One coin, two views

One coin, two views

Despite safety concerns around trading of virtual coins, the cryptocurrency trend has gathered pace in the Swiss financial sector. InvestmentEurope reports.

What is a current safe haven for investors? “Not Bitcoin for sure!” joked Lombard Odier Investment Managers’ chief investment strategist Salman Ahmed answering the question during a mid September press briefing in London.

At the same time, Swiss boutique Decalia AM issued a similar editorial view: “Cryptocurrencies ultimately lack what makes a currency’s appeal: safety. And with no intrinsic value to offer, we view them essentially as speculative vehicles, akin to pyramid schemes or anonymous dealing systems for black marketers, tax evaders and scammers.”

Safety concerns are yet to be removed, as on 19 September 2017, Swiss financial market regulator Finma has cracked down on an association – Quid Pro Quo – as well as on two firms – Digital Trading AG and Marcelco Group AG – that have been together issuing, trading and providing a fake cryptocurrency E-Coin for a year.

The regulator has liquidated the entities which managed to gather at least CHF4m from several hundred users. Finma could seize and block assets of around CHF2m.

Another three firms were placed on Finma’s warning list due to suspicious activity in the same field and additionally, the Swiss market authority said 11 investigations were ongoing into other presumably unauthorised business models relating to fake coins.

The story occurs in the context of a buzz surrounding cryptocurrencies, in particular in Switzerland. The effervescence of the sector has been supported by record valuations of Bitcoin over the summer. Vontobel’s Bitcoin tracker certificate, launched in 2016, ranks among the most traded products on the Six Swiss exchange. Private banks are launching Bitcoin trading services like Falcon and Swissquote did last July. The local fintech sector, especially Zug’s Crypto Valley, are flourishing.

Alexis Roussel, chief executive officer of Neuchâtel-based Bitcoin online gateway Bity, was among pioneers of the cryptocurrency trend in Switzerland. For him, the current play of cryptocurrencies by Swiss private banks only focuses on the speculative aspect of the virtual coins. Their offering remains restricted to Bitcoin and ether trading, he notes, adding that they have not yet exploited the utility function of cryptocurrencies like Bity (withdrawing Bitcoins for instance).

“They do not have the infrastructure to manage cryptocurrencies hence have externalised their processes to fintechs. If they want to achieve greater plans in the cryptocurrency space, they will have to reshuffle their whole ageing IT infrastructure to integrate the blockchain technology and greater security in the management of virtual assets. That will lead to even more partnerships between banks and fintechs. The cryptocurrency market does not find itself in a phase in which banks or asset managers are grabbing shares of one another since its size is growing,” he explains.

Roussel suggests that trading in the Bitcoin space has always had a positive impact globally. Though illiquidity lingers in the field and individuals as well as firms making arbitrages and taking positions on Bitcoin to boost the space are needed, he says.

Another development of the cryptocurrency offering in Switzerland will be the launch of the Cryptocurrency Fund by Zug-based Crypto Fund AG either in Q4 2017 or early Q1 2018.

Targeting institutional and qualified investors, it consists of a passive index fund with an underlying index currently developed that will cover the development of the 5 to 10 largest cryptocurrencies by market cap. The firm specifies investors will be able to purchase the vehicle through an ISIN code.

Crypto Fund AG observes that only a very few specialised banks provide investments in the cryptocurrency asset class.

“This is partly due to the high risk and volatility involved. Institutional investors such as family offices have certain due diligence requirements, which these products are not yet fulfilling. We are trying to tackle these issues by setting up a fully regulated investment vehicle for cryptocurrencies,” the manager says.

Regarding local and global competition on the cryptocurrency investment offering, Crypto Fund AG explains it is monitoring the developments in other regulatory frameworks such as in Liechtenstein and/or Canada.

“Investors from all corners of the globe are asking how to get involved in the fund. That confirms that there is a huge demand for the kind of fund that we are building. On the mid-term, we are not expecting severe direct competition in Switzerland since Falcon private bank and Vontobel are offering products that differ from ours quite heavily and most of the online solutions are very insecure, unreliable and not regulated,” argues Crypto Fund AG.

Says Roussel, the records reached in value terms by Bitcoin this summer form a first step. Bity’s CEO considers the bitcoin is far from its potential value that can only get higher as we remain at the start of crypto-currencies’ use.

“A massive rush of individual investors into crypto-currencies is yet to happen. When the concrete use of bitcoins will be effective, the demand and the price of bitcoin will explode. The current bitcoin inflation comes to an end,” he adds.

For Crypto Fund AG’s founders, the perception of Bitcoin as a store of value has increasingly improved. They stress that despite the bad reputation attributed to Bitcoin in the traditional media in recent years, ever more individuals start realising Bitcoin’s potential as a digital store of value and that the underlying Blockchain technology could “revolutionise not only traditional financial markets but the entire way of transactions between people.”

“Also, many investors were incentivised by the huge gains that were possible though cryptocurrencies in 2016/17. We do believe though that the value will continue to increase in the long run. A lot of institutional money cannot be invested yet and this group is looking for a solution to get safely into the cryptocurrency market,” pinpoints Crypto Fund AG.

The development of such an offering in the cryptocurrency could place Switzerland as an important hub of the Bitcoin map. Bity’s CEO Roussel says a pair of factors have backed the flourishing of cryptocurrencies in the country.

First is cultural as he assesses Swiss individuals do have an overall good financial education. The second reason, according to Roussel, is that the issuance of cryptocurrencies in Switzerland remains free, adding that Swiss regulation much backs the development of cryptocurrency businesses.

Last 29 September, Swiss financial market authority Finma said it has observed a marked increase in initial coin offerings (ICOs) conducted or offered in Switzerland, adding that it was investigating a number of ICO cases to determine whether regulatory provisions have been breached.

Consequently Finma issued a guidance on ICOs focusing on four areas : provisions on combating money laundering and terrorist financing; banking law provisions; provisions on securities trading; provisions set out in collective investment scheme legislation.

“Given the close resemblance, in some respects, between ICOs/token-generating events and conventional financial-market transactions, one or more aspects of financial market law may already cover ICO campaigns according to their various models. FINMA is currently looking into a number of different cases. Moreover, whenever FINMA is notified about ICO procedures that breach regulatory law or which seek to circumvent financial market law it initiates enforcement proceedings,” the regulator clarified.

Roussel estimates that Bitcoin, as a medium, can replace the physical Swiss franc note or coin over the long term, even though the currency itself is unlikely to disappear.

Crypto Fund AG’s view echoes that of Bity’s CEO. According to its founders, Switzerland could totally become a major hub for cryptocurrencies.

“Around here in the Crypto Valley (Zug area), there are plenty of Blockchain startups that are contributing to a prosperous ecosystem. Synergies can be leveraged, the relevant players meet frequently and even the Swiss government supports the development. In the city of Zug, citizens can even pay their taxes via Bitcoin,” they say.

This article is an enhanced version of that published in the latest October 2017 issue of InvestmentEurope.