Tobias Lux, communication head FINMA (left), Luzius Meisser, Bitcoin Association Swtzerland

Switzerland’s steep turn ahead: from off-shore to fintech

By all indications, it seems we are on the verge of another fintech breakthrough.

And this time it is again the technology that is going to radically transform how we conduct our business and financial transactions — even beyond, far greater than our wildest dreams.

Yet the question to my mind is: Is Switzerland ready for this technological upheaval? How can the country remain a leading innovation hub in Europe?

It’s a question that DigitalSwitzerland initiative founder and media group Ringier CEO Marc Walder raised in a very passionate speech three years ago at inaugural Investor Summit in Zurich: How can Switzerland stay on top of the global innovation agenda and become a successful start-up hub? (Just a little disclosure: I am one of the initiative’s early supporters, offering insights and advice as an expert and mentor in its Kickstart Accelerator, now one of the largest European accelerator programs.)

Indeed, Walder’s question has never really left me: In today’s race for the latest innovation, is Switzerland ahead of the pack, or even part of it?

The question becomes more relevant given that Switzerland is one of the top five global financial centres. But, the banking industry has seen disappointing growth rates in wealth management, which is considered one of its core businesses. For me, this gives a clear indication: we need to do something about it.

From the looks of it, the key to what the future holds lies with fintech — or to be more specific about it, innovating via the world of fintech. But is it really possible? How can this new industry be created and planted on the top of the traditional orientation? Is a smooth transition from one extreme to another possible? Can one accomplish such a mammoth task? Well, it turns out Switzerland has actually got on this path. Case in point: the FINMA Blockchain Roundtable in Bern this week (For those who do not know, FINMA is the Swiss government body that is responsible for financial regulation).

FINMA head Mark Branson positive on application of blockchain technology

The agency has invited around 100 fintechs, futurists, lawyers and bankers for a half-day program of presentations, Q&A sessions and panel discussions. A team of eight people from FINMA is out there, discussing with the public how it is addressing technological innovations, specifically the blockchain technology.

FINMA head Mark Branson started off saying the blockchain technology is going to enable new business and finance models in the near future. Due to their innovative nature, these models obviously will not fit in the existing legislation, adjustments will be needed. In cases where these adjustments are possible without changing the legislation, FINMA is ready to help. But in cases where legislative changes have to be made to embrace new business models, FINMA obviously cannot pull along but will provide suggestions for legislative reforms as it deems necessary.

Hinting at the current ICO development, Branson stated that not just because something can be promoted with token offering, it should be allowed without limitations in Switzerland. However FINMA is willing to explore the possible advantages of this technology and how token offering can be deployed in this field. The only area where he said there would be no compromises is in the area of anti-money-laundering (AML & KYC). That was a pretty clear statement.

It was refreshing to hear Branson has a positive take on the technology. I realized that in the last three years in which I tried to catch any public statement regarding fintech regulation, Branson’s speech filled me with the most hope. I believe Branson is a highly capable official driven by innovation agenda. I believe he is exactly the right person to give the country an opportunity to change the financial industry for the better. Being of British origin and watching his colleagues at United Kingdom’s financial regulator FCA moving quickly and boldly in this field, Branson certainly understands the challenges that come on the way of creating a global fintech hub.

Xapo as a showcase and masterpiece of fintech regulation

One should not also miss the remarks made by Ruper Schäfer, member of FINMA’s executive board in charge of strategy. Given his position, it is no wonder Schäfer usually shows up in various public events and conferences dedicated to regulation. Earlier this year at the WorldWebForum in Zurich, I had a pleasure to be in the panel discussion on fintech regulation with him. Back then, we discussed how the blockchain regulation should look like: technology-neutral and principle-based.

At the FINMA Blockchain Roundtable, Schäfer highlighted that it is exactly this principle-based approach which allows his agency to empower innovation in the fintech sector and puts Switzerland at an edge compared with the regulatory approaches of other European countries and the United States.

One proof that FINMA has already stepped in making sure companies can take advantage of the country’s principle-based regulation is Xapo. The Xapo case is important because it was one of the first companies that went for the option of moving its headquarter from United States to Switzerland in search for a more appropriate regulatory environment.

The company, which was a pure Bitcoin wallet/custodian back in 2015, asked FINMA for permission to operate in Switzerland. It was the first company of its kind to inquire about permission for a business model built around Bitcoin. At the time, I had a chance to support Xapo in setting up business in Switzerland. Many things has been written about this prominent case. The bottom line: while the final FINMA decision did not come quickly or easy for Xapo, I think it is fair to say that the way the permission was structured represents a global best practice. In its depth and sophistication is goes a huge mile ahead of anything comparable in terms of regulation worldwide, not to mention the BitLicense created by New York State Department back in 2015. It is, in the true sense of the word, a masterpiece of fintech regulation.

Ueli Schmidiger, who was in-charge of the Xapo case at FINMA, shared with the audience his agency’s experience. He mentioned two challenges with which FINMA struggled while studying bitcoin custodian business: the allocation of customer funds to unique addresses and the separation of funds in bankruptcy cases. Both issues are fundamental concerns every fintech regulator needs to think about.

Switzerland as a smart-contract governance capital of the world

Needless to say, Xapo was just one of the many cases FINMA had to deal with last year. Overall, the agency received around 270 fintech-related requests last year alone. About a quarter of the requests received was related to the blockchain technology. It is a sector that is growing most rapidly lately.

Fintech desk head Björn-Gunnar Flückiger started off highlighting that we are now at the Wild West in crypto-financing and reminding the public about the infamous DAO hack last year. Without doubt, we are facing a new kind of cyber risk and the whole concept of ICOs is now at the very beginning of regulatory journey, he added.

Another interesting thing about the Blockchain Roundtable was its highly interactive sessions with the crowd asking raising provocative discussions. The sessions also made sure to represent our view, the view of the blockchain start-up community.

My good friend and president of Bitcoin Association Switzerland Luzius Meisser made a speech about fintech and Switzerland being a global financial center. He talked about the concept of “zero marginal cost society” and how Switzerland can transition from providing offshore banking services to becoming the smart-contract governance capital of the world. He says, Switzerland has everything to becoming a vital global player in the technology-driven finance of the future: efficient legal framework, business stability and a society that places importance on decentralization.

I smiled to myself and thought, “yes, this is the transition we are all going to witness”.

This is a thing we can make happen together. It is on us to shape the agenda of better finance. And I feel very honored to be part of this journey!