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Switzerland
Crypto
Innovation
2018
In this issue…
04 Crypto innovation burns bright in
the Alps
By James Williams
Publisher
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there are a wide variety of firms working with “It is not surprising that there
cryptocurrencies and blockchain technology
beyond Zug.
are calls now in the EU and
Discussing the opportunities that lie ahead internationally to implement
in crypto assets, Martin Eckert, partner at
regulation around crypto tax
Swiss law firm MME, was quoted by the
Financial Times2 as saying Swiss regulators evasion.”
and politicians want Switzerland to be the Fedor Poskriakov, Lenz & Staehelin
place “to make it happen” but “they don’t
want to be seen as the ‘wild west’. It is
Swiss pragmatism.” cryptocurrencies. From that angle, it is not
Indeed, even though Johann Schneider- surprising that there are calls now in the EU
Ammann, the Swiss economics minister, was and internationally to implement regulation
quoted as saying he wanted Switzerland around crypto tax evasion,” says Poskriakov.
to become the “Crypto Nation”, this was As blockchains are decentralised, no
more a political aspiration than necessarily intermediary is required and therefore it’s
want Finma, the Swiss regulator, has in more difficult to ensure there is proper
mind. It is, as Eckert refers to above, more reporting to the tax authorities, proper AML
pragmatic and prudent in its stance. That’s reporting, etc.
not to deflect the point that Switzerland sees “You could envisage an evolution that
a clear opportunity to evolve, but it goes would connect a distributed ledger with
beyond merely crypto; it sees the potential of an e-identity in a way which would still
digitisation as a whole. ensure privacy, whilst providing a reliable
“Where Switzerland now sees a traceability record, so as to allow “on chain”
development is with digitalisation of the AML checks and funds tracing which are
financial industry more generally, in terms of impossible to falsify. Imagine combining such
fund distribution, reporting, client servicing,” a system with a central bank cryptocurrency
says Francois Rayroux, Partner, Lenz & (CBCC), and you will have an AML resilient
Staehelin: “That is where Switzerland could currency by design.
be at the forefront. Why? Because people “There is still a long way to go, though. In
here are highly educated, and due to the the crypto world, entrepreneurs haven’t been
relatively small size of the country, with affected by all of the issues that banks and
respect to reporting it could be relatively other financial institutions survived through
straightforward to create common standards over decades, including multiple financial
compared to the wider European Union. crises, AML and sanctions compliance,
“Digitalisation, with blockchain as an tax avoidance, litigation and regulatory
important tool for transaction settlement and investigations. Fintech startups are typically
so on…that for me is the future.” less sensitive to some of those risks, and
There are a number of initiatives in are confident they are immune from those. It
Switzerland around blockchain. These may well be, but eventually, those two worlds
include a push to put the commercial will have to meet,” continues Poskriakov.
register on blockchain, there are initiatives The local government of Zug has said that
for electronic identity adoption; a lot of one of the biggest issues is the prevention
moving parts which, when taken together, of AML. Leila Khazaneh is General Counsel
could result in Switzerland becoming the and Director at Jabre Capital. On the AML
Crypto Nation that Schneider-Ammann issues, she remarks: “It’s very important
references; a country where people will be and presents specific challenges. As long
able to do everything on the blockchain and as you trade Cryptocurrencies through an
everything will be traceable and auditable. intermediary, like an exchange, you can
“There is some positive appeal for fit them in your current AML structures.
distributed ledger technology implementation But the philosophy of Bitcoin was based
in various use cases, but there is a flipside, on eliminating intermediaries. And when
which people in Switzerland are cautious it comes to peer-to-peer transactions, the
of, in terms of risks and potential abuses of current structures no longer work. It means 8
Swiss self-regulation
mirrors spirit of innovation
Interview with Leila Khazaneh
The world has become seemingly captivated Technology Ventures, to help bridge the gap
by cryptocurrencies, driven by their rapid between the global investment community
growth, both in terms of the number of and the new blockchain economy.”
cryptocurrencies and their prices. There For institutional investors to become
are now over 1,500 cryptocurrencies with a comfortable investing in this new asset
combined market cap of USD500 billion. The class – which not only include currencies but
rapid surge has meant that investors globally blockchain and crypto-based innovations –
have started to pay attention. there are challenges to overcome. Two of the
At the same time, a consensus is emerging most important are regulation and the need
that the blockchain technology underpinning for more tools to manage crypto investments.
cryptocurrencies may be a game-changer Leila Khazaneh, General
Counsel and Director at Jabre
for the global economy. The technology has Regulation
Capital Partners
started to be used by innovators in myriad Regulatory certainty is essential for this
fields looking for greater decentralisation. technology to gain widespread adoption.
