Swiss authorities tread wary path through 'Crypto Valley'

March 20, 2018

“Bitcoin accepted here,” reads the sign at House of Wines in Zug.

For Albert Osmani, the shop’s owner, allowing payment in the cryptocurrency was a smart move. He pulled off a public relations coup in the tiny Swiss Alpine town — and found a new profit source.

In the time taken to convert payments into Swiss francs, the value of bitcoin often jumps, netting a gain. “I have had only positive experiences,” says Mr Osmani.

Whether Zug has been so smart is less clear. The town has become a global hub for cryptocurrencies and the blockchain technologies they use, creating headlines two years ago by agreeing to accept bitcoin for small payments for some council services.

The area has earned a reputation as “Crypto Valley”, with almost 200 blockchain companies. It hosts the foundation behind Ethereum, the second biggest cryptocurrency after bitcoin.

Johannes Schneider Ammann, economics minister, this year hailed Zug as a model for Switzerland to become the “crypto nation”, stealing a march on global rivals as technology spurs more developments. Thanks to Zug, Switzerland last year ranked second after the US in funds generated from “initial coin offerings” — when start-ups sell tokens or coins — to investors.

The strategy has obvious risks, however. Cryptocurrencies have seen wild price swings, threatening big losses for investors. Worldwide, regulators warn that ICOs and crypto ventures may prove frauds, flops, fronts for criminal organisations or threats to the financial system. Zug must show its cryptocurrency credentials can outlast local marketing tricks and stave off regulatory threats.

“My big worry is that the whole transparency will lower Zug’s standing worldwide,” says Andreas Hürlimann, a local Green party councillor. “You don’t know from where to where the money is flowing, whether it is drug money for instance.”

One Swiss finance specialist says: “I’m just waiting for Washington to call Bern and ask ‘what are you doing down there in Zug?’.”

Zug’s modest size and tranquil setting beneath snow-covered peaks belie a buccaneering business spirit. For decades, low tax rates have attracted entrepreneurs, hedge funds and bankers. International companies in the canton of 124,000 people include Glencore, the global commodities trader.

One of the first into the cryptocurrency wave was Johann Gevers, a South African technology entrepreneur who launched Monetas, a digital payment system, in 2013. At the time cryptocurrency and blockchain pioneers feared raids by legal authorities, he recalls. In the US, bitcoin pioneer Charlie Shrem was jailed in 2014 for his involvement with Silk Road, a black market website.

A month after the Monetas launch, Danish computer entrepreneur Niklas Nikolajsen set up bitcoin Suisse, a cryptocurrency brokerage that last year carried out SFr3bn of transactions. Ethereum was launched by 20-year-old Russia-born Vitalik Buterin in 2014.

Switzerland’s reputation for stability and its highly devolved political system — as well as strong libertarian streak — were attractive for the nascent industry. “Back then, you had to really fear you might be persecuted and shut down, and imprisoned by various governments,” says Mr Gevers.

At a recent rally in Zurich, Steve Bannon, the firebrand former adviser to US president Donald Trump, argued that cryptocurrencies were part of the global populist anti-establishment movement and a reaction against central banks “that debase your currency”.

One local insider is more cynical: “They say they are different to banks, that they are Robin Hoods — but we have Robin Hoods driving around in Lamborghinis.”

Nevertheless, cryptocurrency pioneers see an affinity between revolutionary decentralised blockchain technologies and the Swiss tradition of local decision-making.

“Nobody is here because they can get away from governments. There are here because there are gentle, helpful government structures,” says Marcelo Garcia, co-founder of CryptoExplorers.org, a global community of Blockchain experts who hold conferences in Zug. “If your payback is going to be only in 10 years, you don’t want things changing haphazardly.”

The country’s historic neutrality also helps. “If someone says I have lost my [crypto] key, you need a mechanism for resolving the problem — maybe it is not such a bad idea to have the back-up keys held safely in Switzerland,” says Luzius Meisser, founder of the bitcoin Association Switzerland.

In addition, Switzerland’s mountain bunkers are ideal for the “cold storage” — cut off from the internet for security — of cryptocurrency assets, says Arthur Vayloyan, chief executive of Bitcoin Suisse.

Andreas Hürlimann, a Zug councillor, is concerned that transparency issues with cryptocurrency transactions could lower his town's international standing © Raphael Hünerfauth/FT

Zug is not yet a crypto idyll. One problem is how to transact with local banks that mistrust wealth earned in the crypto world. Instead crypto pioneers have turned to banks in Liechtenstein or smaller private banks prepared to break ranks. “If they [the Swiss] don’t get that solved within the next six months, they risk the success of the [crypto] eco-system,” warns Mr Gevers.

More crucially, Crypto Valley’s fortunes also depend on keeping investors happy. Many coin offerings are in effect donations; if promises were made to investors, strict securities market rules would probably apply. “These ICOs require blind trust in the founders. You can’t do much if the raised funds are misappropriated,” says Mr Meisser.

Last year Tezos, which is developing a new blockchain technology, raised $232m in one of the largest ICOs to date, with proceeds managed by a Swiss not-for-profit foundation under the direction of Mr Gevers. The project became embroiled in rows between Tezos’s founders and Mr Gevers, who stepped down as the foundation’s president. Mr Gevers says he cannot comment given legal action started by those who put money into the project and have been angry at delays.

Then there is the risk of politicians tightening the rules — perhaps in response to foreign pressure, such as the US-led action a decade ago against Swiss banks that helped overseas clients evade taxes.

Local industry experts dismiss the possibility of foreign governments forcing a crackdown. “I don’t really see that coming. Crypto is a different beast — and the money would just go to offshore havens or somewhere,” says Mr Garcia.

Nevertheless Swiss authorities have had to strike a balance between encouraging new technologies and risking the country’s reputation.

“Switzerland remains under pressure to follow a ‘clean money’ strategy. It was hard work to get Switzerland off the blacklists — and there is of course no appetite for it to be back on them,” says Jan Seffinga, blockchain expert at Deloitte, the consultancy.

Heinz Tännler, Zug canton’s finance director, says: “The risk is when you have ‘black sheep’. We have our eyes open. But there is never an opportunity without risks.”

Finma, the Swiss financial regulator, last month issued new guidelines on ICOs, setting out how entrepreneurs would have to apply anti-money laundering and securities laws.

While that has provided more clarity, and supported Switzerland’s “crypto nation” ambition, Zug authorities are wary about being too ambitious about their blockchain projects.

Accepting bitcoin for council payments was “clearly a marketing gag,” says Mr Hürlimann. Dolfi Müller, Zug town council president, says: “We play the background music . . . We don’t have great plans — we don’t want to be a ‘smart city’ like Dubai. It’s step by step. It’s Asterix against Rome.”

For some local crypto pioneers and analysts, that wariness is a concern when other cities are also promoting their credentials as crypto hubs. “Hong Kong and Singapore have also done a lot of the right things — and have big marketplaces on their doorsteps, lots of entrepreneurs and smart regulators,” says Daniel Diemers, Zurich partner at PwC Strategy&, the consultant.

Richard Olsen, founder and chief executive of Lykke, a Zug-based blockchain financial exchange, says the town — and the country — needs to seize the moment to follow through on its leadership while it can.

“People come to Zug to see Crypto Valley and they just see letter boxes,” he says. “With every project there is on the federal, canton or city level, they should ask: what could we do with blockchain?”

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