Use of Cryptocurrency as Share Capital

Background on the Use of Cryptocurrency 

A cryptocurrency can be defined as a virtual or digital currency that makes use of cryptographic protocols and coding systems that are complex for the security of their units of exchange. As a result of this security feature, the counterfeit of cryptocurrency is difficult (Sapovadia, 2015). A cryptocurrency is theoretically immune to any form of manipulation or interference by the government since any central authority does not issue it. Hundreds of these cryptocurrencies are available around the world. For example, Bitcoin which is the most used cryptocurrency. Others include Namecoin, Feather coin, Primecoin, and Litecoin. Each of these cryptocurrencies has a particular spin on the blockchain technology as well as intended use.

Cryptocurrencies can be beneficial to companies in many ways. For instance, many companies are making use of cryptocurrency for investment and trade in commodities. With cryptocurrency, the holders of the account essentially have possession of all the coins that he or she has purchased, in contrast to banks that is capable of freezing a person's assets and other accounts such as PayPal that can be put on hold or even shut down (Adhami, Giudici & Martinazzi, 2017).The government cannot take over cryptocurrencies; therefore, investments made by these currencies are somehow protected since cryptocurrency accounts cannot be accessed. There is also minimal risk of fraud for companies that accept the use of cryptocurrencies because it is difficult to counterfeit the cryptocurrencies.

Cryptocurrencies can be used as a global currency since any person or company with access to the internet can purchase them (Raymaekers, 2015). A company can use cryptocurrencies as a way of connecting to a new niche in their markets to facilitate business transactions with those companies that accept them as the primary currency. The use of Cryptocurrencies by any company in its operations is subject to the laws and regulations of the country with some like Switzerland readily accepting its use.

The Legality of Cryptocurrency 

Legality of Cryptocurrency in other Regions of the World 

The activities revolving around the cryptocurrencies technically portray them as a well-established currency system. However, no uniform international laws that regulate the use of cryptocurrency exist. Some countries do not allow the use of cryptocurrencies for many reasons. For instance, it can be used by criminal elements because they can anonymously be used in conducting transactions between different account holders from any place across the globe (Raymaekers, 2015). They can use cryptocurrencies to trade in goods considered illegal including weapons and drugs. Most countries do not have precise determinations concerning the legality of cryptocurrencies, and instead, they prefer to make use of the wait-and-see approach. Some states have consented to the legal use of cryptocurrencies, and in these countries, regulatory oversight has been enacted to this effect (Chohan, 2017). Cryptocurrencies are however never accepted to be used as a substitute for legal tender of any country.

Some countries do not allow the use of cryptocurrencies, for instance, in Iceland, foreign exchange trading involving any form of cryptocurrency is banned because of its non-compatibility with the Foreign exchange Act of the country. The government of Vietnam has maintained that cryptocurrencies are not legitimate methods of payment (Raymaekers, 2015). It is illegal for the citizens as well as the financial institutions to deal in cryptocurrencies because they can be used in money laundering and other criminal activities. In Bolivia, the use of cryptocurrencies has been banned by the El Blanco Central de Bolivia. In China, individuals are allowed to deal in cryptocurrencies between themselves, however, for financial institutions including banks, transactions involving cryptocurrencies is prohibited.

Examples of countries that have accepted the use of cryptocurrencies include the United States. Prominent companies including Dell, Overstock.com, and Dish Network have welcomed the use of cryptocurrency Bitcoin as payment. The United States Financial Crimes Enforcement Network, which is a department of treasury issues guidance on the use of Bitcoins. Canada is the other country that maintains a stance that is friendly to cryptocurrency. The Canada Revenue Authority views cryptocurrencies as a commodity (Engle, 2015). Canada considers exchanges involving cryptocurrencies as money service businesses. Australia permits business entities to mine, trade or buys cryptocurrencies (Carlson, 2016). The Australian Taxation Office considers the transactions that make use of cryptocurrencies as barter arrangements that are subject to taxes. The European Union has not made any decision about the legality, acceptance or use of cryptocurrency. The individual countries of the European Union have formed their cryptocurrency stances.

