Despite naysayers and critics, the area known as "digital assets" refuses to go away. And a country that appears to be trying to encourage the space is Switzerland. While Swiss banking has been under an unflattering spotlight, the cryptoassets sector appears to retain plenty of energy.

Whatever else one can say about the Swiss financial services industry right now, it isn’t boring. The demise of Credit Suisse – in the process of being acquired by UBS – hit the image of a state more accustomed to being seen as a solid place. But this independent-minded country has had to reinvent itself before – look at its wristwatch industry – and the same may happen in finance. And that includes what are known as digital assets. A question is to what extent can such innovation help the country win back some of its edge?

In cantons such as Zug, there’s the “crypto valley” (an office block rather than something more scenic) in which scores of firms, operating in areas such as blockchain, tokenized assets, smart contracts and cryptocurrencies, operate. The Swiss Financial Market Supervisory Authority, aka FINMA, operates a relatively liberal regulatory regime for the space. In September 2021 it authorised what is called the “Crypto Market Index Fund,” a fund that can be used by qualified investors.

As described by Global Legal Insights, the government’s attitude towards blockchain technology and tokenization of securities is “very positive.” As for cryptocurrencies such as bitcoin, they aren’t yet legal tender – but they aren’t in almost all other countries, anyway. In September 2020, Swiss laws approved the concept of DLT-Securities, which allow rights, claims and financial instruments to be tokenized.

For all the headwinds caused by the 2022 tech stocks selloff, and the collapse of cryptocurrency exchange FTX in the US, Switzerland-based digital assets firms continue to build out offerings so that investors, including high net worth individuals, can tap into the market in a (hopefully) risk-controlled way. 

A firm that continues to build is SCRYPT, which was founded in 2019, headquartered in Zug and licensed in the country. 

In another case, Switzerland-based Tyr Capital (launched in 2018) is a fan of the Swiss market, and explains why. 

“The Swiss wealth management industry has been the biggest allocator into cryptos out of all countries,” Ed Hindi, Tyr’s chief investment officer, told this publication. A reason for this is that Switzerland has a lot of international clients, and they tend to be more open to wealth-protecting/diversification ideas that lend themselves to crypto, Hindi said. “The Swiss regulator, FINMA, has been clearer and more proactive in terms of regulation.”

Tyr has launched Tyr Capital Venture SP, a discretionary hybrid venture capital fund. It offers exposure to long-term returns across a portfolio of liquid tokens and illiquid digital assets (early-stage tokens and multi-stage venture capital equity) with a liquidity horizon of one to three. It also has the Tyr Capital Arbitrage Fund.

Crossover appeal
As digital assets’ promoters try to take the area more mainstream – and hopefully damp down unappealing volatility – the worlds of Swiss wealth management and a sometimes-mind-bending tech world intersect.

“The wealth that stays in Switzerland is international – there’s a melting pot of wealth. It is typically more attracted to the idea of these alternatives to other forms and value propositions,” Hindi said. 

“We are a one-stop shop where advisors and investors can get exposure to different aspects of what the asset class has to offer,” he said.

Access point
SCRYPT has a different approach to the digital assets story. It sees itself as a trusted access point to digital assets for institutions – very much a play on making this area more regular, liquid and “mainstream.” The firm was founded by Norman Wooding and Sylvan Martin. Wooding, who came to the space as a hobbyist, ended up making it his business.

“There is a definite shift towards more regulated and compliant entities in the industry. This reflects a growing recognition that regulation and compliance are important for the long-term sustainability and growth of the industry, and it also helps to build trust with investors and other stakeholders,” Wooding told this publication. 

Wooding thinks that the Swiss authorities are among the more supportive of this sector.

“Switzerland has taken a forward-thinking approach to regulating the crypto industry, with FINMA being a key player in shaping the regulatory environment. They have been proactive in their approach and have sought to create a framework that supports innovation and growth in the industry, while also ensuring that consumer protection and market stability are prioritised,” he continued. 

“The crypto industry has certainly had its fair share of market and regulatory drama over the past year. From stablecoin controversies to the FTX situation to increased regulatory scrutiny. It’s been a challenging time for many people in the industry,” he said. “I think the mood in the sector is generally optimistic and forward-looking. Despite the challenges, there is continued innovation and growth in the industry, with new use cases for blockchain technology and digital assets emerging all the time.”

Wooding entered the space at a young age – a familiar pattern with startups. “I've been involved in the crypto industry since 2015, back when I was a student studying economics and politics. I started out as a hobbyist mining bitcoin. I aligned with the economics, self-sovereignty, and political empowerment it represented and mining also happened to be a fun way to make money or ‘earn rewards’ for validating transactions and adding to the supply of this new 'economy' by participating in the creation of ‘blocks’,” he said. “After that, I conducted academic research during my master’s studies on smart contracts in corporate governance and even taught courses on cryptocurrency and disruption at the London School of Economics.”
 

