A banking centre seeks to reinvent itself

ON A clear day, sunset over Lake Zug is magnificent. Snow-dusted mountains cut through the orange glow above and are mirrored in the lake below. “Zug is our spiritual home,” says Jeremy Epstein, from Washington, DC, who has just taken 40 foreigners to tour the small Swiss town south of Zurich. They came not for sunsets, though, but to find out how Zug has become known as “crypto-valley”—meaning the home of many firms dealing in crypto-currencies and related activities.

Switzerland’s famous banking secrecy is falling to a global assault on money-laundering and tax evasion. But financial security remains in demand. The country should seek to become the “crypto-nation”, said the economy minister, Johann Schneider-Ammann, last month. Zug aims to be the capital of that nation.

To that end, Switzerland is maintaining loose rules for crypto-businesses, even as other countries are tightening theirs. An industry is developing to store tangible crypto-assets, such as the hard drives on which cryptographic keys are stored, offline in cold, dry, secret sites complete with rapid-response teams. Where better than a decommissioned military bunker in the Swiss Alps? In Zug, friendliness to crypto-currencies is in evidence all around. “Bitcoin accepted here” stickers adorn the city hall and several shops, including the wine merchant’s. In 2016 Zug became the first place in the world to accept bitcoin for some public services. Residents can get a blockchain-based digital identity.

About a quarter of last year’s global total of $5bn in initial coin offerings (ICOs, a form of crowdfunding whereby investors are issued with digital tokens) was raised in Switzerland, estimates PwC, a consultancy. Of the ten largest ICOs, four were in part based in Zug.

The town decided early on to attract crypto-entrepreneurs, for example by allowing companies to incorporate based on bitcoin wealth, rather than insisting that it be converted into fiat currency. Taxes have long been low. After the second world war the former fishing village cut its corporate-tax rate to 8.5%. The rate is still competitive, at 14.6% compared with Zurich’s 21%.

Snowball effect

The crypto-chapter of Zug’s history began in earnest in 2013 when the Ethereum Foundation, a non-profit to support the development of the eponymous blockchain, based itself there. More crypto-firms followed. Now, having dealt with 150-odd of them, the local tax authorities are experts, as are the accountants and lawyers.

Two years ago Lakeside Partners, which runs a business centre in Zug, housed just five blockchain-related companies, of a total of 30. Now the number is 70 out of 90. “They landed like flying saucers,” says the mayor, Dolfi Mueller. At first he was unsure that the invaders would benefit the town, but “curiosity and being open to the world have brought us much wealth in the past.”

Switzerland’s decentralised government, direct democracy and history of libertarianism are all essential to Zug’s success. These contrast with rival hubs such as Hong Kong and Singapore, and appeal to fans of blockchain technology, which underlies most crypto-currencies and is essentially a distributed ledger maintained collectively by some users. There are practical benefits for crypto-entrepreneurs, too. The federal government takes a light approach to regulation in general, and to new technologies in particular. Cantons have wide latitude in how they deal with companies. A fintech licence, expected to become available next year, should make life even easier for fintech startups.

A final draw is a reputation for security and safety—including from governments. “You can have all the armoured walls in the world, but if your vault is in China or Singapore and the government says, ‘I’m seizing your assets’, there’s nothing you can do,” says Niklas Nikolajsen of Bitcoin Suisse, a financial-services provider. “That would never happen in Switzerland.”

Regulators elsewhere see it as their job to protect consumers from dubious new crypto-currencies. But Switzerland’s take a more bracing approach. “Our consumers should have the freedom to invest in exotic instruments, even gamble,” says one official. Jörg Gasser, the state secretary for international finance, has little doubt that, if and when the bitcoin bubble bursts, investors will ask for regulation. But, he says, the sector must not be regulated to death.

That does not mean anything goes. His priority, says Mr Gasser, is to protect the integrity of Switzerland as a financial centre. The national regulator, FINMA, is investigating several ICOs for possible breaches of regulations, including anti-money laundering rules. On February 16th it issued guidance on how it would apply existing market legislation, and warned that some tokens would be treated as securities and have to follow stricter rules. A working group has been assembled to look at which rules, if any, ought to apply to ICOs. The aim is to increase legal certainty and ensure that, in the words of a press release from the State Secretariat for International Finance, a government department, “Switzerland remains an attractive location in this area.”

Crypto-entrepreneurs took the measured tone as indicating that Switzerland is still keen on their business. Indeed, as the sector matures, places that offer some regulatory protection or licensing should benefit, says Joey Garcia, a lawyer at Isolas LLP, who has just helped develop a licensing system in Gibraltar, a rival crypto-centre.

While crypto-companies are growing, physical hubs with well-crafted rules and a critical mass will continue to seem attractive. But crypto-currencies’ intrinsically decentralised nature means that eventually the benefits of being part of a cluster may weaken. Unless Zug continues to court them, only the vaults carved into the Swiss granite will stand the test of time.