Swiss crypto valley rides out cold market winds

Tiny Zug was once an innocent place, known for its pastry nuns, half-timbered houses and the kirsch-soaked pie beloved of Audrey Hepburn.

Then it became a low-tax haven and a magnet for corporate letterboxes: home of Glencore and other even less cuddly behemoths. And now, in the unassuming business parks and low-rise office buildings that gently stretch out from the small old town center, it has become the European kingdom of cryptocurrency.

Or as Zug’s smart traders like to call it: “Crypto Valley”. In a recent report, local investor CV VC wrote that there are now 960 crypto start-ups in Switzerland, employing over 5,000 people. Almost half of the start-ups — 433 — are based in Zug.

None of this is hard to miss these days: Visitors to the country might conclude, based on publicity footage, that distributed ledger technology was only third behind chocolate and luxury watches. in Switzerland’s contributions to the world. The fintech bro has almost become a fixture in Zurich’s very expensive bars than the bank pro Paradeplatz.

But there is a cold wind blowing in the crypto valley, just like in the blockchain world. UBS warned this week of an impending “crypto winter” as the Federal Reserve raises rates. Bitcoin’s price crash in recent days is the first sign that the party is over, bank analysts say.

And so quiet, Zug finds itself at the forefront of global finance. Switzerland, at least, seems to think crypto is here for the long haul. As other governments seek to rein in crypto firms, the country has been keen to promote them in recent months. In February 2021, Bern introduced a new “blockchain law” to codify how digital assets should be treated by courts with respect to particular aspects of things such as proof of ownership and custody.

Market regulator Finma has meanwhile been extremely proactive in trying to engage and understand the new world of crypto. He even authorized two crypto-banks in the country: Seba and Sygnum. Switzerland, says Finma’s position, intends to have a first-mover advantage in crypto fintech.

Top industry figures – not surprisingly – also see a prosperous Swiss future for crypto. During a recent visit to the offices of Sygnum, Managing Director Mathias Imbach told me that the volatility and exuberance that many sober investors have associated with crypto was just foam, but that in below were serious proposals and investment opportunities.

At the base of Switzerland’s interest in crypto and the enthusiasm of the crypto world for Switzerland, there are of course common values: a belief in the power of technology for example, and more importantly again, a libertarian bent that promotes political and institutional freedom.

But there is an elephant in the room here, perhaps even bigger than the dizzying selloff in cryptocurrencies in recent months. And that, it seems, Switzerland still has no long-term answer, no matter where crypto 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 former source in a previous report told me recently, are very concerned about how crypto technology enables illicit financial and political activity.

Meeting a crypto asset manager in Zug on a freezing morning a few weeks ago, over coffee in his office, I got a disarmingly candid assessment of the problem in Switzerland: It is certain that there are a number of unscrupulous outfits in the crypto valley, he mentioned. And perhaps worse, there are an even greater number of very naïve entrepreneurs hungry for money and customers, who see themselves as unbound by the rules governing traditional finance.

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

In Zug, then, it seems that regardless of market weather, winter or summer, the bright future for crypto is likely to repeat Switzerland’s troubled financial past.

sam.jones@ft.com

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