In the works
Many of the firms are startups with small teams, although there is maturation with a few larger players. There were about 1,128 blockchain companies in Switzerland and the neighbouring principality of Liechtenstein at the end of 2021. The Swiss government (as referenced earlier) implemented the legal basis for distributed ledger technology in 2021 and for listing security tokens on regulated secondary markets. To take just one example of what is going on, in late February, Swiss digital assets platform SEBA Bank secured a regulatory green light from Abu Dhabi.

The ferment around the whole space is tangible. At Avaloq, the Switzerland-based technology firm that is well known for its core banking software and other offerings, an exploration of blockchain tech is very much part of its R&D efforts, for example. The former co-founder of Saxo Bank in Copenhagen, Lars Seier Christensen, is a moving force behind Zug-based Concordium Blockchain. He also has a family office in St Gallen. He has stressed the need for this technology to be an integral part of regular finance and economics, not some kind of Wild West fringe.

With compliance and risk management back at the forefront of minds after a March of financial drama, regulators will want to be careful. In the US, the Securities and Exchange Commission continues to lock horns in a high-profile legal case against Ripple Labs, creator of currency exchange Ripple, over whether the XRP cryptocurrency should be defined as a security. (In December 2020, the regulator sued ripple Labs for selling XRP tokens, as it regarded these as unregistered tokens.) A patchwork of different rules and approaches operate around the world, with Canada, Singapore and Switzerland among the more “liberal.”

Wooding, who said SCRYPT is applying for a portfolio management licence, as well as licensing for derivatives trading in the digital assets space, knows that getting the regulatory side right is important for the industry: “Of course, obtaining these licences is a complex process, and we are working closely with regulators to ensure that we meet all of the necessary requirements. At the same time, we are also committed to maintaining the highest standards of transparency, security, and compliance in everything that we do, so that our clients can trust in the quality of our services and the expertise of our team.” 

Wealthy investors need to get involved, Tyr’s Hindi said.

“Wealth managers, family offices and high net worth [individuals] should be invested in this space,” he said. “Swiss-based asset managers have a bigger appetite for this asset class…some major banks, private banks and others are interested in products like ours.”

Teenagers and solutions
Hindi considered that one of the original reasons why bitcoin took off as an idea was its supposed status as a decentralised form of money that isn’t at the mercy of central banks’ theories and political interference. “Bitcoin is the opposition to a one-party government and alternative to the existing financial system.” It has, for example, appeal in developing countries with histories of financial turbulence and unreliable central bank currencies. It can also mitigate fiat currency debasement in developed countries, he said. “Bitcoin is a teenager: it’s moody and there is not a long narrative to it yet,” Hindi continued.

With Etherium, Hindi used a different metaphor. “It is like the Nasdaq index for Web 3. It is not a store of value but a platform where all sorts of projects can sit and be built. It is primarily a tech play,” he said.

FTX and Signature
This publication asked Wooding what he thought about the FTX collapse, and the failure of US-based Signature Bank – which had close links to the digital assets world – would do to perceptions of the sector.

“While the FTX saga has certainly raised questions about the practices of some market participants, I believe that it also underscores the importance of transparency, accountability, and responsible risk management in this space. As digital assets become increasingly mainstream, it is essential that all market participants work together to ensure the integrity of the market and protect the interests of investors,” he replied. 

"As to Signature Bank, I’m as confused as everyone else. Its ‘takeover’ by the [US] Fed was a one-sentence line in a press release around SVK – so I wouldn’t even know whether to call it a ‘rescue’. Using such terminology also seems to remove any liability on the US government and/or regulatory authorities from doing their job in the first place,” Wooding continued. 

“As the digital assets market continues to evolve and mature, I believe that we will see greater scrutiny and regulation from governments and regulatory bodies around the world, and I look forward to the day when these entities actually work and sit at the same table as firms such as Kraken and Coinbase, instead of their current approach,” he said.  

New developments
PostFinance, the Swiss financial services firm that is state-owned, says it will begin offering its users access to cryptocurrency, thanks to a partnership with regulated digital asset services provider Sygnum Bank. 

SCRYPT’s Wooding said this sort of move by regular Swiss organisations, such as those at the cantonal level, shows how significant the digital space now is.

“In recent years, Swiss cantonal banks have been exploring opportunities in the digital assets space, recognising the potential of this market to provide new sources of revenue and meet the changing needs of their clients,” Wooding said. 

“This move is also a reflection of the broader trend towards greater adoption of digital assets by traditional financial institutions, and I believe that we will continue to see more banks and other financial institutions entering this market in the coming years,” Wooding added.

This is a story full of ironies. A few days before Credit Suisse was taken over by its larger Swiss rival, the bank announced that it was lead investor in the Series B funding round of Taurus, a digital assets business. In December 2022, UBS closed what it says was the first tokenized debt transaction for Asia-Pacific investors. UBS’s London branch issued $50 million in digital fixed-rate security tokens that use blockchain technology to a series of high net worth, global family and institutional wealth investors across Hong Kong and Singapore.

Whatever else happens in Swiss banking, digital assets are, one suspects, not going away.