How The Swiss Government Is Helping Bitcoin & Blockchain Technology Grow Up – Forbes

Posted: April 29, 2022 at 3:31 pm

Switzerland's tech-neutral approach to regulation has created a fertile ground for bitcoin adoption

Ask the average person in the street what they think about bitcoin, and youre likely to hear one of two responses: either its an earth-shattering invention thatll transform global finance; or its a dodgy game for fraudsters and speculators thatll end in tears.

Bitcoins tendency to divide opinions isnt surprising. The blockchain technology its built on is a complex invention, only deeply understood by programmers and mathematicians. Its also relatively new the first bitcoin block was mined just 13 years ago so there hasnt been much time for governments, academics and the media to wrap their heads around the subject.

What everyone seems to agree on and what fuels much of the skepticism about bitcoin is the fact that its early history was entwined with criminality and an ultra-libertarian worldview that bordered on anarchism.

It was the cypherpunk movement of the 1990s that laid the foundations for bitcoin, coalescing a community of geeks around the shared belief that cryptography a form of digital encryption could protect global citizens from intrusion by all-seeing governments, intelligence agencies and corporations.

Whether Satoshi Nakamoto, bitcoins creator, saw himself as part of the cypherpunk movement isnt clear. His invention used cryptography in a more nuanced way: sidelining central banks by creating a decentralized form of digital money. Nonetheless, most of bitcoins early use cases were illicit extorting hacking ransoms, for example, or selling drugs on the dark web so the link with anarchism became entrenched.

Fast forward to today, and bitcoin is a very different animal. The worlds oldest and largest cryptocurrency now has a market cap of $735 billion; its spawned thousands of rivals and a new industry of Decentralized Finance (DeFi); two countries El Salvador and the Central African Republic treat it as legal tender; financial institutions hoard it as digital gold; and the endless applications of blockchain have fueled innovation in every business sector on the planet.

One country, in particular, seems determined to help bitcoin and blockchain grow out of their roots in the cypherpunk movement and spread their wings as avowedly mainstream technologies.

The financially innovative, politically libertarian nation of Switzerland has already made strides in legitimizing bitcoin. In the town of Zug, SEBA Bank, one of two Swiss crypto banks, is reporting a surge in institutional demand for cryptocurrencies thanks to its myriad regulatory licenses. In Zurich, Sygnum, the other crypto bank, is using blockchain-specific laws to create a new form of tokenized art investments. And in Lugano, the municipal government backed by stablecoin issuer Tether is exploring how to make its local economy run almost entirely on cryptocurrency.

Developments like these are probably not what the cypherpunks had in mind when they first heard of bitcoin. But Swiss officials make no apologies for their pragmatic approach.

To the contrary, an administrative unit of the federal government thats tasked with regulating and promoting international finance is pulling out all the stops to put a friendly face on the new, crypto-centric digital economy.

Much of the ecosystem you see flourishing not just in Switzerland, but also abroad is probably going against the initial idea of the crypto anarchists, explains Nino Landerer, head of capital markets & infrastructure at the State Secretariat for International Finance (SIF), which is based in Switzerlands capital Bern and comes under the responsibility of the finance ministry.

[The original vision for bitcoin was] having a fully decentralized system where everyone manages his or her own keys, and no one trusts anyone, but they can all verify everything. That was the ultimate basic idea in Nakamotos white paper. And some tech people believe in that fundamental philosophy. But that's not the ecosystem we see. We see a rather centralized ecosystem. We see service providers like banks who are providing services to clients. And their clients trust the banks not the DLT (Distributed Ledger Technology that helps make bitcoin secure).

So it's really kind of building up a similar system to what we already have just based on cryptoassets.

Many of the industry experts who are trying to make bitcoin a part of everyday life seem to agree. Paolo Ardoino, chief technology officer at Tether, is one of the architects of Luganos Plan B initiative, which envisages the city becoming the European capital of bitcoin. He describes himself as super libertarian but is quick to add: You also have to be realistic.

We need regulation and we need laws, Ardoino says. You can be an anarchist when you are with a few of your friends. But if youre actually living in a country and you want to build infrastructure, you cannot be an anarchist.

Switzerlands attempt to find a middle ground involves falling back on the governments longstanding claim of tech neutrality. Rather than developing regulation for certain technologies and, in doing so, showing an indirect preference for them the country favors a catch-all approach of regulating activities. Thus when crypto banks like SEBA and Sygnum offer custody for bitcoin deposits, their services are held to the same standards and obligations that apply when traditional banks custody fiat deposits.