The Legality of Cryptocurrency in Switzerland 

Switzerland established a global hub called the “Crypto Valley” in Zug for virtual currencies. The Swiss Financial Market Supervisory Authority (FINMA) implemented a forward-looking regulation for the cryptocurrencies (Kaal, 2018). Oliver Bussmann who founded the Crypto Valley Association stated that the establishment made Switzerland one of the leading ecosystems for Blockchain, crypto as well as the distributed ledger technology.

Johann Schneider Ammann who heads Switzerland’s department of economic affairs explains that the country is developing into a “crypto nation” with regards to the digital revolution as the market of the Initial coin offering (ICO) continue to flourish (Chohan, 2017). The Zug municipality in central Switzerland came up with a decision to accept the use of cryptocurrency Bitcoin as a method of payment for the government services but on a trial basis. Standard government services required Bitcoin payments value of up to 200 Swiss Franc. Niklas Nikolasjen who is Bitcoin Suisse cofounder and chief executive stated that it was the first time that the cryptocurrency Bitcoin was accepted on a state level as a currency.

The Initial Coin Offering provided a new way in which capital funds that are enabled by the Blockchain technology and the digital currencies can be raised (Gainsbury & Blaszczynski, 2017). In this case, the participants receive digital assets and “tokens” in return for investing fiat currencies (Kaal, 2018). A company, person or project that requires capital to create new kinds of digital coins after which it can make use of the digital trading platform to exchange them for fiat currencies

About 550 million US Dollars were raised by the Initial Coin Offerings based in Switzerland in 2017, and this was about 14% of the value of the global International Coins offering the market, which is about four billion US Dollars. Tezos ICO which is based in Zug alone raised 232 million US Dollars during this period. Dr. Luka Muller who is a legal partner of the law firm MME located in Switzerland explained that the money raised by the Swiss-based Initial Coin offerings are treated as though they are donations and may not find their way back to the investors (Cohan, 2017). The Swiss ICOs are organized as foundations that make application for the non-profit tax status. The Swiss law firm MME helped in setting up the Tezos foundation and in addition to other prominent Initial Coin Offerings.

The Financial Market Supervisory Authority of Switzerland (FINMA) came up with a regulatory approach concerning the Swiss ICOs which had sharply increased in number. FINMA on 16 th February 2018 under the Swiss securities and anti-money laundering laws published some guidelines regarding the ICOs. According to the issued regulatory guidelines, many ICOs will be handled as securities in Switzerland. There are exceptions to these guidelines, for instance, cryptocurrencies which act only as a method of payment and tokens which are used in accessing already functioning platform (Kaal, 2018). The two will not be regarded as securities; however, FINMA stated that the latter would be treated as per the anti-money laundering regulations. The Chief Executive officer of FINMA, Mark Branson explained that the balanced approach they used in handling the inquiries and the projects of the Swiss ICOs was to ensure that legitimate innovators are allowed to explore the regulatory landscape and launch their projects as per the Swiss laws. The further says that the approach was critical in protecting investors as well as the integrity of the financial system.

The tax laws in Switzerland are favorable therefore the place is attractive for the ICOs, both for the issuers and investors. Cryptocurrencies are not considered as money nor any form of currency. They are also not a financial supply of goods and services tax. Transactions in tokens which qualify as securities may result in security transfer tax duties at a rate of 0.30% for non-domestic instruments and 0.15 % for the domestic instruments in instances where a dealer in the Swiss securities was involved in the transaction (Cohan, 2017). The cryptocurrencies act as an asset for the capital gains purposes, and this applies only to a person regarded as a professional trader. Cryptocurrency holders or investors are subject to tax wealth, at a rate that is determined by the authorities on 31 st December of the Fiscal year. Unlike a debt token, an equity token that is issued by the ICO may be liable to a one-time capital duty of 1%. Any profit distribution with regards to the equity tokens or payments on debt tokens is liable to Swiss withholding tax at a rate of about 35%.

Company Operations in Switzerland 

The form of business organization that is most widespread in Switzerland is the company limited by shares. The corporation is distinguished by the existence of shares, derived from the division of the minimum capital (Ferran & Ho, 2014). Shares confer limited liability on the shareholders and can be freely transferred. Shares can be paid up by way of cash or in kind. Companies that are limited by shares can be formed for commercial or non-commercial reasons, in accordance with the Codes of obligations (CO, Art. 620).

