Security Tokenization; the Swiss standard
In December 2021, Switzerland took a major step in formalizing share tokenization by adopting the STANDARD for the Tokenization of Shares using Distributed Ledger Technology (DLT). This move, led by the Capital Markets and Technology Association (CMTA), marked a significant advancement in how shares of Swiss corporations, especially those organized under Swiss law (Aktiengesellschaften / sociétés anonymes), could be digitally recorded, tracked, and transferred.
The Birth of Share Tokenization in Switzerland
The standard aims to streamline the tokenization of both voting shares and non-voting shares, allowing companies to leverage digital tokens recorded on a blockchain to represent ownership. As a result, legal title to shares can be transferred only through token exchanges on a distributed ledger, such as Ethereum or Tezos. This is a game-changer for the capital markets sector, where historically, transferring shares required traditional intermediaries like brokers.
In 2020, the Swiss Parliament passed the DLT Act, which modified the Swiss Code of Obligations, providing a clear framework for how financial instruments could be tokenized. Following this, the CMTA released the CMTAT smart contract, an open-source contract framework designed for tokenizing shares. By utilizing a smart contract, share transactions become automated and secure, cutting down the inefficiencies associated with manual transfers.
Certification and Compliance
Companies adopting this tokenization approach can seek CMTA certification, provided they adhere to strict requirements laid out by the standard. This includes:
- Use of the CMTAT smart contract or an equivalent contract recognized by CMTA.
- Hiring a CMTA-recognized technology service provider to handle the smart contract’s deployment and ensure tokens are allocated to shareholders.
- Obtaining a legal opinion from a CMTA-recognized legal expert confirming compliance with the standard.
Key Concepts and Structures
The DLT Act introduced the idea of ledger-based securities, where tokens are linked to shares and transfers occur via the distributed ledger. However, shares themselves are not issued in the form of tokens; instead, tokens serve as a digital representation that facilitates share transfers. This structure is supported by Swiss corporate law, which references several types of registers, such as the register of uncertificated securities, the register of beneficial owners, and the share register.
Each of these registers plays a different role in maintaining the integrity and legality of tokenized shares. For example, the distributed ledger records token transactions, while the company maintains a share register to track official shareholder records.
Post-Tokenization Actions
Once shares are tokenized, companies must monitor the functioning of their distributed ledger and address issues like lost private keys or corporate actions such as dividends. Notably, Switzerland has procedures in place under the CO Article 973h to cancel tokens if a private key is lost or stolen, ensuring that ownership disputes are resolved through legal channels.
Tokenized shares can also be integrated into the intermediated securities system, making them transferable through professional custodians, akin to traditional securities held in Swiss banks.
Moving Forward
With the 2022 modification of the standard, Switzerland is refining its position as a global leader in digital finance. The success of tokenizing shares under Swiss law is expected to influence other jurisdictions and create new opportunities for corporate governance and capital markets around the world. For companies, tokenization reduces administrative burdens, increases security, and potentially broadens access to investment markets.
This shift from traditional shareholding to a tokenized model promises to make Swiss capital markets more accessible and efficient while maintaining the high standards of legal and technical compliance that Switzerland is known for.