Why Switzerland wants to be the crypto nation

News and opinion on finance

Zug, Switzerland proves an unlikely setting for the centre of cryptocurrency

Switzerland is Europe’s most cosmopolitan nation, although its geography should make it the most closed. This is a paradox rooted in finance, and the situation is getting weirder. The European hub of cryptocurrency is not London or Paris, but Zug.

I travelled to Zug last month to attend a launch of SEBA Crypto, which hopes to get a Swiss banking licence next year to offer accounts in state-issued money as well as crypto, bridging the two. It is a small town that nestles on a lake, in a bucolic valley of green fields and clonking cow bells, a short and winding train ride from Zurich (itself hardly a pulsating metropolis).

Rather than the self-effacing rustic types one might expect to find in a place like this, a craft ale-swigging crowd from the four corners of the earth greets me. I only managed to get to Seba’s chief executive Guido Buehler after a battle with the firm’s vociferous New York-raised chief marketing officer, Morgan Pierce. (if you want to make money in the financial market use our  forex robot)

Crypto leadership

Seba is the latest advance to Zug’s European crypto leadership. The canton already takes tax payments in Bitcoin and Ethereum, and uses blockchain for voting. The federal authorities, including financial supervisor FINMA, have a relatively benign view of the sector.

This would not be the first bank dedicated to or involved in cryptocurrencies. Among the latter, for example, is Falcon Group, recently better known for a Swiss investigation into its alleged failure to prevent money laundering in the 1MDB scandal. Falcon says it is the first Swiss private bank offering blockchain asset management.

What makes Seba different are its dedication to crypto, an investment of CHF100 million ($100 million), and backgrounds at UBS. Buehler got into crypto while running his own family-office advisory firm but previously worked in UBS’s trading division alongside Urs Bernegger, Seba’s head of trading and liquidity management. Seba’s chairman is Andreas Amschwand, formerly UBS’s long-standing foreign exchange head. Backers include Swiss-based Guy Schwarzenbach, who has a similar background in currency trading, as well as Jack Chung, of Hong Kong’s Summer Capital.

Seba will stand out most of all if it succeeds in its pursuit of a banking and securities licence, rather than one of the fintech licences Switzerland is launching in 2019. Buehler says the full licence will make it a more trusted custodian, as he hopes to attract more institutional investors to crypto. “We will be in a position to buy and sell significant amounts of crypto assets and be able to guarantee that they are non-tainted coins,” Buehler claims.

Switzerland is already the clear capital of Initial Coin Offerings (ICOs) in Europe, according to PWC. Finma’s bottom-up supervisory model is a support, according to Buehler.

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Private banking

This crypto boom follows a series of blows to Swiss banking secrecy, and thereby parts of its private banking sector. Meanwhile, perhaps more than anywhere else in Europe, negative interest rates threaten the basic maturity-transformation business of its domestic lenders.

The rising heat in the local mortgage market is a big worry for Swiss regulators, raising the spectre of the early 2000s Swiss banking crisis. Earlier this decade the self-regulating Swiss Bankers Association agreed to tighter guidelines for loan-to-value and loan-to-income ratios, which slowed the owner-occupier sector. Now, the banks are resisting the central bank’s call for tighter guidelines on investment mortgages: and no wonder, as the cantonal and cooperative banks are running out of other ways to make money.

Switzerland is clearly more open than most to radical ideas about money, as in this summer’s Vollgeld referendum to end banks’ ability to create money by lending (even if its proponents lost). Perhaps cryptocurrencies are the answer to a mainstream financial system whose ability to support innovation and growth – even to sustain itself – is in question. Blockchain could unlock the Gordian knot, says Buehler. Finma seems to agree it could be part of the answer to banks’ diminishing scope to sustain profits.

The ideal is that ICOs would finance small businesses better than banks and state-issued currencies. This would not, however, help the banks’ predicament. The crypto world, in any case, might have little regret for the demise of their rivals.

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Part of crypto’s appeal to some is its anti-establishment image, although this hardly makes it easier to operate in the real world, even in Switzerland. Requests have flooded into Seba as it also hopes to be transaction banker to a sector where firms struggle to find banks to pay salaries, rents and bills. Seba itself found it hard to open an account, eventually turning to Hypothekarbank Lenzburg, a regional lender in an even smaller town than Zug.

Like private banking, crypto’s greatest strength is also its deepest flaw, as it will always be difficult to ascertain the purity of assets, when the whole point is secrecy.

Switzerland’s principles-based approach to anti-money laundering is no doubt stricter than some of the smaller jurisdictions popular for ICOs. Moreover, Swiss banks’ expansion in emerging markets – where it is often just as hard to know real beneficiaries – is a greater source of money-laundering risks, as the flows are bigger and Switzerland still does not share tax data with countries such as China and Russia. But that doesn’t make crypto’s risks any less problematic. Indeed, the two may be mutually reinforcing.