Formation of Companies Limited by Shares in Switzerland 

A company is formed by at least three founders, who can be legal entities or individuals. In case there are less than three shareholders, the company may be dissolved by a declaration from a judge upon request by a shareholder or a creditor (Tajeddini & Mueller, 2012). However, the dissolution may not take place if the company decides to undertake corrective actions within a reasonable period as stipulated in the codes of obligations (CO, Art. 625). The founders, as well as the shareholders of the company, are not subject to the requirements of any residence or nationality. However, the codes of obligations (CO, Arts. 707 and 708) state that the members of the company’s board of directors have to be shareholders with the majority being the citizens of Switzerland.

A company limited by shares is created during the incorporation meeting, and a public notary and all the shareholders must be present during in the meeting (Tajeddini & Mueller, 2012). Adoption of the articles of incorporation and appointment of the corporate process then follows. A notarized deed is finally drawn up recording the resolutions arrived at from the meeting (CO, Art. 629 et seq). Upon incorporation, it is a requirement for the company to be registered in the Commercial Register as spelled out by the codes of obligation (CO, Art.640). The companies then become legal after the registration. The Codes of Obligations state that no shares should be issued before the process of registration. (CO, Art. 644).

The Share Capital in Swiss Companies 

A minimum of required share capital is mandatory for any person wishing to incorporate in Switzerland, including in the initial stages of the process involved in company formation. The limited liability company (Art 772 -827 of the Codes of Obligation), commonly called the GmbH as well as the public limited company (AG) which is the most suitable business structure for Swiss corporation are regarded as the most popular. Many types of companies in Switzerland can be established by the use of both the Limited Liability Company and public limited company.

The share capital of any company is a representation of the worth of the total contributions from the associates which in this case may be legal entities or individuals (Brealey et al., 2012). The contributions of the associates can be in the form of cash or in-kind (property), an industry such as work or service, and in receivables. Associate contributions in the way of property must be viable economically. Payment of the in-kind contribution occurs by transfer of the corresponding rights and efficient delivery of the goods that are in use for the specific company. Contributions that are in the form of receivables possess the status of in-kind contributions. They are not admitted to the joint stock companies that are constituted via public subscription, or for the limited liability companies or the joint stock companies.

The minimum capital required for Swiss corporation is 100,000 Swiss franc. The capital is divisible into shares which have 0.01 Swiss franc as the minimum face value (CO, Art. 621 et seq).It is a requirement that the founders of the co-operation pay about 50,000 Swiss francs or 20% of the minimum required capital share (CO, Art 632). The Private Limited Liability companies are needed to have a minimum share capital of only 20,000 Swiss francs. The public company shares have to be subscribed during the incorporation (CO, Art. 632).

The share capital contributions can either be in kinds or cash. In case the form of contribution is in kind, immediate access to the assets is necessary upon the registration of the company in the Swiss Commercial Register (Ferran & Ho, 2014). The property description, the shareholder from whom the property is received, the number of the shares that are issued in return for contribution and the value of the property must be included in the articles of Association (CO. Art. 634). It is only after the approval of 75% or more of the shares represented at incorporation meeting that the company may agree to receive contributions to share capital in the form of in-kind contributions (CO, Art. 704).

Increase in the share capital can occur within two years from the time the Swiss company was formed in case the general shareholders meeting authorized the procedure (CO, Art. 653). The board of directors decides as to what extent and when the share capital of a particular company can be increased (Ferran & Ho, 2014). A conditional capital increase can also be included in the Articles of Association. The purpose of the conditional capital is to secure the conversion rights and options in regards to warranty issues and convertible bonds. The conditional capital can also be utilized in creating shares for the employees of the company. Share capital increase and the exercise of respective rights take place at the same period.

According to the Swiss Corporation law, there are many categories of shares. For instance, Bearer shares which are transferable by way of delivery (Brealey et al., 2012). The corporation cannot restrict the transfer of the bearer shares. For the Bearer shares to be issued, it is required that the entire issue price is paid in (CO, Art 683). These shares are popular in Switzerland since the protection of identity is preferred by many owners. Registered shares also exist, and these do not require to be fully paid. Transfer of the registered shares occur by assignment or endorsement, and this may not be restricted. It is a requirement that the company keeps a shared ledger that lists the names of the owners and their places of residence.

