Decentralization: What bases need to covered from a legal & tax perspective?

Explore the legal and tax implications of decentralized exchanges (DEXs) and token holders, including VAT liabilities, AML/CFT regulations, and jurisdictional considerations, from a Swiss and global perspective.

Key takeaways

It’s crucial to identify important roles in a decentralized exchange (DEX), including the liquidity provider, front-end operator, and decentralized order book operator, from a legal and tax perspective.
For tax purposes, providing liquidity without any control over the token-related aspects may not trigger VAT liabilities.
From a consumer protection policy perspective, risk assessment is essential, including market abuse rules and investment advice regulations.
The concept of “smart contracts” is crucial in defining who is in control, whether there is factual control, and what controls exist.
It’s a gray area regarding who operates a DEX, whether it’s always centralized, and how to address cases like Tornado Cash.
Providing liquidity in security tokens might trigger AML/CFT (anti-money laundering and combating the financing of terrorism) regulations.
Decentralization may not necessarily mean it’s always outside the scope of regulations; consider country-by-country, or even state-by-state, legal and regulatory frameworks.
From a Swiss perspective, the Swiss Federal Code is relevant, including articles about the Federal Act on Stock Market, Banks, and Savings Institutions and the Federal Act on International Automatic Data Processing and Exchange Transactions.
The concept of “decentralization” is complex and evolving; its application in different jurisdictions and legal contexts can lead to different conclusions regarding whether a DEX is fully decentralized.
There may be regulatory hurdles in implementing a decentralized, transparent, and accountable governance mechanism in Switzerland.
From a tax perspective, individual token holders should consult a tax professional to determine their individual tax liabilities.
Decentralized systems might be more vulnerable to cyber threats, such as 51% attacks on decentralized networks.
A clear code of conduct or self-regulation can be an alternative to traditional regulatory approaches for a DEX.
Regulatory experts believe that the token holder can influence the decision-making process and might, in some cases, be liable for their decisions.
It’s a crucial aspect to determine the jurisdiction that regulates a DEX, considering countries where the DEX operates.
In Switzerland, there might be a way to register a DAO (Decentralized Autonomous Organization) as a legal entity under specific circumstances.

Decentralization: What bases need to covered from a legal & tax perspective?

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