘pure’ cryptocurrencies, which are those that do not give raise to a claim against the
issuer or a right in rem.

5 Eidgenössische Finanzmarktaufsicht [5], p. 3.

6 Directive [4], Art. 3 (18).
7 Eidgenössische Finanzmarktaufsicht [5], p. 3.
102 T.A. Frick

1.3 Developments

The success of Bitcoin let to many similar protocols published which tried to improve
on the Bitcoin protocol. The Bank for International Settlements (BIS) summarised
the development in its Annual Report 2018, with a rather critical eye.8 The Bank ex-
plained that cryptocurrencies combine three key figures by being digital, by the fact
that although created privately, they are no one’s liability (making them similar to a
commodity money without any intrinsic value – thus the BIS is using the same key
feature to define a cryptocurrency as FINMA), and by the fact that they allow for dig-
ital peer-to-peer exchange.9 The BIS was highly critical of cryptocurrencies, pointing
out that they use a lot of energy (in 2018, the total electricity use of Bitcoin mining
was allegedly equal to the total energy use of Switzerland), that cryptocurrencies do
not scale like sovereign moneys and that transactions may be executed only several
hours after they have been initiated. The BIS furthermore pointed out the unstable
value of cryptocurrencies, as well as problems such as loss of consent in the group,
leading to forks in the protocol (such as the creation of Bitcoin Cash).10
In spite of the well-founded criticisms of Bank for International Settlements, more
than 2,000 cryptocurrencies have developed over the past few years. Cryptocurrencies
were often created in an initial coin offering (ICO) when newly-issued tokens were
opened for sale to the public. Prior to an initial coin offering, there is typically a pre-
sale in which selected parties may acquire tokens at a reduced price. While in 2017,
Switzerland was one of the favorite jurisdictions for conducting initial coin offering s
(the total volume was second only to the volume issued in the United States), in 2018
the picture changed dramatically and more than 60% of all initial coin offerings were
done from the Cayman Islands or the British Virgin Islands.
As of 2019, the general expectation is that the market will shift to asset tokens, i.e.,
tokens mirroring or representing shares or claims. It is today unclear to what extent
cryptocurrencies will continue to play a role, possibly with the exception of the most
established cryptocurrencies such as Bitcoin, Bitcoin Cash, Ether, Ripple, Litecoin
and others. Predictions for the future value of Bitcoin vary from 0 to USD 0.5 million
per coin.

2 Cryptocurrencies and anti-money laundering

2.1 International developments

In various international forums, the raise of cryptocurrencies caused concern. The Or-
ganisation for European Coordination and Development (OECD) stated in its Interim
Report 2018 and Report to G20, inter alia, that

