Switzerland’s fight to keep the Crypto Crown

By Dr Michael Jünemann, Johannes Wirtz

08-2018

Cryptocurrencies and Blockchain-based crypto applications are the en-vogue topic on the financial markets. Employing hundreds of people with a both steady and steep growth rate, the crypto business is a driver for innovation, though small compared to traditional banking in Switzerland. Here and around the globe, Initial Coin Offerings (ICO) and Initial Token Sales (ITS) have become a popular means for start-ups to raise fresh funding. Governments and regulators in Switzerland have made some meaningful strides to create a crypto-friendly environment and regulation. There is however an omnipresent obstacle for businesses. As we also see in relation to our clients, there are hardly any banks in Germany, Switzerland and the rest of Europe which offer bank accounts to crypto businesses, not to mention accounts to deposit its cash-equivalent. Switzerland used to be one of the places where banks were open to the crypto business, but as two major players in the emerging sector shut their doors, the start-ups might need to look someplace else. Swiss regulators now step up to halt the exodus and keep businesses operating in the alpine state.

1. How it started

The Swiss canton Zug (also known as Crypto Valley) is home to many virtual currency entities with 200-300 launches in the recent years. The thought would come easy, that in a jurisdiction place of many ICOs/ITS more than just a handful of the country’s 250 banks would be open for their business. But with fear of fraud and a lack of transparency, many countries (like the United States) increase their security efforts. While (in the USA) this is driven by its regulators, in Switzerland the banks themselves operate more carefully. As they urge regulators to take action and give clarity regarding rules to apply before offering their services to the crypto market. In 2017, one of the few big banks in the world which have offered services in the first place closed accounts for crypto businesses. This bank used to be the place that helped establish Switzerland’s role as a crypto hub.

2. What do the banks do?

The largest concern, according to insiders, is that many ICO/ITS do not perform reliable, if any, AML checks on their investors/buyers. In the case of misconduct, the banks fear liability themselves without a chance of compliance. To close business is, in the view of the banks, the only sensible option. Today, only very few, maybe even just two, Swiss banks remain as possible places to deposit ICO-cash stipulating strict KYC/AML compliance for any company opening an account. The rest has slowly but steadily ceased to support new business models based on cryptocurrencies. Those who have a bank account are not necessarily safe. Banks routinely ask enterprises to move their ICO funds to a different institution and until that time freezes the money in the account to not become liable in their fear of a potential scam. However, Bitcoin, Ether, Ripple or other virtual currencies do not perform as a regular means of payment in the broader economy. Technically this locks a new business out of the banking system. The situation leaves a business without a chance to deposit and/or spend the money it raises for its enterprise; may that be used for new software, to rent office space or pay or hire employees. More than one enterprise has ultimately decided against an ICO in Switzerland.

3. Where does the crypto business go?

Many businesses leave for Switzerland’s offshore rivals including the Cayman Islands, Gibraltar, the British Virgin Islands, and most prominently Liechtenstein. Banks in these territories seem to be a lot more welcoming to crypto projects offering various services to the sector including the deposit of an ICO/ITS cash-equivalent with their organisation. Crypto projects from other major economies may follow as Swiss banks lose their willingness as hosts. A potential contender may as well be Malta who is in a process of passing a general crypto currency bill. Recent talks among the Ministry of Finance, the Swiss National Bank, regulator FINMA, bankers association and sector insiders assessed the future attractiveness of Switzerland as a crypto business location and how to make banking services accessible to VC ventures.

4. The regulator takes action

As ITS have been met by many governments and regulators with not a small amount of scepticism, market players have become weary, too. Curiously, Switzerland’s authorities are now actively trying to reverse the trend working on new rules to make banks feel comfortable with the acceptance of cryptocurrency companies’ accounts. While the goal is to remain competitive with the British Virgin Islands or Gibraltar (who top the list of ICO funds raised in 2017, and relegated Switzerland to a sixth place), the ministry aims for a broader legal framework on Blockchain and ICOs with no room for fraud or financial crimes by the end of the year. Until that point, FINMA has issued separate guidelines on AML and securities regulations of ICOs

5. Germany’s role

In the most recent past, Germany has not been on top of the list for ICO or ITS. Similarly to Switzerland and most major economies, Crypto companies face substantial difficulties when opening a bank account or looking for a banking partner to facilitate token trade. While German regulator BaFin slowly issues statements giving more guidance bit by bit regarding the regulation of token, there has not been any statement that might encourage banks to support the development of crypto currencies in the world. To potentially benefit from the economic and technical boom, to avoid to be left behind and to claim a spot in the global and undeniably growing crypto sector, Germany will have to act soon.