That technology has come with its own Switzerland has expressed its intention
financing model, the initial coin offering (or to remain a centre of innovation for the
ICO). More and more entrepreneurs are blockchain economy and is, in many ways,
turning to ICOs to raise capital to fund the taking a lead role in Europe. Swiss financial
development of blockchain-related products services regulator FINMA is taking a very
and services. In 2017, it is reported that proactive approach to all things Fintech and
more than USD5 billion of capital was raised made it a clear priority in 2017.
through ICOs and that number looks to be “One of the key factors in making this
far exceeded in 2018. asset class stable is having a tech-savvy
Speaking at the Swiss-UK Dialogue in regulator that is able to provide clarity and
London on 18th March 2018, Mark Branson, certainty. Without that, professional investors
the CEO of FINMA, the Swiss regulator, will continue to stay on the sidelines, no
remarked that “there is at least a whiff of matter how convincing the investment thesis
religious mania hanging around the blockchain may otherwise be,” says Khazaneh.
world”, and perhaps it is this mania that is During his speech in London, Branson
prompting institutions to remain cautious. talked about the anti-innovation bias of
Hedge fund managers, traditional venture current regulation. “At FINMA, we have long
capitalists and the like are yet to get totally advocated the removal of barriers to entry in
behind the blockchain innovation story that is order to release the potential of technological
unfolding but there are those, such as Jabre innovation in finance. Our goal as regulators
Capital, one of Switzerland’s best known should be to create an environment where
hedge fund managers, who recognise the innovation can happen,” he said.
investment opportunities in the emerging That is not to suggest that FINMA will
blockchain economy. take a hands-off approach to overseeing
“In 2018 I think we will start to see a shift, crypto currency-related businesses and initial
with more institutional investors recognising coin offerings (ICOs). Quite the contrary.
this new asset class,” suggests Leila FINMA has taken steps to reduce the
Khazaneh, General Counsel and Director at confusion surrounding regulation, laying
Jabre Capital. “We are currently looking to ground rules for those seeking to get
set up a new business division – Blockchain involved in this field. In February 2018, for
and could facilitate the emergence of trading industry who are joining forces and
fundamental new business models. Queisser investing significant amounts of money to
and his team look at the way incumbent develop distributed ledger based solutions
business models could be disrupted and and platforms.
what type of new, innovative models could “In trade finance for instance, it can take
emerge using the blockchain technology. two or three days for a bank to receive an
The third dimension is incentives. Through original document, verify signatures, validate
incentives and earning coins one can genuineness and then release the payment.
shape behaviour. One example of this is With distributed ledger technology, this whole
governance. It is one of the key challenges process could be reduced to 20 minutes or
for cryptocurrencies and tokens. Any type Antonio Gambardella, Director even less,” suggests Poskriakov.
of currency issued by a government has an of FONGIT Antonio Gambardella is Director of
implicit obligation, which is to uphold a social FONGIT, a Geneva-based incubator
contract or governance contract. platform, which stands for the Foundation
By extension, any cryptocurrency or token for Technology Innovation Geneva. It is a
issued should strengthen the community and private non-profit foundation supported by
should have transparency – otherwise you the State of Geneva and the Swiss federal
don’t know who is behind the governance. government. Gambardella is quick to confirm
“You need flexibility but at some point, that many of the business models being
governance will be key to sustain trust. developed by entrepreneurs make sense
That’s why some people have decided for blockchain, including those that relate to
to come to Switzerland. It is a bottom-up commodity trading.
decentralised democracy. You don’t have “Every year, banks spend millions buying
one person running the show. Switzerland paper for credit letters. There are two
has made a good start on the path towards blockchain projects in Geneva focusing on
making governance more transparent this; one within the banking system, the
to the benefit of the widest community,” other being a company called CommoChain;
adds Queisser. this is very interesting in terms of how
The issue of trust in relation to crypto blockchain could be applied to commodity
assets is interesting in that it will, by default, trading,” says Gambardella.
require individuals using the blockchain to If one goes to CommoChain’s web
give up some of their privacy rights. page, it points out that from a blockchain
One area that Queisser is looking at innovation perspective, 60 per cent of
is the concept of permissioned networks. global trade finance transactions are done
Each person joining a private or semi- in Switzerland. That the company is based
private network would need to be verified in Geneva further demonstrates that the
and confirmed. This could address the trust creative fire of crypto innovation burns bright
issue while reducing energy consumption beyond the city limits of Zug.
and revolutionise the way business models Gambardella confirms that seven out of 10
operate. For example, the use of Digital Credit entrepreneurs coming to FONGIT are non-
Notes in the commodities trading sector. Swiss entrepreneurs.