Personal membership rights cannot be exercised by a buyer of shares that are incorrectly transferred. Subsequent conversion of the registered shares into bearer shares or vice versa are provided by the articles (CO, Arts. 622, 630, 685 et seq). Special rules are available that are applied in the restriction of transfers involving the registered shares (Jongh, 2012). The Codes of Obligations differentiates between companies that are quoted and non-quoted. In the first situation, entry into the shareholders' register may be denied by the company in case of an "important reason" or where the company decides to obtain the shares of the seller at a favorable market price. "Important reasons" are provisions concerning shareholder structure which warrants that defiance in view of economic independence, for example, a takeover of the company that is regarded as unfriendly as stated in (CO, Art. 685 (b). Article (CO, Art. 685 (c)) indicates that before the company is formally registered, the ownership of the rights that are linked to the shares must remain with the seller.

A shareholder of a company that is quoted can only be rejected if a maximum shareholding is provided for by the articles and in cases where the purchaser exceeds this limit (Ferran & Ho, 2014). Companies, both quoted and non-quoted can decline the registration in instances where the shares are acquired only on a fiduciary basis as entailed in (CO, Art. 685(b) and 685 (c)). In cases where the sale of the quoted registered shares is made at the stock exchange, the company has to be informed by the seller's bank giving details on the name of the seller and the number of shares that have been sold as stated in (CO, Art. 685). The purchaser acquires the shareholder rights upon the transfer of shares. However, the voting rights and any other connected right may not be exercised before the person is entered into the shareholders' register. Monetary rights and all the other rights may be used by the new acquirer as provided by (CO, Art. 685(f)).

Preferred shares holders enjoy some preferences including non-cumulative and cumulative dividends. Also, they also possess the preferential rights that guarantee them the subscription to new shares and priority in the liquidation proceeds (Brealey et al., 2012). The articles must provide the preferential treatment, or they can be adopted by the votes of not less than two-thirds of the entire shares that are represented. The articles of incorporation or an amendment that is agreed upon at the general meeting contain the provisions of the preferential rights (CO, Arts. 627 and 654).

There are also the voting shares which provide the stakeholders who represent a financial minority with the power to decide within particular cooperation (Jongh, 2012). One vote is entitled to each share, and because the shares varying in value can be issued, an equal amount of contribution may not be represented by each of the votes. It is a requirement that the nominal value of the other shares should not be more than ten times the nominal value of voting shares as stated in (CO, Art 693). In this instance, shares that have a smaller nominal value compared to other company shares can be issued only as registered shares.

The general meeting of the shareholders can issue another type of shares, the profit sharing certificates. The issue of the certificates is done in favor of the persons with interest in that specific company via previous contributions of capital, employees, creditor's claims, shareholdings or other similar relationships. The rights that may be granted by the profit sharing certificates include a share in the proceeds of liquidation, shares in profits and subscription to new shares. Membership rights are not procured by the profit sharing certificates (Ferran & Ho, 2014). It is a requirement by law that the profit sharing certificates do not have a par value. They cannot also be issued as an exchange for the contributions that are characterized by assets (CO, Art. 657). Shares can be in the form of certificates of participation which is mostly a non-voting share. The holders of these certificates have equal status as the shareholders except that they do not have the right to vote. The capital for participation should not be more than double the share capital (CO, Art. 656 (a) et seq.).

A share is characterized by two aspects, including the legal ownership stake of the shareholder in a corporation, for instance, the equity interest of the shareholder. Another element of shares is the security that provides evidence of the ownership interest. An investor becomes a company's shareholder once he or she buys a share. The investor also owns a stake in the share capital and co-owns the assets of the company (Brealey et al., 2012). The person becomes entitled to a share in the profits of the company, either indirectly through the share price performance or directly by payment of the dividends. The investor upon becoming a shareholder has control over the decisions of the company since he or she has a legal interest in the company. The stock exchange trading is involved in the setting of the prices of the shares. The shares, however, do not award the shareholders the right to recovery hence they cannot the repayment of the invested capital.