The advantage of this approach, officials say, is that it allows the rules to be applied universally in fast-moving situations. When sanctions were imposed on Russia following the invasion of Ukraine, for example, cryptoassets were explicitly included without any need for additional, sector-specific regulation.

As well as influencing the Swiss Financial Market Supervisory Authority (FINMA) particularly in relation to Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) compliance the philosophy of tech neutrality affected how lawmakers drafted last years DLT Act.

Instead of writing brand new legislation for bitcoin and other blockchains, the government made ten separate amendments to pre-existing laws some more than a century old bringing them up-to-date while harmonizing the rules for traditional financial entities and newer fintech players. The need to get a handle on the market had become particularly apparent during the boom in Initial Coin Offerings (ICOs) a few years earlier, Landerer says, referring to the cryptocurrency equivalent of Initial Public Offerings (IPOs), in which tech firms raise funds by issuing digital tokens.

These legislative changes didnt come out of the blue, he insists. It was around 2017 that they became more salient, and the government decided it needed to do something.

Doing something doesn't mean kill it, but embrace it to the extent that it can be useful, while also making clear that it shouldn't be the Wild West ... [You want to] create a framework to enable innovative business models and financial services, but also account for the risks in terms of money laundering, in terms of financial stability, in terms of reputation.

Nino Landerer, head of capital markets & infrastructure at the State Secretariat for International ... [+] Finance (SIF), an administrative unit of the Swiss finance ministry

Asked about specific provisions in the DLT Act that have helped the crypto sector move forward, Landerer cites three areas.

First, the legal recognition of ledger-based securities that enable peer-to-peer transfers without a central intermediary; Sygnum has already exploited this change of contractual law by pioneering Art Security Tokens (ASTs). Second, the integration of DLT trading and settlement layers into one single step an upgrade that significantly boosts the efficiency of digital trading platforms, and thats only possible thanks to the immutable nature of blockchains. Third, the separation of cryptoassets during insolvencies.

There are many other areas that still require legal and regulatory clarity, of course chief among them DeFi protocols. But theres also no shortage of private-sector entities looking to work with SIF and FINMA as they navigate these uncharted waters.

You can be assured there's hundreds of pages going back and forth between the regulators and us, says Mathias Imbach, Sygnums co-founder and group chief executive. We see ourselves as a player who can help to address these challenges.

I'll give you some examples ... What is it on a bank's balance sheet if you have exposure to a decentralized liquidity pool? How do you manage that from an Excel accounting standpoint? What does it mean for your liquidity ratio? Is it that you need to have a financial audit on the smart contract every year? That's not possible because it's not a centralized entity. There's questions around who is the counterparty and what does that mean for the bank's risk management operation. There's questions around taxes.

Landerer admits that the cypherpunks would probably find it kind of absurd that regulated banks are now getting involved in DeFi markets a space that exists, by definition, to provide an alternative to banking.

But their involvement means that a field which might otherwise be deemed unscrupulous or disreputable is enjoying a mainstream makeover potentially mirroring bitcoins own evolution from a currency for drug dealers into a store of value for financial institutions. In DeFi many things are not as decentralized as they appear to be, or they would like to be, Landerer argues. Ultimately, when you look under the hood, its actually quite centralized.

For all the talk of tech neutrality, its hard not to wonder: if bitcoin gained popular support as the dominant medium of exchange in Switzerland, would the government seriously embrace its monetary function over, say, the Swiss franc or a future Central Bank Digital Currency (CBDC)?

Thats a decision for politicians and central banks to make. But, in Landerers mind at least, the question isnt as controversial as it might seem elsewhere in the world.

We have always had private money in Switzerland. Even today, much of the money we use as a medium of exchange is private money its credit from [commercial] banks. As citizens, we don't have access to central bank money in electronic form as of yet. So why would that change?

A more pertinent question, he suggests, is whether a decentralized, proof-of-work cryptocurrency like bitcoin is really capable of being a better medium of exchange than the public and private alternatives. Decentralization in itself is inherently inefficient from a technological standpoint, he points out, referring to the burden of distributing and validating blocks across a DLT network. Attempts are being made to address bitcoins scalability problem with second-layer, off-chain solutions like Lightning, but the jurys still out on their long-term viability.

Overall, thats not the question we need to answer as a regulator whether blockchain technology is really the gamechanging thing that the market thinks, Landerer says. [Our role] is to enable innovation, to allow it to flourish without creating too many tears.

And I think that's the fundamental attitude we have in Switzerland towards any technological innovation. We dont prejudge things.

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How The Swiss Government Is Helping Bitcoin & Blockchain Technology Grow Up - Forbes

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