The global safe investment box in Zurich

PKF was proud to attend the Crypto annual summit which took place in Zurich. This has grown into the largest Blockchain event in Europe. It brings together global speakers, top policymakers, investors and entrepreneurs with more than 1,400 delegates from 37 countries.

The event organiser for the Zurich Summit was Smart Valor, headed by its CEO Olga Feldmeier.

This is a Swiss-based Blockchain start-up which is building a decentralised marketplace or tokenised alternative investments.

Smart Valor is based in Zug and has a network of financial institutions pumping out a supply of the coins which in turn provide insurance in case one of them shuts down.

Olga Feldmeier believes her company’s project will help to allay volatility fears and encourage more people to get into the so-called “token economy”. Just stop and consider how already over 50 million people use Bitcoin, and that number is growing every day.

At the same time, people have been buying many other coins as they want to mitigate some of the volatility and for investment purposes.

Smart Valor decided to set up a subsidiary in Liechtenstein, a jurisdiction seen by many as being even more friendly towards cryptocurrencies than others.

Liechtenstein’s regulator has given approval to operate a crypto exchange for utility and payment tokens. Smart Valor has applied for a Liechtenstein banking licence, in addition to its submissions for various licences in Switzerland.

Readers may ask: why Switzerland? Switzerland is renowned for its large banking industry yet although it is a liberal country by comparison, the cryptocurrency sector still constitutes only a small percentage of its global financial services industry. Having said that, its cryptocurrency sector has been steadily expanding and presently offers employment to hundreds of people.

Blockchain-related regulation in Switzerland is well-ahead of its competing geographical neighbours although Malta is currently racing ahead to issue guidelines to regulate the industry

For example, the so-called ‘Crypto Valley’ which is in the Swiss Canton of Zug has so far between two-hundred and three-hundred business entities related to virtual currency.

However, the Swiss government is not inclined to allow virtual currency service providers access to the banking system which will eventual drive them to move elsewhere if prohibition is not lifted.

Swiss banks complain of not having clear enough rules on cryptocurrency projects wanting to offer their services to the market.

Zuercher Kantonalbank (ZKB) is one of the few larger Swiss banks to cater for issuers of cryptocurrencies but due to fears of treading on legislative grounds it has closed its doors on cryptocurrency groups. The name Crypto Valley is a hypothetical reference to Silicon Valley. The Zug Crypto Valley Association today can boast of over four-hundred companies.

On the whole the Swiss people are willing to embrace cryptocurrency making the sentiment favourable to the cryptocurrency sector as a whole. Blockchain-related regulation in Switzerland is well-ahead of its competing geographical neighbours although Malta is currently racing ahead to issue guidelines to regulate the industry.

It is rather ironic but whilst the Swiss government is keen to declare the nation as a Blockchain technology hub; at the same time the stern position taken by banks particularly with respect to cryptocurrency start-ups is, in practice, stifling the growth of business in the sector.

This is a familiar occurrence in Malta where legacy banks shy away from handling crypto accounts even though rumours are taking shape that a number of applications at MFSA are in the pipeline to register as new crypto handling institutions. Banking is an essential element for the industry to flourish so as an interim way of getting around this problem, Swiss cryptocurrency firms provide the sort of financial services they would have been denied by the Swiss banking industry.

It is good to know that, in 2013, the Swiss government approved the Parliamentary Group for Digital Sustainability. It is proposing the acceptance of Bitcoin as a digital currency. It is worth remembering that in Zug it is possible for the residents to settle their utility bills paying with Bitcoin.

Since March 2018, Switzerland accounted for 58% of the Blockchain-derived activity with the European region which is a win-win situation. For the Swiss government taking cryptocurrency on-board helps to maintain its reputation as a dominant financial services jurisdiction.

An incessant scourge in digital asset custody is the concern of being targeted by hackers. Even if it may be safer for users to hold their own private keys and keep their assets off exchanges, the more mundane frequency of cryptocurrency calls for more flexible yet secure methods of asset control.

It is no surprise that all business ventures operating in the Blockchain arena that offer ICOs and raise capital for corporate purposes by issuing tokens, are subject to more advanced procedural requirements, over-and-above the application of the Anti-Money Laundering Act. This is because of the known risks that a decentralised system brings about in terms of anonymity.

Asset ICOs are considered securities and therefore those legal requirements applicable to securities also apply to asset ICOs. Genuine cryptocurrencies are stored on distributed networks whereas E-Coins were stored exclusively on the Association’s server.

E-Coins were supposed to have an 80% backing of tangible assets but in practice this was found to be less, resulting in a loss to investors.

Other unauthorised business models were also subject to investigation in Switzerland by FINMA and it has reiterated the importance of investors to weigh carefully the risks that this market may pose.

In conclusion, the message given at the Crypto Summit in Zurich strengthens the commitment by the Swiss government for Zug. It wants it to classify as a world leader in this exciting industry.

In my opinion, Malta should not stand idle in Zug’s shadow but harken to consolidate its legal and banking set-up to be able to compete with Zug if it wishes to become the Blockchain island in the MED. As always gold-plating the regulations is a cheap ploy which in the long run may have counter-productive consequences.

Achieving a healthy balance between light touch regulation and draconian measures is the key to help the nascent sector to prosper.

The writer is a partner in PKF an audit and business advisory firm.