“Most of the cost reduction could “Since the foundation was born in 1991
be achieved through digitisation of the we’ve hosted more than 150 start-ups in
transactional documentation and processing cleantech, IT, engineering and medtech.
trades in a permission network. More Currently, we support more than 60
conceptually, you could say this technology companies. We host entrepreneurs in more
could become a new value transfer protocol than 5,000 square metres of office space
– that for me would unleash the most value in Geneva. We offer complete back-office
for everyone,” suggests Queisser. support for them, we provide coaching
Swiss banks are involved in a number of services – we are often the interim CFO or
blockchain projects to streamline processes COO of many of our start-ups – and we offer
and reduce costs, as well as ensure data seed financing, providing up to CHF150,000.
integrity. And as Poskriakov confirms, “In Geneva, the crypto angle (as it relates
there are large players in the commodity to the financial industry) is naturally an 12
relates to full registration under AIFMD or requirements are and simplify what, from
as it relates to NPPR rules for individual EU afar, looks complicated,” adds Frogg
Member States. Spadola. “We sit down with the manager,
“We manage the infrastructure relating either traditional or alternative, and determine
to distribution, ensuring the fund is ready which markets they are focusing on, where
from and operational and regulatory their contacts are, work out the next steps
perspective to be introduced to investors or and then determine the amount of work
institutions,” says Frogg Spadola. The benefit involved and, of course, the cost.
to managers is that they only require one “Depending on the manager’s budget, size
counterparty relationship to manage for all of of fund, expectations on asset raising, etc,
their marketing and distribution activities. we consult on how best to approach these
“It’s the advisory aspect according to markets from a time and cost perspective.
the manager’s marketing strategy and their We are close to investors in Switzerland so
network”, continues Frogg Spadola, “that we we are able to provide firsthand feedback
think is the value proposition. Being able to on what investors are looking for, how they
sit with any global fund manager and give approach managers, what type of information
them an integrated solution is actually very managers should have ready, etc.”
compelling. ACOLIN Holdings has regulated Hugo Fund Services represents close to
entities across Europe and we are the only 600 funds for qualified investors and ACOLIN
independent entity providing this solution in close to 900 funds for retail (non-qualified)
Switzerland.” investors. When asked what is the most
What sets ACOLIN and Hugo Fund common mistake made by fund managers
Services apart from other institutions offering marketing into Switzerland, Vidal stresses the
representation services, many of which are point that it takes a serious commitment.
legal firms, is that the team has a manager- In conclusion, Frogg Spadola advises
focused mindset; individual team members managers to take a close look at their
have worked previously in fund-of-fund or distribution network and appreciate the fact
private equity firms and as Vidal states: it has become a much more expensive
“We bring an investor’s perspective to fully and complicated world: “Be realistic in your
understanding a manager’s fund structure.” expectations and partner with a group that
“The way we help is to translate into understands your business. It will ease the
easy, understandable language what the process and reduce your time to market.” n
9 important one. We have one project on the “In two or three years’ time
platform that is set to become the first, fully
regulated trading platform for Swiss-based when crypto becomes more
crypto assets. Switzerland is establishing a mainstream, I would trust
very favourable environment and we have
those hedge funds who had
a number of companies preparing ICOs,”
adds Gambardella. tested investment ideas and
While Zug has attracted a lot of learnt from their mistakes
businesses focusing on the first dimension
that Queisser refers to – namely crypto
with their own money, not
tokens and cryptocurrencies – Geneva external investor money.”
is better positioned to capitalise on the
Jean François Hirschel, Unigestion
second phase of the evolution, with respect
to governance and trust. This is where
innovation in commodity trading could lead “In two or three years’ time when
to the establishment of better risk controls crypto becomes more mainstream, I would
– and by extension apply them to the wider trust those hedge funds who had tested
financial markets. investment ideas and learnt from their
One might imagine that those with the mistakes with their own money, not external
greatest leaning towards exploring the investor money.”
investable opportunities on offer within the That being said, Hirschel is optimistic
cryptocurrency space would be quantitative about the role that Switzerland is crafting
hedge fund managers. Given that there are in the digital asset space. He perceptively
believed to be more than 1,500 different points out that the country has a pretty good
cryptocurrencies, there’s no shortage of track record of reinventing itself.
trading opportunities. Much the same “Everyone thought the introduction of
argument could be directed towards factor- the digital watch would signal the end of
based systematic fund strategies, with a the Swiss watch making industry but that
focus more on building equity exposure in proved to be unfounded. And more recently,
crypto-focused companies. that the end of banking secrecy would spell
However, despite the flurry of innovation disaster for Switzerland. Could crypto assets
in all things ‘crypto’, many institutional be to finance what Swatch was to the Swiss
investors, including pension funds and watch making industry? No one knows for
insurance companies, remain in ‘wait sure but I’m confident innovation will drive
and see’ mode. Some are comparing the Switzerland’s financial industry to a new,
speed of blockchain innovation to the dot. exciting place,” says Hirschel.