8 Bank for International Settlements [2], pp. 91–109.

9 Loc. cit., p. 95.
10 Loc. cit., p. 101ss.
Virtual and cryptocurrencies—regulatory and anti-money laundering 103

“technologies like blockchain give rise to both new, secure methods of record-
keeping while also facilitating cryptocurrencies which pose risks to the gains
made on tax transparency in the last decade.” 11
The OECD’s concern that cryptocurrencies may be used to avoid taxes and to gain ad-
ditional anonymity after automatic information exchanges made most barriers raised
by banking secrecy and similar national laws redundant is mirrored by concerns
voiced by the Financial Action Task Force (FATF). The Task Force Plenary held
from 17 to 19 October 2018 adopted amendments to Financial Action Task Force
Standards to respond to the increasing use of virtual assets for anti-money laundering
and terrorist financing. Under the revised rules, exchanges and wallet providers will
be required to implement anti-money laundering/know your customer (KYC) con-
trols and to be at least monitored by national authorities. The aim of the Financial
Action Task Force is that jurisdictions will ensure that virtual asset service providers
are subject to anti-money laundering and know your customer regulations and that
they will conduct proper customer due diligence when taking on customers and keep
an ongoing monitoring and report on suspicious transactions. The Task Force intends
to further elaborate on how these requirements should be applied. The Financial Ac-
tion Task Force recommendations are limited to anti-money laundering aspects and
do not imply further regulatory standards. To achieve that, recommendation 15 was
amended and new definitions for ‘virtual asset’ and ‘virtual asset service provider’
were added to the Glossary. The second paragraph of Recommendation 15 (‘New
Technologies’) now reads as follows:
“To manage and mitigate the risks emerging from virtual assets, countries
should ensure that virtual asset service providers are regulated for AML/CFT
purposes, and licensed or registered and subject to effective systems for mon-
itoring and ensuring compliance with the relevant measures called for in the
FATF Recommendations.” 12
This approach—aiming at regulating service providers—was also suggested in the
Bank for International Settlements Annual Report 2018, in which the BIS voiced
concerns about anti-money laundering compliance (by referring to the 2013 drop in
Bitcoin value when the black market trading place ‘Silk Road’ was closed-down as
well as to various thefts from crypto exchanges leading to estimates that about 20%
of all Bitcoins ever issued are missing, usually stolen from exchanges). The approach
suggested by BIS entails on the one hand globally-coordinated regulations, interop-
erability with financial entities and, in particular, the regulation and monitoring of
service providers for cryptocurrencies.13 Therefore, the approach suggested by the
BIS and the approach implemented in revised Recommendation 15 of the OECD
correspond with one another in focusing on service providers, and calling states to
regulate or at least monitor such service providers.
The approach taken by these international institutions and forums is all the more
interesting as according to advice provided to the European Securities and Markets

11 OECD [11].
12 FATF [12], with further references.
13 Bank for International Settlements [2], pp. 107–109.
104 T.A. Frick

Authority by the Securities and Markets Stakeholder Group on 19 October 2018, in

the first half of 2018, 40% of all initial coin offerings were conducted in the Cayman
Islands which is not an Financial Action Task Force member.14

2.2 Developments in the EU

In the EU, the Fourth Anti-Money Laundering Directive of 2015 is the main legal
instrument for the prevention of the use of the financial system for the purposes for
money laundering and terrorist financing today. The transposition deadline for the
Directive expired on 26 June 2017. However, already in 2018, a Fifth Anti-Money
Laundering Directive was adopted. Among other issues it addresses (such as pro-
viding a uniform approach on how to deal with high risk third countries), the Fifth
Anti-Money Laundering Directive also aims to cover all the potential uses of virtual
currencies.15 In the recitals to the Directive, it is clarified that local currencies used
in very limited networks such as a city or a region among a small number of users
should not be considered to be virtual currencies and that virtual currencies should
also not be confused with electronic money as defined in Directive 2009/110/EC of
the European Parliament and of the Council, nor with monetary value stored on in-
struments exempted as specified in points (k) and (l) of Article 3 of Directive (EU)
2015/2366, nor with in-games currencies that can be used exclusively within a spe-
cific game environment.16 The Fifth Directive states that today, providers engaged in
exchange services between virtual currencies and fiat currencies and custodian wallet
providers are under no Union obligation to identify suspicious activities (which does
not exclude that certain member states impose such obligations). The concern is that
terrorist groups may be able to transfer money into the Union financial system and
to benefit from a certain degree of anonymity on virtual currency networks. Hence,
the scope of the Anti-Money Laundering Directive should be extended to include
providers engaged in exchange services between virtual currencies and fiat curren-
cies as well as custodian wallet providers. Competent authorities should by those
means be able to monitor the use of virtual currencies.17 The recital acknowledges
that the
“inclusion of providers engaged in exchange services between virtual curren-
cies and fiat currencies and custodian wallet providers will not entirely address
the issue of anonymity attached to virtual currency transactions, as a large part
of the virtual currency environment will remain anonymous because users can
also transact without such providers”.18
Therefore, the Directive envisages that national financial intelligence units should be
able to obtain information to allow them to associate virtual currency addresses to the
identity of the owner of the virtual currency. The Fifth Directive achieves such result

