Tiny Zug was once an innocent sort of place, known for its baking nuns, half-timbered houses and a kirsch-soaked torte favoured by Audrey Hepburn.
Then it became a low-tax paradise and a magnet for corporate letterboxes: home to Glencore and other, even less cuddly behemoths. And now, in the unassuming business parks and low-rise office blocks that gently sprawl from the small old town centre, it has become Europe’s cryptocurrency kingdom.
Or, as the clever marketeers of Zug like to call it: “Crypto Valley”. In a recent report, one local investor, CV VC, wrote that there were now 960 crypto start-ups in Switzerland, employing more than 5,000 people. Nearly half of the start-ups — 433 — are based in Zug.
None of this is hard to miss these days: visitors to the country might conclude, based on advertising footage, that distributed ledger technology was third only to chocolate and luxury watches in Swiss contributions to the world. The fintech bro has almost become a more common fixture in the vastly overpriced bars of Zurich than the Paradeplatz banking pro.
But there is a cold wind blowing through crypto valley, as there is across the blockchain world. UBS this week warned of a looming “crypto winter” as the Federal Reserve raises rates. Bitcoin’s price collapse in recent days is the first sign that the party is over, the bank’s analysts believe.
And so quiet Zug finds itself on the front line of global finance. Switzerland, at least, seems to think crypto is here for the long term. While other governments seek to rein in crypto businesses, the country has been keen to promote them in recent months. In February 2021, Bern introduced a new “blockchain law” to codify how digital assets should be treated by the courts when it comes to the peculiar aspects of things such as proof of ownership and custody.
The market regulator, Finma, has meanwhile been extremely proactive in trying to engage with and understand the new crypto world. It has even licensed two crypto banks in the country: Seba and Sygnum. Switzerland, Finma’s position indicates, intends to have a first-mover advantage when it comes to crypto fintech.
The big figures in the industry — hardly a surprise — see a prosperous Swiss future for crypto too. On a recent visit to Sygnum’s offices, chief executive Mathias Imbach told me that the volatility and exuberance many sober investors have associated with crypto is just froth but beneath it are some serious propositions and investment opportunities.
Underpinning the Swiss interest in crypto and the crypto world’s enthusiasm for Switzerland, of course, are some shared values: a belief in the power of technology for example, and more importantly, a libertarian bent that favours political and institutional freedom.
But there is an elephant in the room here, perhaps an even bigger one than the vertiginous sell-off in cryptocurrencies in recent months. And this, it would seem, Switzerland still does not have a long-term answer for, regardless of where crypto prices are in a year’s time or how institutionalised the industry has become.
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Crypto technologies and businesses are increasingly at the centre of global illicit financial flows and criminal enterprise. Western intelligence agencies, an old source from a previous reporting gig told me recently, are very worried about the ways in which crypto technology is enabling illicit financial and political activities.
Meeting with a crypto asset manager in Zug on a freezing morning a few weeks ago, over coffee in his office, I got a disarmingly frank assessment of the problem in Switzerland: for sure, there are a number of unscrupulous outfits in crypto valley, he said. And perhaps worse, there are an even larger number of very naive entrepreneurs keen for cash and clients, who consider themselves unbound by the rules governing mainstream finance.
Crypto asset management, the asset manager added, has become the go-to home for many compliance-averse financial advisers who were booted from Switzerland’s scandal-prone private banks in recent years. And many of crypto valley’s clients, it seems, are politically exposed persons that have been “off boarded” from banks’ books amid reputational fears over white-collar crime.
In Zug, therefore, it seems that — regardless of the prevailing market weather, winter or summer — crypto’s bright future risks being a repeat of Switzerland’s murky financial past.