There is a lot of interest today surrounding cryptocurrencies such as bitcoin and the underlying blockchain technology, including in Zug’s Crypto Valley. However, concerns surrounding security, trust and regulation must be addressed before cryptocurrencies can enter the mainstream world of business.
In September, a Zurich-based technology start-up launched a round of financing in which investors used cryptocurrencies – rather than Swiss francs – to invest in the business. modum.io AG raised the equivalent of USD$13.5 million, according to the company. Investors who participated in the financing received modum tokens (MOD) with voting and profit participation rights.
The emergence of Initial Token Offerings (ITO) – also known as Initial Coin Offerings (ICO) – represents another step in the evolution of cryptocurrencies. Many people have heard of the digital currency bitcoin, first launched in 2009, but few are aware that they can now obtain bitcoins at some ATMs, use them to make payments at certain organisations or even invest in start-ups. And bitcoin is not the only cryptocurrency out there today; others have followed, issued by private firms rather than governments.
Cryptocurrencies, however, have yet to make it in the mainstream business world. Many business and government leaders have expressed conflicting views on the future of these new, fledgling currencies. For example, Jamie Dimon, Chief Executive Officer of JPMorgan Chase & Co., in September called bitcoin a “fraud” that will eventually blow up. In contrast, Christine Lagarde, Managing Director of the International Monetary Fund, has predicted citizens could one day prefer cryptocurrencies.
“I think it may not be wise to dismiss cryptocurrencies,” Lagarde told a Bank of England conference at the end of September. “In many ways, virtual currencies might just give existing currencies and monetary policy a run for their money. The best response by central bankers is to continue running effective monetary policy, while being open to fresh ideas and new demands, as economies evolve.”
Switzerland appears to be taking an open approach to cryptocurrencies. In the past few years, the town of Zug has become home to what is known around the world as Crypto Valley. The low taxes, engineering talent from leading educational and research institutions, supportive government, privacy protection and decentralized institutions have helped attract companies, according to the Crypto Valley Association. As a public demonstration of its support for the burgeoning industry, the city of Zug started accepting bitcoin payments for city fees in 2016.
“Do you know why Silicon Valley became Silicon Valley? The legal framework was better there,” says Jan Brzezek, Chief Executive Officer and Co-Founder of Zug-based Crypto Fund AG, which was founded this year. His company plans to launch Switzerland’s first cryptocurrency fund early in 2018, pending approval from Switzerland’s financial regulator FINMA.
“It’s the same situation in Zug,” Brzezek explained in an interview with Swiss Trade. “You have a tax advantage in Zug, good infrastructure, and it’s close to Zurich. A few crypto firms moved to Zug, and you had a chain reaction as others went there as well. If you want to hire good people, you’ll find them in Zug.”
The Swiss government sees an opportunity in Crypto Valley to support the country’s important banking industry through innovative fintech solutions.
“Digitalisation presents an enormous opportunity for Switzerland,” Swiss Economics Minister Johann Schneider-Ammann said in August on a trip to Crypto Valley.
Marc P. Bernegger, who is involved in Zug’s Crypto Valley as a member of the Crypto Fund AG board and Co-Founder of the Crypto Finance Conference, said in an interview with Swiss Trade that Switzerland “missed most of the global fintech wave.” But he is confident that it will be different with cryptocurrencies.
All cryptocurrencies are based on a technology known as blockchain, which combines distributed computing and cryptography. This combination has existed for more than 25 years, although it only became more widely know with the advent of bitcoin, ETH Professor Roger Wattenhofer said in an interview with Swiss Trade.
Indeed, companies around the world are already exploring the use of blockchain in areas as diverse as supply chains, procurement, customs procedures and vehicle and food safety in order to reduce costs, improve safety and create new business models.
IBM, for example, is working with food producers and retailers such as Nestle, Unilever, and Walmart to use blockchain technology to more quickly and effectively trace sources of food contamination. Ship operator AP Moller-Maersk plans to start using a new blockchain-based marine insurance platform next year.
There are also many blockchain-related start-ups including modum.io, which uses sensors and blockchain to monitor the temperature for pharma supplies and determine if it’s in line with regulations, and Zug-based Ambrosus Technologies GmbH, which combines sensors with blockchain technology to make food and medicine supply chains more secure and transparent.
Blockchain is a permanent digital ledger with each transaction stored in a block. In the case of cryptocurrencies like bitcoin, a third party, like a bank, is no longer needed to verify transactions. Instead, a network of computers must approve an exchange between anonymous buyers and sellers before it is entered in the ledger for all involved parties to see. Cryptography is used to protect the data.
Wattenhofer predicts that governments in the future will issue their own cryptocurrencies, and businesses will use these government-issued and approved cryptocurrencies.
“Asymmetric cryptography will reform many things, including all areas that so far rely on handwritten signatures,” says Wattenhofer. “Cryptocurrencies allow for easier and faster management and direct security.”
Brzezek of Crypto Fund AG believes cryptocurrencies bring benefits for businesses and individuals alike. For example, a large multinational company could use a cryptocurrency to send funds directly to a foreign subsidiary instead of through a bank, saving time and fees. And for the many individuals working abroad and sending money home, cryptocurrencies would allow them to avoid costly remittance fees.
But he acknowledges that adoption will take some time. “With exponential technologies, you tend to overestimate the impact in the short term, and underestimate in the long term,” Brzezek says.
Indeed, there are numerous hurdles to overcome in order for both businesses and governments to use cryptocurrencies.
First, there is the matter of trust. The value of cryptocurrencies like Bitcoin have so far proven volatile. In addition, the anonymous nature of cryptocurrency transactions has proven appealing to criminals. There are still significant security issues to be addressed in terms of the safe storage of cryptocurrencies so that hackers can’t access them.
“Bitcoins, like fine art and gold, only have value because we all agree they are valuable,” consultancy firm Deloitte wrote in its 2016 report Bitcoin, Blockchain & Distributed Ledgers: Caught Between Promise and Reality. “The value of Bitcoin rests on our trust that if we wish to transact our Bitcoins will be accepted by another member of the Bitcoin community.”
Hence, the fraud or tulip bulb debate within the financial community.
While Bernegger sees real benefits to initial coin offerings, for example retail investors rather than just venture capital companies can invest in start-ups, he believes there are many “unserious” ICO cases currently and the bubble could soon burst.
Financial regulators around the world are closely watching the sector. The governments of China and South Korea recently banned ICOs, In September, FINMA closed three companies related to a fake cryptocurrency called “E-Coin” – and unveiled there are 11 other investigations underway. The Swiss regulator also issued new guidance on the treatment of ICOs, a move welcomed by The Crypto Valley Association (CVA).
“FINMA clearly states that while it supports the innovative potential of blockchain technology, regulation must still apply, another sign of the Swiss regulator’s clear and balanced approach to blockchain and Fintech,” said Oliver Bussmann, President of the CVA.
Only when the right regulations are in place and trust established, can businesses decide if they will stick to paper money or move to cryptocoins.