Given the continued popularity of crypto-assets, such as Bitcoin or Ether, the question arises as to whether they can serve as assets in a collective investment scheme under the Collective Investment Schemes Act (CISA). FINMA recently approved the first crypto fund—that is, the first collective investment scheme that holds crypto assets as assets.[1] This text is a brief guide on how to structure a crypto fund in accordance with the KAG.
There is no universally accepted definition of the term “crypto-assets.” Generally, however, it refers to cryptocurrencies such as Bitcoin or Ether. It can also include other tokens, such as protocol tokens from various blockchain ecosystems.
To establish a crypto fund, the fund must first be approved by FINMA (2), a prospectus must be published if required (3), and the company establishing the fund—or the investment company—must be authorized (4).
As a quick reminder: Collective investment schemes, or funds, are defined as assets raised by at least two investors for the purpose of joint investment and managed on their behalf.
Under the CISA, investment funds may include, in particular, securities and real estate funds, as well as other funds for traditional and alternative investments. For crypto-assets, the provisions governing other funds for alternative investments must be observed. The relevant provisions are set forth in Articles 69 and 71 of the CISA, as well as in Articles 99 et seq. of the Collective Investment Ordinance (CIO).
Depending on the investors’ circumstances, a collective investment scheme may be structured as an open-end or closed-end fund. For open-end collective investment schemes, the options include contractual investment funds and investment companies with variable capital (SICAVs). For closed-end schemes, the options include limited partnerships for collective investment schemes and investment companies with fixed capital (SICAFs). Closed-end structures are particularly well-suited for long-term investment strategies in which the pooled funds are invested on a fixed basis, as is the case, for example, with private equity strategies. However, open-end collective investment schemes are generally the preferred choice for collective investment schemes that invest in crypto-assets.
To establish an open-ended collective investment scheme, a license must be obtained from FINMA. To establish a contractual investment fund, authorization as a fund management company is required under Art. 32 of the Financial Institutions Act (FINIG). If the SICAV form is chosen for the collective investment scheme, authorization must be obtained in accordance with the provisions of Art. 14 in conjunction with Art. 36 of the Collective Investment Schemes Act (KAG).
A collective investment scheme must, as a general rule, designate a custodian bank that is licensed under the Banking Act (BankG). The custodian bank holds the fund’s assets, handles the issuance and redemption of shares, and manages payment transactions.
When it comes to the custody of fund assets, crypto assets definitely require a specialized provider with the necessary expertise for this activity. SEBA Bank AG and Sygnum Bank AG, as banks specializing in crypto assets, are particularly well-suited for this purpose.
A collective investment scheme must generally be approved by FINMA. Depending on the chosen legal structure, either the fund contract of the contractual investment fund or the articles of association and investment regulations of the SICAV must be submitted to FINMA for approval. In this process, FINMA will verify whether the investment requirements of the CISA are being met.
There is a great deal of flexibility in structuring an alternative investment fund. However, FINMA also has considerable discretion to impose requirements on the management of such collective investment schemes.
According to a press release, FINMA has also ruled that the approved collective investment scheme may invest only in established crypto-assets with sufficiently high trading volumes. Furthermore, investments must be made through established counterparties and platforms that are headquartered in a member state of the Financial Action Task Force (FATF) and are subject to applicable anti-money laundering regulations. While these requirements are not universally applicable, they do provide strong indications that future crypto funds will likely be required to comply with them as well. In particular, the requirements regarding anti-money laundering regulations will most likely be imposed on all such collective investment schemes, as the risk of money laundering in the crypto-asset sector remains very high.
It is unlikely that FINMA will now apply the requirements for this fund—regarding permitted crypto-assets (established and high trading volumes)—to future crypto funds as well. The world of crypto-assets is too diverse to be limited to just a few cryptocurrencies. Accordingly, a collective investment scheme that invests in non-fungible tokens (NFTs)—some of which are highly volatile—should also be permitted, in keeping with the nature of alternative investments.
As a general rule, a prospectus must be prepared for collective investment schemes in accordance with the provisions of the Financial Services Act (FIDLEG) and the corresponding ordinance (FIDLEV). However, the prospectus does not need to be submitted to the audit body under FIDLEG; it need only be submitted to FINMA.
If the collective investment scheme is to be offered only to qualified investors in accordance with Art. 10, paras. 3 and 3ter of the Collective Investment Schemes Act (CISA), an application may be filed with FINMA to waive the requirement for a prospectus. If, however, retail investors are also to be targeted, a key information document must be prepared in addition to a prospectus, in accordance with the provisions of Art. 58 et seq. of the FIDLEG.
The specific risks associated with alternative investments must be disclosed in the name of the collective investment scheme, in the prospectus and the key investor information document, as well as in advertising.
A collective investment scheme with crypto-assets as its underlying assets can certainly be established in Switzerland and structured with a high degree of flexibility. Furthermore, the fund’s assets can be held in custody in Switzerland without any issues. However, the organizational and financial hurdles are relatively high without partnering with companies that have already been authorized. FINMA is generally open to such crypto funds, but appears to be somewhat more restrictive in terms of specific implementation than would be desirable in principle. However, FINMA has not yet established a fixed practice, which means there is certainly room for innovative models.
[1] FINMA press release dated September 29, 2021 https://www.finma.ch/de/news/2021/09/20210929-mm-genehmigung-schweizer-kryptofonds/.
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