Switzerland’s Crypto Valley Looks Beyond Cold Market Winds

Tiny Zug was once an innocent place, known for its baking nuns, half-timbered houses, and Audrey Hepburn’s favorite kirsch-soaked cake.

It then became a low-tax haven and a magnet for corporate mailboxes – home to Glencore and other even less tender giants. And now, in the unassuming business parks and low-rise office blocks that gently roll out from the tiny old city center, it has become Europe’s crypto kingdom.

Or, as Zug’s savvy traders like to call it: “Crypto Valley”. In a recent report, a local investor, CV VC, wrote that there were now 960 crypto startups in Switzerland, employing more than 5,000 people. Almost half of the new companies (433) are based in Zug.

None of this is hard to miss these days: Visitors to the country might conclude, based on advertising images, that distributed ledger technology ranked third after chocolate and luxury watches in Swiss contributions to the world. The fintech brother has almost become a more common fixture in Zurich’s enormously expensive bars than the banking professional on Paradeplatz.

But there is a cold wind blowing through Crypto Valley, as there is throughout the entire blockchain world. UBS warned this week of an impending “crypto winter” as the Federal Reserve raises rates. The collapse of the price of Bitcoin in recent days is the first sign that the party is over, analysts at the bank believe.

And so quiet Zug is on the front lines of global finance. Switzerland, at least, seems to think that crypto is here for the long haul. While other governments seek to curb crypto businesses, the country has been keen to promote them in recent months. In February 2021, Bern introduced a new “blockchain law” to codify how courts should treat digital assets when it comes to the peculiarities of things like proof of ownership and custody.

Meanwhile, the market regulator Finma has been extremely proactive in trying to get involved and understand the new crypto world. It has even authorized two crypto banks in the country: Seba and Sygnum. Switzerland, Finma’s position indicates, intends to have a first-mover advantage when it comes to crypto fintech.

Big names in the industry, not surprisingly, also see a prosperous future in Switzerland for cryptocurrencies. On a recent visit to the Sygnum offices, CEO Mathias Imbach told me that the volatility and exuberance that many sober investors have associated with cryptocurrencies is just froth, but underneath there are some serious propositions and investment opportunities.

The Swiss interest in cryptocurrencies, and the crypto world’s enthusiasm for Switzerland, are of course underpinned by some shared values: a belief in the power of technology, for example, and more importantly, a libertarian bent that promotes political and institutional freedom.

But there is an elephant in the room here, perhaps one even bigger than the dizzying cryptocurrency sell-off in recent months. And this, it seems, Switzerland still doesn’t have a long-term answer to, regardless of where cryptocurrency prices are a year from now or how institutionalized the industry has become.

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Crypto technologies and businesses are increasingly at the center of global illicit financial flows and criminal enterprises. Western intelligence agencies, a longtime source from a previous gig told me recently, are very concerned about the ways in which crypto technology is enabling illicit financial and political activity.

Meeting with a crypto asset manager in Zug on a frosty morning a few weeks ago, over coffee in his office, I got a frankly captivating assessment of the problem in Switzerland: there are certainly a number of rogue outfits in crypto valley. , the said. And perhaps worse, there are an even larger number of very naive entrepreneurs hungry for cash and customers, who consider themselves free from the rules that govern conventional finance.

Crypto asset management, the asset manager added, has become home to many compliance-averse financial advisers who were kicked out of Switzerland’s scandal-prone private banks in recent years. And many of Crypto Valley’s clients, it appears, are politically exposed persons who have been “kicked” off the banks’ books amid reputational fears over white-collar crime.

In Zug, therefore, it appears that regardless of the prevailing market climate, winter or summer, the bright future of cryptocurrencies risks being a repeat of Switzerland’s murky financial past.

sam.jones@ft.com

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