The Swiss DLT Act came into force on 1 February 2021. Drafted in a technology-neutral manner, it does not mention the term “blockchain” at all, despite it being enacted in order to solve certain legal needs in this field. It introduces the ledger-based security as an uncertificated security or, in blockchain terms, a token. In other words, a ledger-based security is an entry on an electronic register.

The legal concept

The issuer and the acquirer of a ledger-based security have to agree in a registration agreement that the right vested in the ledger-based security can only be transferred and exercised via the electronic ledger. Consequently, the ledger-based security has the same effects as a security of public faith. The ledger that the security is entered into must meet certain minimal requirements that justify these effects. The law sets out the following three requirements that must be complied with. lf the ledger does not meet them it does not have the effects of a security of public faith so that, legally, no ledger-based security exists.

The functional reliability of the ledger is not a qualifying feature and so need not be constantly met. If the ledger temporarily fails to function properly, the holder’s right to a ledger-based security remains intact. It is rather the issuer’s responsibility to ensure that the register of securities is organised in line with its purpose and functions at all times, in compliance with the registration agreement and the law.

What kind of rights can be securitised?

A ledger-based security, by definition, must securitise a right. Not all tokens necessarily securitise a right. Bitcoin tokens for example do not securitise any rights. Bitcoins are register entries that can be used as a means of payment if a person accepts them as such. If a token does not represent any right, then it is a mere (immaterial) object. Such an object can be purchased and transferred by handing over the related private key. In the regulatory field, such tokens qualify either as payment tokens or as utility tokens, depending on their functionality. Only tokens that include a right qualify as asset tokens.

The DLT Act was disruptive in the legal domain because a transfer of rights usually requires the written form, i.e. the assignment must be signed in wet ink or by means of a qualified electronic signature. This holds true for the transfer of contractual rights, membership and shares. In contrast, the transfer of rights in rem – rights that rest on an object or good (or chattel) – requires the transfer of possession in cases of movables, or a public deed and a land register entry in cases of immovables. Before the DLT Act, it was not possible to tokenise shares in a company and transfer them via a token transfer.

The key feature of the ledger-based security is that the right vested in it will transfer via transfer of it. However, a ledger-based security cannot securitise any and all rights, only those rights that can be securitised in securities of public faith. These are contractual rights like receivables. Also memberships and shares in companies can be securitised in a ledger-based security, provided that this is allowed by the applicable company law. In Switzerland, this is currently the case for shares in a stock corporation and in a partnership limited by shares. It is also possible to securitise shares in foreign companies, if allowed by local company law.

The securitisation of rights in rem on chattels is generally not possible as they are not rights in securities of public faith. As an exception to this principle, the law allows securitisations of mortgage certificates and bonds secured by land charges or charges on chattels. Likewise, commodity papers issued by a freight carrier or a warehouse may be securitised in ledger-based securities. Other than this, though, rights in rem can generally be neither represented nor traded by a title. Such rights in rem can, however, be transferred (indirectly) via ledger-based securities securitising a contractual right against an escrow agent holding the right in rem for the ledger-based security holders.