Cryptocurrency is turning into a billion-dollar mania – and Switzerland is playing a key role. Swiss regulators are having trouble keeping up. finews.com takes a look.
Cryptocurrency providers have raised nearly $2 billion this year through so-called initial coin offerings, or ICOs. Everybody is getting in on it: a German advertizing executive and former municipal politician raised $14 million this week by selling tokens in Dimcoin through a Singapore-based foundation.
The more than eight-fold surge in fundraising over last year is reminiscent of a gold rush or dot-com build-up – and has symptoms of a bubble, according to research house Autonomous. One Twitter user who chronicles ICOs recorded eight offerings on Tuesday alone:
Switzerland, home to foundations governing Ethereum and Bancor, is responsible for a good chunk of the hundreds of millions raised so far this year, including an eye-watering $232 million raise for Tezos, via a Swiss foundation.
Prominent Detractors
«Thanks to its tradition of neutrality, stability and international arbitration, Switzerland is in a good position to capture a significant share of the crypto-economy,» Swiss economist and digital currency expert Luzius Meisser says.
It already has: Zug, or «cryptovalley» just south of Zurich, jumped on the digital currency bandwagon early, and hard. Every January, Switzerland hosts the World Economic Forum (WEF), an annual confab of the world's rich and powerful. A group of fintech experts has just set up a mini-WEF on cryptocurrencies right before the actual event.
Crypto has its detractors: legendary investor Howard Marks and Russia have both said it is reminiscent of a pyramid scheme. Russia, which is seeking a piece of the fintech and crypto pie, suddenly banned coin offerings for retail investors this week, calling them «very dangerous investments» for regular investors.
Sluggish Response
Regulators have been slow to respond: last month, the Securities and Exchange Commission paved the way to crack down on cryptocurrency offerings by classing tokens as securities, not assets. In theory, ICOs are closed to U.S. retail investors, but controls are lax and easily bypassed.
Singapore quickly followed suit, then doubled down with a highly detailed warning to investors: tokens are more susceptible to fraud schemes than other investments, highly speculative, often fail, and at risk for money-laundering and terror financing, the Monetary Authority of Singapore said. South Korea has also voiced a cautious regulatory stance on digital currencies.
In Switzerland, where more than $615 million has been raised so far including several well over $100 million, authorities are far more relaxed. Regulator Finma has done little beyond the general warnings it issues to retail investors for financial products and a brief summary of what virtual currencies are.
Rife With Risk
The nub of the issue is whether tokens are securities like stocks and bonds or a category of their own, which complicates how regulators will tackle their sale.
Unlike traditional stock listings, offerings are conducted digitally and virtually. In other words, out of any jurisdiction. Several token providers have set up foundations in Switzerland or Liechtenstein, which is likely to rouse interest from foreign tax authorities, according to experts.
Plowing funds into a coin offering is rife with risk: the industry is already attracting fake entrepreneurs who see ICOs as easy money in the regulatory blank spot. Even legitimate providers can be hazy on basics like their identity and hidden fees.
Hacking Threat
Then there are the hacks: a thief who remains unidentified made off with $50 million last year in a hack of DAO, which is a decentralized organization built on Ethereum, a token provider. Last month alone, Verisateum was hacked to the tune of $4.5 million and thieves lifted $7.4 million from CoinDash's ICO.
«Many ICOs still lack proper cybersecurity which can represent a major threat for investors,» PwC consultant Daniel Diemers said.
Wallets or vaults used for safekeeping have also been attacked. It doesn't take a genius to see that this doesn't sit well with attempts in Switzerland to sell the alpine nation as a virtual bank vault and digital safekeeper.
Lackadaisical Finma
Finma doesn't regulate ICOs at all, nor has it warned investors off them. To be sure, the Swiss regulator would supervise financial firms if they required a banking license, but many which have chosen Swiss entities, like Tezos as finews.com previously reported, are out of the regulator's purview.
In all likelihood, Finma is waiting for its peers to move. The Financial Stability Board, a global regulator set up after the financial crisis to ensure the stability of the financial system, has acknowledged digital currencies, but given no indication how its views regulating them.
Official Switzerland has welcomed token providers with open arms at the highest level of government (pictured above: Swiss finance minister Ueli Maurer visiting Bitcoin Suisse's offices, with Chief Executive Niklas Nikolajsen at right). After a long bruising battle over banking secrecy in recent years, Switzerland again has much at stake – and potentially much to lose.