14 Securities and Markets Stakeholder Group [15] p. 6.

15 Balzli [1], p. 444.
16 Directive [4], recitals 10 and 11.
17 Loc. cit., recital 8.
18 Loc. cit.
Virtual and cryptocurrencies—regulatory and anti-money laundering 105

with minimal amendments. In addition to the definition given for virtual currencies
(see above, 1.2), the Fifth Directive defines a custodian wallet provider as ‘an entity
that provides services to safeguard private cryptographic keys on behalf of its cus-
tomers, to hold, store and transfer virtual currencies’.19 In Article 2 lit. g and h of
the Fifth Directive, it is specified that the Directive will apply to ‘providers engaged
in exchange services between virtual currencies and Fiat currencies’ (lit g) and to
‘custodian wallet providers’ (lit h).
Through those means, exchanges and wallet providers become ‘obliged entities’.
Article 47 para. 1 of the Fifth Directive furthermore states that ‘Member States shall
ensure that providers of exchange services between virtual currencies and fiat cur-
rencies, and custodian wallet providers, are registered, that currency exchange and
check cashing offices, and trust or company service providers are licensed are regis-
tered, and that providers of gambling services are regulated’.
Therefore, the EU took up the OECD recommendation that exchange services and
wallet providers should be registered or licensed but prescribed only registration. Fur-
thermore, exchange platforms that operate only between different virtual currencies
(i.e., do not provide exchange services between virtual currencies and fiat currencies)
will continue not to qualify as obliged entities; the same applies to initial coin offer-
ings. The new EU approach is therefore a classic ‘gate-keeper’ approach, aiming to
control flows of virtual currencies by the gate-keepers that may exchange virtual cur-
rencies into real-world assets such as fiat currencies, or wallet providers that provide
the physical storage for virtual currencies.

2.3 The Swiss approach

Switzerland’s anti-money laundering provisions are found in the Swiss Penal Code
and in various regulations of self-regulatory organisation such as the Swiss Bankers
Association’s famous Due Diligence Convention. However, the most important legal
basis to combat money laundering and terrorist financing is the Federal Act against
Money Laundering and Terrorist Financing (AML). Since 1997, this has been revised
numerous times. The law applies mainly to financial intermediaries defined as entities
active in the finance sector and persons who, on a professional basis, accept or store
third parties assets or help to invest or transfer such assets. This includes persons who
provide payment services or issue means of payments (Article 2 para. 3 AML).20 The
field of application of the Swiss anti-money laundering rules is, therefore, broader
than the field of application of the EU Fourth Anti-Money Laundering Directive. This
is in line with the general approach taken by the Swiss regulators which aims to have
a technology-neutral approach to regulating the finance sector. Under this approach,
the rules applicable should not be determined by the technical means used but rather
by the actual product put on the market. One of the consequences of introducing a
technology-neutral approach has been that asset management agreements no longer
need to be entered into in writing (i.e., with an original signature of the customer) but
could be concluded electronically. Under this approach, cryptocurrencies fall clearly