com boom that emerged at the end of the Anne-Cathrine Frogg Spadola, co-founder
last century. As history has shown, many and Managing Partner, Hugo Fund Services,
tech companies were grossly overpriced a subsidiary of ACOLIN Holdings, says
and investors lost fortunes. Those lessons that crypto assets have become a topic
have not been forgotten. And while there of discussion within the Swiss regulatory
will undoubtedly be stellar companies landscape, in terms of how to remain at the
that become the standard bearers of forefront of the trend. However, like Hirschel,
digitalisation, the risks to over-extending she notes that this hasn’t yet translated
one’s exposure are all too familiar. into many crypto funds coming to market;
“I would be worried if they (quantitative although that seems to be starting to change.
hedge funds) were investing in crypto assets “We have only seen a few examples, up
right now, on behalf of their investors,” says until now. That said, we had a very early
Jean François Hirschel, the former Head of discussion with a cryptocurrency FoFs,
Marketing and executive board member at which clearly shows there is enough supply
Unigestion who has just launched a strategic of products globally. There are several crypto
marketing agency, H-Ideas to advise clients funds with Finma waiting for approval for
in the asset management arena including public distribution. It will be interesting to see
hedge funds. how Finma will handle them.
“It could be a big opportunity. The Swiss curve for Finma and they welcome that.
regulator has shown willingness willing to They want to learn, to discuss, to debate
be flexible on everything Fintech in general,” and at the end of the day, they will apply the
remarks Frogg Spadola. existing regulations in a ‘technology neutral’
In order to fully capitalise on digitalisation, manner whilst protecting financial markets
Finma is committed to pushing itself outside and investors. That’s why for me the ICO
of its comfort zone, because comfort zones guidance was a very good marketing move,”
are the “antithesis of innovation”, said Mark argues Poskriakov.
Branson, Finma’s Chief Executive Officer, in Gambardella believes it is a winning
a speech he delivered in London on 13th strategy, noting that security token ICOs, in
March 2018. particular, are very consistent with existing
He went on to say: “Innovation- securities regulation. He welcomes this
friendliness, however, does not mean and thinks it could foster a new era of fund
carelessness. We are as passionately raising for companies.
anti-crime as we are pro-innovation. And “However, ICOs are not a way to seed a
innovative environments are prone to abuse company. Rather, they should be used as
and even criminal behaviour. The world of a way to raise capital for A, B and even C
the gold-diggers was exciting, occasionally rounds,” warns Gambardella.
profitable, and lawless. And the miners of In other words, they need to be real ‘bona
cryptocoins could be seen as the gold- fide’ companies going down the ICO route,
diggers of today. It is our duty as a regulator not raw start-ups.
to fight misuse of the financial system and If the ICO does indeed issue security
protect investors. tokens, Switzerland’s regime is very liberal
“As an integrated supervisory authority in terms of self-issuance of securities.
with responsibility for all market participants, One might need to produce a prospectus
their stability and their conduct, we at but it doesn’t need to be approved by
FINMA are in a unique position to address Finma. Capital markets are very liberal in
investor protection, money laundering risks Switzerland from that perspective.
and banking and payment issues out of In five or 10 years’ time, an ICO might very
one hand.” well become the standard funding model
Finma’s position for many years has for small and medium-sized companies as
been technology neutral and generally opposed to trying to do a costly IPO.
speaking, they look at principals rather than For this to happen, further work is needed
prescriptive rules. on the governance and custody issues
For ICOs, there are two ways of looking that are, at present, not robust enough.
at what Finma did. The have issued ICO That Finma has issued ICO guidelines is a
guidelines on how they look at submissions positive step, such that to participate in a
and adopted a relatively straightforward Swiss ICO, the KYC checks one has to go
framework, which some people criticised through are much higher and much more
saying they didn’t go far enough. But on stringent than non-Swiss ICOs.
balance, what they did was a smart move. With so much innovation under way in
“They didn’t create any new laws or Zug, Geneva and Zurich, a history of self-
regulations, what they did was explain how regulation and a financial regulator that is
they treat ICOs through a purely regulatory throwing its doors open to embrace the
prism, giving the market a much needed digital transformation taking place, there are
reliable and stable guidance, so that project many reasons to believe that Switzerland
promoters can anticipate what requirements could indeed live up to its Crypto Nation
apply in which situation. moniker. And steer the marketplace towards
“Other regulators have issued no guidance adopting best practices. n
and will proceed to so only once someone
crosses a red line. That’s not Finma’s
Sources:
approach. They will gradually educate the 1. https://www.ctvnews.ca/business/switzerland-at-
epicentre-of-cryptocurrency-revolution-1.3866304
market and will ask questions to those 2. https://www.ft.com/content/c2098ef6-ff84-11e7-9650-
involved in launching ICOs; it’s a learning 9c0ad2d7c5b5