Shareholder 

The principal corporate body of a company that is limited by shares is the general shareholders' meeting which comprises of all the shareholders (Jongh, 2012). The general meetings can occur in two forms including ordinary general meetings and extraordinary general meetings. Ordinary general meetings are convened on an annual basis, within six months after the business year is closed. Extraordinary general meetings are only held when required. Some of the rights of a general shareholder's meeting are to adjust articles of incorporation, nominate the auditors as well as the directors, to authenticate particular decisions made by the board, to make approval of the reports from directors and financial statements.

The general shareholder's meeting is involved in making vital decisions that are not assigned to other bodies (Belcredi & Ferrarini, 2013). The proposal of the board regarding the distribution of the company's annual profits must also get approval from the shareholders as stipulated in (CO, Art. 698). The board of directors and in some cases the auditors calls a general shareholders meeting. One or more shareholders who represent a total of not less than 10 percent of share capital can in some instances request the calling of extraordinary general shareholder's meeting. The request made is required to be in writing indicating the justification for the meeting as stated in (CO, Art. 699 et seq.)

Two categories of shareholders rights are distinguished by the Codes of Obligation including personal membership rights and the financial rights. As stated in (CO, Art. 660 et seq.), financial rights of the shareholders entail the right to a subscription to the newly issued shares, a share of liquidation proceeds and receipt of dividends (Jongh, 2012). In addition to the financial rights, shareholders have personal membership rights that entail many features. For instance, the right to attend the general shareholders' meetings either in person or through representation by a proxy. The person who holds the bearer shares or the holder's proxy can attend the meeting in case the share is present. On the other hand, a person who holds registered shares who requires a written proxy form to be produced before he or she is represented by a proxy as articulated in (CO, Arts. 689 and 698 et seq.)

The personal membership rights also give the shareholder voting rights, and this is in relation to the overall nominal value of the shares (Belcredi & Ferrarini, 2013).The shareholders exercise the voting rights at general shareholders meeting (CO, Art. 692). The shareholders are also accorded the right to information by the personal membership right. They are permitted to review or inspect the financial statements, and for this reason, its statements must be available at the corporation's registered address for inspection not more than 20 days before the annual general shareholders meeting. A copy may be sent to any shareholder before the meeting upon his or her request as stated in (CO, Art. 696). Any shareholder is permitted to request for information regarding the company’s affairs from the board of directors or the auditors at the meeting as stipulated in (CO, Art. 697).

Share as a Form of Security 

The shares can provide documentary evidence of the ownership interest in a particular corporation since it is regarded as a legal document. A share comprises of the coupon sheet and a mantel. The certificate is evidence of the rights that are attached to the share. It includes the name of the issuing company, the security number, nominal value, the date and the place of issue and the signatures of the chairman as well as the directors of the supervisory board (Bayern et al., 2017). The Swiss Code of conduct states that the proprietary and the membership rights are connected to the certificate such that they cannot be claimed or transferred to other persons unless the certificate is available. A stringent framework is laid down by the Swiss Code of Obligations that restricts the transfer of shares

Conclusion 

In conclusion, the Swiss law particularly the Codes of Obligations provide a variety of options for the contribution of shares during the creation of new shares. The creation of new shares can take place during the increase of share capital or in the formation of a new company. Usually, during the establishment of a company that is limited by shares or if its capital is to be increased, share contribution is by way of cash. The cash has to be deposited in an account with a bank that is based in Switzerland. The money is released by the bank once the company is duly incorporated. As mentioned above, another option of contributing capital as stipulated in the codes of obligation is the in kind. A variety of protective mechanisms are made available by the Swiss law concerning the in-kind contribution. A written report has to be provided by the founders of the company stating the nature as well as the condition of the in-kind contribution. A license auditor is required to confirm the completeness and accuracy of the report in writing. It is a requirement that the company discloses the contribution in kind in the respective Articles of Association as well as the commercial register. The commercial register located in Zug stated that contribution in Bitcoin could be accepted as a form of contribution in kind. Swiss Commercial Gazette published the incorporation of a company named Blockchain and Cryptocurrency Services Zug AG. The publication revealed that the company had a share Capital of 100.000 Swiss Franc and this was partly paid up by Bitcoins which is a cryptocurrency. It is therefore essential to say that other Companies apart from Zug will in the future accept cryptocurrencies as a contribution in kind.

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