19 Directive [4], Art. 3 (18).

20 Bundesgesetz über die Bekämpfung der Geldwäscherei [3].
106 T.A. Frick

under the Swiss anti-money laundering regulations as they qualify as a means of

payment.
However, it is not the currency as such that is regulated but rather the person
providing certain services in connection with cryptocurrencies, i.e., the financial in-
termediary. The following activities in connection with cryptocurrencies will render a
person or a legal entity a financial intermediary and subject him or her to obligations
under Swiss anti-money laundering laws:21
• the issuing of cryptocurrencies (in an initial coin offering or otherwise). Issuing
means of payment qualifies as a service to support payments. The Swiss Financial
Markets Authority (FINMA) in its 2018 guideline states that the issuing of pay-
ment tokens constitutes the issuing of a means of payment subject to anti-money
laundering regulations, ‘as long as the tokens can be transferred technically on a
blockchain infrastructure’. FINMA specifies that this may be the case at the time
of the initial coin offering or only at the later date.22
• the mining of a cryptocurrency will not qualified as issuing a means of payment as
long as the newly mined tokens are only used by the miner.
• the ordinance to the Swiss AML specifies (see Article 4 para. 1 lit. c in connection
with para. 2) that the transfer of assets by accepting virtual currencies and payment
of a corresponding sum in cash, precious metal or virtual currencies or cashless
transfer or credit transfer via a payment or settlement system will also qualify as
a service for payment; under the same ordinance, a person will also qualify as a
financial intermediary if he or she transfers cryptocurrencies to a third party on
behalf of his contracting party and in so doing physically takes possession of these
assets, has them credited to his own account or orders the transfer of the assets on
behalf of the contracting party (Article 4 para. 1 lit. a).23
• cryptocurrency exchanges: The exchange of cryptocurrencies (i.e., purchase and
sale of cryptocurrencies may also qualify the person as a financial intermediary.
Qualification as a financial intermediary leads to various obligations. A financial
intermediary has to identify the counterparty and to determine the beneficial owner of
the funds; furthermore, he/she has either to join a self-regulatory organisation for the
purpose of anti-money laundering supervision or to subject him or herself to direct
anti-money laundering supervision by FINMA.
There are some qualifications and exceptions which help persons active in the
cryptocurrency field in Switzerland to comply with these regulations. In the case of an
initial coin offering, the issuer of the cryptocurrency e.g., does not need to join a self-
regulatory organisation (or be subject to direct supervision through FINMA) in the
event that the acceptance of the funds resulting from the initial coin offering is done
through a financial intermediary in Switzerland that is, in its turn, a member of a self-
regulatory organisation.24 In case of exchanges of cryptocurrencies, the obligation to
identify the counterparty and to determine the beneficial owner only applies in case

21 For the following: Balzli [1], p. 451s.

22 FINMA [5], p. 6.
23 Hauser-Spühler [8], p. 158s; Verordnung über die Bekämpfung der Geldwäscherei [17].
24 Balzli [1], p. 452.
Virtual and cryptocurrencies—regulatory and anti-money laundering 107

transactions linked to each other exceed a total amount of CHF 5,000 or in the case
of additional elements that should create suspicion. Furthermore, the recipient of a
payment only needs to be identified if the amount transferred exceeds CHF 1,000
(again, unless there is a special reason for suspicions).
The Swiss Bankers Association recently issued guidelines on the opening of cor-
porate accounts for blockchain companies, dealing in particular with how banks
should deal with their due diligence obligations.25
Under such guidelines, Swiss banks are encouraged to accept funds received
through an initial coin offering only if the initial coin offering organiser registers
each participant regardless of the subscription amount and record the name, address,
date of birth, nationalities and place of birth. A full identification according to anti-
money laundering standard is expected as soon as a subscription amount exceeds
CHF 15,000. The information collected in the identification process should also con-
tain all relevant wallet addresses that the initial coin offering participant uses when
making capital contributions. While this rule should apply to all initial coin offerings
(i.e., also initial coin offerings of utility and security tokens), in the case of payment
tokens (i.e., crypto currencies) simplified identification duties may only apply up to a
threshold of CHF 3,000. Up to such an amount, a simple copy of an identification doc-
ument with the name, address, date of birth, beneficial owner, e-mail and telephone
number and all relevant wallet addresses will be sufficient. Beyond that threshold, a
full anti-money laundering identification of the contributor will be required. Further-
more, the initial coin offering organiser should do a background check of the wallet
addresses.26
In spite of these detailed rules, Swiss banks continue to be very reluctant to accept
funds resulting from the issuance of cryptocurrencies - which harms the further de-
velopment of cryptocurrencies in Switzerland. Very recently, individual banks have
adapted their internal compliance standards to the crypto world and started to accept
crypto funds (also as wallet providers) and fiat funds resulting from the issuance of
cryptocurrencies. It is expected that this trend will continue.

