When a company holding the private keys for crypto tokens goes bankrupt, access to the tokens can be lost for ever. | Illustration: Joël Roth

The first Bitcoin was mined in 2009. Since then, virtual currencies have enjoyed a rapid rise. At present, some 3,000 cryptocurrencies are being traded across the world. Altogether, they were worth some CHF 250 billion in early 2020. They have different characteristics and applications, but they all have three things in common. They are based on blockchain technology, they are managed decentrally, and they are all in a legal grey zone. “Whoever buys a Bitcoin is neither its owner, nor otherwise protected by law”, explains Stephan D. Meyer, who has written his doctoral thesis at the University of Zurich about the current legal uncertainty.

Not yet a crypto nation

This is one of the first examples of intensive research into this field in Switzerland. “It’s really basic research”, says his doctoral supervisor Harald Bärtschi, who runs the ‘Virtual currencies’ project at the ZHAW School of Management and Law. “Research like this is important so that we can develop legal solutions, and reconcile this new technological phenomenon with traditional instruments of law”.

Two years ago, the former Swiss Minister for Economic Affairs, Johann Schneider Ammann, said that Switzerland should become a “crypto nation”, and he spoke of “optimum conditions” for the crypto-financial industry. Such conditions would have to encompass clear legislation – but in fact, cryptocurrencies are not covered in full by any law at all. They only exist virtually and are thus like immaterial goods; but they are also exclusively controllable (for more on this, see the box on the right); and like securities, they are based on a register. But they can only be controlled by a person who knows the private key comprising a mixture of numbers and letters. “Cryptocurrencies call into question the boundaries of existing legal institutions that were thought to have been clearly drawn”, says Meyer. He meanwhile works as an entrepreneur in digitalising securities, and is also a lawyer at a large law firm where he specialises in blockchain technologies.

Who should pay up if a private key is lost due to negligence? | Illustration: Joël Roth

Little protection against wrongdoing

Whereas Bitcoin was conceived purely as a means of payment and storing value, in recent years a multitude of new units of value have emerged that can do more than just function as so-called digital money. They are known as crypto tokens, and have a market capitalisation of over a hundred billion Swiss francs. They are comparable to classical securities. You can transfer receivables and rights of members with them, and they can certify physical goods or intellectual property rights. But in legal terms, they are generally in a vacuum.

“The problems can be seen especially in the areas of insolvency law, the law of torts, and inheritance law”, says Stephan D. Meyer. He offers three examples to illustrate his point. “If a company goes bankrupt that has been storing the access codes to crypto tokens for third parties, it is unclear whether or not the owner can demand to be given his access codes and thereby get his assets”. The law only provides for the right of separation of property in cases of insolvency when it is dealing with physical objects. The legal situation is also unclear in cases of wrongdoing. Imagine that a colleague at work negligently deletes the access code, which means the owner irrevocably loses access to his tokens – he cannot demand damages, because appropriate standards of protection are absent. Meyer also sees problems with issues of inheritance. “What happens if someone bequeaths tokens to which he has no actual right in legal terms?”

If someone dies, their crypto stash might well be buried with them. | Illustration: Joël Roth

Meyer has examined several possibilities for closing these legal gaps. Ultimately, he argues in favour of creating a special law such as Liechtenstein introduced in January 2020. “The unique characteristics of crypto tokens can be recognised best by such a special law”, he says.

Inadequate legislative proposal

In the past two years, the Swiss Federal Council has also been busy looking into these legal loopholes. In November 2019, it published a legislative proposal. But the Federal Council does not want to introduce a special blockchain law after the example of Liechtenstein, as Stephan D. Meyer recommends. Instead, it proposes adapting numerous existing laws. In future, crypto tokens should be treated in legal terms like securities. The forgery-proof data structure of the blockchain will here serve instead of paper; it allows financial assets to be recorded, and purchases and sales can be transacted online without involving traditional banks or stock exchanges.

Mirjam Eggen is a professor of civil law at the University of Bern. She was one of the experts consulted while the Federal Council was preparing its draft legislative proposal, and she was a member of Switzerland’s ‘Blockchain Taskforce’. “I think the legislative proposal of the Federal Council has succeeded very well, especially with regard to the Code of Obligations”, she says. At the beginning, the Taskforce discussed the possibility of creating a special law, but they quickly distanced themselves from it. Swiss legislation is not oriented to factual issues, which is why there is no ‘Internet law’ and no ‘animal law’. It makes more sense to embed the new legislation in existing laws. “At present I don’t see any big gaps in the draft. But if the technology progresses, we will have to catch up”.

Stephan D. Meyer has a more critical view of the proposal by the Federal Council. “If you just adapt existing law, this will only apply to those tokens that are like a security. Virtual currencies like Bitcoin and other units of value will get left by the wayside, with just a few exceptions”. If parliament votes for the legislative proposal, ambiguities and insolvencies will be controlled in future. The lack of legality and the open questions about crimes and inheritances would remain, however. “The Federal Council regrettably missed the chance to undertake a holistic integration of digital goods”. The courts, fears Meyer, will be faced with big challenges. “They will have the task of filling legal gaps with their judgements”. Further legal adjustments will thus be needed to ensure legal security. Especially if Switzerland doesn’t want to lose its reputation as an attractive site for cryptocurrencies.