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In other countries, politicians express concern about the cryptocurrency craze, citing worries about security, regulation, volatility and a speculative bubble. Not in Switzerland.

The affluent Alpine country wanted “to be the crypto-nation”, Johann Schneider-Ammann, economics minister, told journalists as he arrived for a private crypto finance conference in St Moritz last week. Of the 10 biggest proposed initial coin offerings — by which start-ups raise funds by selling tokens — four have used Switzerland as a base, according to PwC.

The burgeoning ICO industry is burnishing Switzerland’s business friendly reputation and sometimes buccaneering spirit — a reputation spoilt by the past decade’s scandals over the help its traditional private banks gave to wealthy clients in evading tax.

But it has created a dilemma for Swiss politicians and regulators: just how far should they go in encouraging a digital “wild west”?

As Mr Schneider-Ammann spoke in St Moritz, the government in Bern announced an ICO working group to consider possible actions by regulators and lawmakers. Separately, the Finma financial regulator is expected soon to give an update on how it is policing ICOs.

“We think there is huge potential — but the market is not as disciplined as we want,” says Jörg Gasser, state secretary at the Swiss finance ministry. “We want it [the ICO market] to prosper but without compromising standards or the integrity of our financial markets.”

Countries that raised more that $20m from ICOs in Jan-Oct 2017

“They want Switzerland to be the place to make it happen — but they don’t want to be seen as the ‘wild west’. It is Swiss pragmatism,” says Martin Eckert, partner at MME, a Swiss law firm.

Digital pioneers say Switzerland emerged as an ICO hub because it has a cluster of rich investors and technology specialists. The small canton of Zug, near Zurich, has unofficially become “Crypto Valley”. The Crypto Valley industry association says it receives five to ten inquiries a day from start-ups around the world interested in how to do a Swiss ICO.

ICOs build on the Blockchain distributed ledger technology behind bitcoin. As well as fuelling the fantasies of speculative investors, they threaten to disrupt the venture capital industry by slashing the cost of fundraising — and opening up the possibility of investing in start-ups to anyone with a smartphone.

Zug and its lake, Switzerland.
Zug, near Zurich, has unofficially been dubbed 'Crypto Valley'

Some practitioners dislike the term ICOs because it suggests they are just get-rich-quick schemes which seek to avoid cumbersome investor protection regulations. Proponents argue that many “tokens” offer access to services or property rights and are not meant as speculative investments. An alternative is to call them “token generating events”.

Other EU countries and the US have warned of the dangers of ICOs — and China and Korea have banned them.

But another reason for Switzerland’s crypto success, argue proponents, has been its openness to business innovation. Mr Eckert at MME says: “Swiss regulators are among the few that really have a deep understanding of the technology and how it works.”

Nevertheless, Finma last September struck a note of caution, warning it was investigating “a number” of ICO cases for possible breaches of regulations, including on preventing money laundering and the financing of terrorism.

Crypto traffic: regulators’ different views on ICOs

Red light/bans

China, South Korea, Vietnam, Russia

Advising caution

US, UK, European Union, Hong Kong, Canada, Australia, Singapore

Favourable

Switzerland, Gibraltar, Isle of Man, Cayman Islands, Mauritius

Kari Larsen, attorney at Reed Smith in New York, says Switzerland’s approach was pragmatic but also “may be to a certain extent opportunistic”. It could face competition from places such as Gibraltar — leading to damaging competition to attract ICOs. “Just being welcoming, without also looking where consumer and market protection may be appropriate, would be short sighted,” Ms Larsen says.

Digital purists argue no action is needed by politicians or regulators. The government “should be incredibly welcoming. It is a huge opportunity for Switzerland,” says Richard Olsen, founder and chief executive of Lykke, a Swiss company building a Blockchain based financial exchange.

Top 10 initial coin offerings

Mr Olsen argues technology will allow ICOs to become self-policing — just as users of the Airbnb property rental site steer clear of anyone with poor reviews. “It will become an ultra transparent world if people have to pay more to hide . . . It is a huge opportunity to clean up the world.”

Switzerland is unlikely to be so liberal. A big worry in Bern is of cyber currencies being used for illicit activities, especially given that Switzerland dominates the market for the cross-border management of private wealth.

“They don’t want to fall into the same trap as banks over the past 30 to 40 years — they are extremely sensitive to things like anti-money laundering rules and ‘know your customer’,” says Oliver Bussmann, president of the Crypto Valley association.

Against that, industry practitioners say Swiss ICOs are, in practice, obliged to follow strict anti-money laundering procedures anyway: if they do not, traditional banks will turn away their funds.

Bern could also toughen up how different ICOs are categorised, and when they fall under strict financial market or bank rules. It could also strengthen consumer protection. Significantly tougher rules could kill the Swiss ICO business and drive it elsewhere.

Money raised by ICOs worldwide

But Bern’s stated objective is to ensure Switzerland keeps a competitive edge in blockchain technologies. By removing uncertainty about its legal framework, it hopes to encourage ICOs.

Mr Bussmann says: “I see a desire by the government to continue to be a leading [ICO] hub, and provide the right balance between innovation, attracting business — and having a stable regulatory environment.”

Additional reporting by Martin Arnold in London

Sceptic converted after successful token sale

Swiss entrepreneur Marc Degen, 40, was initially sceptical about many initial coin offerings. He worried the “tokens” investors acquired often locked them into a single technology, preventing evolution.

But he changed his mind when raising funds for his latest venture: Modum, a Zurich start-up that provides blockchain-based services to monitor shipments of medicines. Traditional venture capitalists were reluctant to commit. Many meetings with them “were a waste of time”, he says.

So in August last year, Modum launched a token sale, offering token holders the right to vote on future payouts if certain milestones were reached by the new company.

Swiss regulators did not create any hurdles. The country has “a libertarian but also accountable environment,” says Mr Degen. “The legal setting and the mindset around it is exactly what creates a tremendous opportunity.” US investors were excluded to avoid any clash with the US Securities and Exchange Commission.

Modum’s ICO raised $13.5m in one week, and Mr Degen is now a convert. “You can talk eye-to-eye with investors,” he says “You can really focus on your idea and making it fly — you are not just running from funding round to funding round.”

As they survey the market, Swiss regulators should do little, Mr Degen argues. Existing laws and regulations are sufficient to prevent fraud and abuse.

“ICOs give everyone the possibility of participating in the early stage of a company — including the possibility of losing everything. Why should the only possibility be lotteries or casinos, which have much worse odds?” Ralph Atkins

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