3 Regulatory treatment of cryptocurrencies

3.1 The EU approach

The approach of the European Union to cryptocurrencies (in the wider framework
of ‘crypto assets’, as this term is used in the reports hereinafter referred to) is well
summarised in the two reports issued by the European Banking Authority (EBA) and
the European Securities and Markets Authorities (ESMA) 27 , respectively, in January
2019. As the EBA summarises, ‘typically crypto-assets fall outside the scope of EU
financial services regulation’ and divergent approaches to the regulations of such

25 SwissBanking [16].
26 SwissBanking [15], p. 11.
27 ESMA [7].
108 T.A. Frick

activities are emerging across the EU.28 It is for this reason that, in their reports,
both the EBA and the ESMA provide an analysis of the legal situation in the EU
and in certain member states as well as certain suggestions regardin what regulatory
measures the EU should propose.
The key issue for the qualification of cryptocurrencies is whether they qualify as
a financial instrument as per the Markets in Financial Instruments Directive (MiFID
II), as a fund as per the Payment Services Directive (PSD2) or as electronic money
as per the Electronic Money Directive (EMD2).29
The European Banking Authority in its reports deals in particular with the terms
‘electronic money’ and ‘fund’ and refers to the European Securities and Markets’
report on whether crypto assets qualify as financial instruments.
According to Article 2 point 2 of the Electronic Money Directive, ‘electronic
money’ is defined as
“electronically, including magnetically, stores monetary value as represented
by a claim on the issuer which is issued on receipt on funds for the purpose of
making payment transactions as defined in point 5 of Article 4 of [the Payment
Services Directive], and which is accepted by a natural or legal person other
than the electronic money issuer.” 30
According to this definition, cryptocurrencies could potentially qualify as electronic
money within the scope of the Directive. If so, the issuance of such funds may require
an authorisation of the issuer as an electronic money institution.
However, certain cryptocurrencies such as stable coins (the value of which is sup-
ported by commodities such as precious metals or fiat currencies) may provide their
holders with a claim against the issuer in case of a reduction of the value of the
currency. In such cases, stable coins may qualify as electronic money. Typical cryp-
tocurrencies (which do not give raise to a claim against the issuers, such as Bitcoin
or Ether) will not qualify as electronic money.
Under the Payment Services Directive, cryptocurrencies would only be qualified
as ‘funds’, as per point 25 of Article 4 of the the Payment Services Directive, if there
were bank notes, coins or scriptural money, or if they qualified as electronic money
according to the Electronic Money Directive. Hence, the Payment Services Directive
will not apply to typical cryptocurrencies that do not provide a claim against the
issuer. As the European Securities and Markets Authority report states,
“where crypto-assets qualify as transferable securities or other types of MiFID
financial instruments, a full set of EU financial rules, including the prospectus
directive, the transparency directive, MiFID II, the market abuse directive, the
short selling regulation, the central securities depositories regulation and the
settlement finality directive are likely to apply to their issuer/or firms providing
investment services/activities to those instruments”.31
28 EBA [6], p. 4.
29 Following quotes from the ESMA and EBA reports referred to.
30 EBA [6], p. 12.
31 ESMA [7], p. 5.
Virtual and cryptocurrencies—regulatory and anti-money laundering 109

The European Securities and Markets Authority, in its report, assesses various
types of crypto-assets, including hybrid tokens with payment functions. However,
as ESMA writes, “pure payment-type crypto-assets were not included [. . . ] as they
are unlikely to qualify as financial instruments”.32 Financial instruments are defined
in Article 4 (1) (15) of MiFID II as the instruments specified in Section C of Annex I.
These include transferable securities, money market instruments, units in collective
investment undertakings and various derivative instruments. Although the definition
of transferable securities is a broad one, it does not entail all non-physical assets that
can be traded. In particular, both the European Securities and Markets Authority and
various regulators of EU member states have voiced the opinion that pure cryptocur-
rencies will not qualify as financial instruments under MiFID II. Therefore, whereas
stable coins could potentially qualify as financial instruments, a pure cryptocurrency
will typically not qualify as a financial instrument and, therefore, not be governed by
the various financial regulations referred to in the European Banking Authority and
the European Securities and Markets Authority’s reports.
Both the European Banking Authority and the European Securities and Markets
Authority provide advice for further legislative developments based on their gap anal-
ysis:
• the European Banking Authority observes that current EU financial services law
does not apply to a number of forms of crypto-assets and related activities such
as crypto-asset custodian wallet provision and crypto-asset trading platforms, and
notes that divergent approaches across the EU have been identified at Member
State level. Hence, the European Banking Authority recommends the carrying out
of an analysis so as to assess whether EU level action is appropriate. In case action
is taken, the EBA recommends focusing on access points to the traditional financial
system and on consumers.33
• the European Securities and Markets Authority draws attention to the fact that
when crypto-assets do not qualify as financial instruments or electronic money,
investors will not benefit from the safeguards that such rules provide and that in-
vestors may not easily distinguish between the various type of crypto-assets. There-
fore, ESMA recommends implementing a bespoke regime for specific types of
crypto-assets with a focus on the one hand on anti-money laundering considera-
tions (so that anti-money laundering rules should apply to all activities involving
crypto-assets) and on the other hand on appropriate risk disclosure requirements to
ensure that consumers are aware of the risks.34

3.2 The Swiss approach

In Switzerland, the regulatory treatment of cryptocurrencies and other tokens was re-
cently summarised in a comprehensive report rendered by the Swiss Government in
December 2018. The report follows the classification of tokens by the Swiss Finan-
cial Markets Authority in its guidelines in February 2018, in which it distinguished

32 Loc. cit., p. 19.

33 EBA [6], p. 18s.
34 ESMA [7], p. 40.
110 T.A. Frick

utility tokens, asset tokens and payment tokens. Payment tokens are defined as cryp-
tocurrencies (in the narrow sense, such as Bitcoins) that neither provide the holder
with a claim nor a right in rem. The report acknowledges that in addition to these
typical cryptocurrencies, other tokens may qualify as payment tokens, in particular
stable coins which are backed by assets or fiat currencies.35 The report thereafter con-
tinues to assess, under the various Swiss financial market laws, whether tokens will
fall under their ambit.
The acceptance of customer deposits is reserved to banks holding a banking li-
cence under the Swiss Federal Banking Act. The issuance of a cryptocurrency can
only qualify as accepting a deposit if the issuer accepts a claim of the customer against
the issuer when issuing the cryptocurrency. Typically, this is not the case (unless the
cryptocurrency is backed by real assets). However, acceptance of a cryptocurrency
(including Bitcoins) by a service provider that accepts a claim of the customer for
repayment of such Bitcoins may qualify as a deposit and trigger the banking licence
requirement. Storage of tokens will only be exempted if the tokens are merely trans-
ferred for safe deposit, are directly stored on the blockchain and can be allocated to
each individual customer at any time.36
There are various other exemptions e.g., customer funds booked on accounts for
the execution of customer transactions do not qualify as deposits as long as no inter-
est is paid and the execution is made within 60 days. Furthermore, funds which are
transmitted to a payment system and only serve for the future purchase of assets or
services may be exempted if the maximum claim per customer never exceeds CHF
3,000. Finally, under a recently introduced sandbox scheme, no banking licence is
required if the total deposits accepted by a financial service provider do not exceed
CHF 1 million in total, no interest is paid and the depositors are informed that the
service provider is not supervised by FINMA.37
On 1 January 2019, a new ‘FinTech Licence’ was introduced permitting service
providers to accept customer deposits up to CHF 100 million (including cryptocur-
rencies). Such service providers will be supervised by FINMA but under a lighter
supervisory regime.
Under the new Financial Market Infrastructure Act (FinFraG, SR 958.1)38 that
became effective on 1 January 2016, various service providers may be regulated in
case tokens qualify as securities. However, while a discussion is ongoing as to which
types of tokens may qualify as securities, pure payment tokens will not qualify as
securities (however, according to the FINMA guidelines, in case of a pre-sale in an
initial coin offering a claim granted to a pre-sale purchaser to receive future payment
tokens will indeed qualify as a security as a claim is granted against the issuer, even
if the claim is at a later stage satisfied by allocation of a payment token that itself
does not give raise to a claim).39 Although the use of payment tokens by a payment
system may still fall under the Financial Market Infrastructure Act, only payment

35 Rechtliche Grundlagen für Distributed Ledger-Technologie [13], p. 89.

36 Loc. cit., p. 91.
37 Rechtliche Grundlagen für Distributed Ledger-Technologie [13], p. 93.
38 SR: Systematic Collection of Federal Laws, accessible under https://www.admin.ch.
39 FINMA [5], p. 11.
Virtual and cryptocurrencies—regulatory and anti-money laundering 111

systems relevant to the functioning of the financial markets require an authorisation

or in case protection of market participants requires this.
Asset managers managing token investments (including cryptocurrencies) may
fall under the (not yet enacted) Financial Institution Act (FINIG, SR 954.1). As per
the (also new) Financial Services Act (FIDLEG, SR 950.1—both of which are ex-
pected to become effective on 1 January 2020—payment tokens will again not be
qualified as securities as long as they do not give raise to a claim against the issuer.40
Therefore, as a rule, pure cryptocurrencies will not qualify as financial instruments.
However, asset management or investment advice given may still qualify under the
Financial Services Act even if it relates to payment tokens.
The Swiss Government is of the opinion that the current regulatory framework, de-
signed as being technology-neutral, covers the developing crypto and token business
well. However, the Federal Council proposes a new licence category for financial
market infrastructure in the blockchain/distributed ledger area due to the fact that
traditionally separated activities like trading and settlement or storage are typically
combined on the blockchain. To achieve this, it proposes to deviate from the princi-
ple of technology-neutral regulation and to introduce an additional special regulatory
category.41

4 Conclusion

Both the EU and Switzerland are currently assessing how to deal with the new crypto
economy and, among other things, cryptocurrencies. Tokens may appear in a variety
of forms. Not only utility tokens and security tokens need to be differentiated from
cryptocurrencies but cryptocurrencies as a group need to be assessed differently, de-
pending on whether a token is a ‘pure’ cryptocurrency (such as Bitcoin, giving no
claim against an issuer) or is a stable coin, i.e., the payment token is secured by com-
modities or fiat currencies, and gives the holder a claim or a right in rem to stabilise
the value of the stable coin. In case of pure cryptocurrencies, the current approach in
the European Union on the Union level and in Switzerland is not too different, but
interesting differences can be discovered.
Anti-money laundering regulations apply to pure cryptocurrencies both in Switzer-
land and in the EU, once the Fifth Anti-Money Laundering Directive is implemented.
However, in the EU, an exchange from one cryptocurrency to another will continue
not to be regulated by the Fifth Anti-Money Laundering Directive; and transfers of
cryptocurrencies and initial coin offerings may also not be covered by anti-money
laundering rules. Therefore, the Swiss approach to bring cryptocurrencies under anti-
money laundering regulations seems to be broader.
Financial market regulations apply only sporadically to pure cryptocurrencies.
While Switzerland seems to be willing to accept this in general, recent reports by
the European Central Bank and by European Securities and Markets Authority ad-
vocate that appropriate risk disclosures and warnings to buyers about the risks of

40 Rechtliche Grundlagen für Distributed Ledger-Technologie [13], p. 123.

41 Loc. cit., p. 114s.
112 T.A. Frick

crypto-assets to buyers in general (without exempting cryptocurrencies) should be

introduced.
In both jurisdictions, comprehensive reports were provided by the end of 2018/the
beginning of 2019 and it can be expected that the discussion about the appropriate
approach to be taken vis-à-vis cryptocurrencies is far from over.

Publisher’s Note Springer Nature remains neutral with regard to jurisdictional claims in published maps
and institutional affiliations.

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