The EconomistFebruary 24th 2018 Finance and economics 65O
N A clear day, sunset over Lake Zug is
magnificent. Snow-dusted moun-
tains cut through the orange glow above
and are mirrored in the lake below. “Zug is
our spiritual home,” says Jeremy Epstein,
from Washington, DC, who has just taken
40 foreigners to tour the small Swiss town
south of Zurich. Theycame not for sunsets,
though, but to find out how Zug has be-
come known as “crypto-valley”—meaning
the home of many firms dealing in crypto-
currencies and related activities.
Switzerland’s famous banking secrecy
is falling to a global assaulton money-laun-
dering and tax evasion. But financial secu-
rity remains in demand. The country
should seek to become the “crypto-na-
tion”, said the economy minister, Johann
Schneider-Ammann, lastmonth. Zug aims
to be the capital of that nation.
To that end, Switzerland is maintaining
loose rules for crypto-businesses, even as
other countries are tightening theirs. An in-
dustry is developing to store tangible
crypto-assets, such as the hard drives on
which cryptographic keys are stored, off-
line in cold, dry, secret sites complete with
rapid-response teams. Where better than a
decommissioned military bunker in the
Swiss Alps? In Zug, friendliness to crypto-
currencies is in evidence all around. “Bit-
coin accepted here” stickers adorn the city
hall and several shops, including the wine
merchant’s. In 2016 Zug became the first
place in the world to accept bitcoin for
some public services. Residents can get a
blockchain-based digital identity.
About a quarter oflast year’sglobal to-tal of $5bn in initial coin offerings (ICOs, a
form of crowdfunding whereby investors
are issued with digital tokens) was raised
in Switzerland, estimatesPwC, a consul-
tancy. Of the ten largestICOs, four were in
part based in Zug.
The town decided early on to attract
crypto-entrepreneurs, for example by al-
lowing companies to incorporate based on
bitcoin wealth, rather than insisting that it
be converted into fiat currency. Taxes have
long been low. After the second world war
the former fishing village cut its corporate-
tax rate to 8.5%. The rate is still competitive,
at 14.6% compared with Zurich’s 21%.Snowball effect
The crypto-chapter of Zug’s history began
in earnest in 2013 when the Ethereum
Foundation, a non-profit to support the de-
velopment of the eponymous blockchain,
based itself there. More crypto-firms fol-
lowed. Now, having dealt with 150-odd of
them, the local tax authorities are experts,
as are the accountants and lawyers.
Two years ago Lakeside Partners, which
runs a business centre in Zug, housed just
five blockchain-related companies, of a to-
tal of 30. Now the number is 70 out of 90.
“They landed like flying saucers,” says the
mayor, Dolfi Mueller. At first he was unsure
that the invaders would benefit the town,
but “curiosity and being open to the world
have brought us much wealth in the past.”
Switzerland’s decentralised govern-
ment, direct democracy and historyof lib-
ertarianism are all essential to Zug’s suc-
cess. These contrast with rival hubs such asHong Kong and Singapore, and appeal to
fans of blockchain technology, which un-
derlies most crypto-currencies and is es-
sentially a distributed ledger maintained
collectively by some users. There are prac-
tical benefits for crypto-entrepreneurs, too.
The federal government takes a light ap-
proach to regulation in general, and to new
technologies in particular. Cantons have
wide latitude in how they deal with com-
panies. A fintech licence, expected to be-
come available next year, should make life
even easier for fintech startups.
A final draw is a reputation for security
and safety—including from governments.
“You can have all the armoured walls in
the world, but if your vault is in China or
Singapore and the government says, ‘I’m
seizing your assets’, there’s nothing you
can do,” says NiklasNikolajsen ofBitcoin
Suisse, a financial-services provider. “That
would never happen in Switzerland.”
Regulators elsewhere see it as their job
to protect consumers from dubious new
crypto-currencies. But Switzerland’s take a
more bracing approach. “Our consumers
should have the freedom to invest in exotic
instruments, even gamble,” says one offi-
cial. Jörg Gasser, the state secretary for in-
ternational finance, has little doubt that, if
and when the bitcoin bubble bursts, inves-
tors will ask for regulation. But, he says, the
sector must notbe regulated to death.
That does not mean anything goes. His
priority, says Mr Gasser, is to protect the in-
tegrity of Switzerland asa financial centre.
The national regulator, FINMA, is investi-
gating several ICOs for possible breaches
of regulations, including anti-money laun-
dering rules. On February 16th it issued
guidance on how it would apply existing
market legislation, and warned that some
tokens would be treated as securities and
have to follow stricter rules. A working
group has been assembled to look at
which rules, if any, ought to apply to ICOs.
The aim is to increase legal certainty and
ensure that, in the words of a press release
from the State Secretariat for International
Finance, a government department, “Swit-
zerland remains an attractive location in
this area.”
Crypto-entrepreneurs took the mea-
sured tone as indicating that Switzerland is
still keen on their business. Indeed, as the
sector matures, places that offer some regu-
latory protection or licensing should bene-
fit, says Joey Garcia, a lawyer at Isolas LLP,
who hasjusthelped develop a licensing
system in Gibraltar, a rival crypto-centre.
While crypto-companies are growing,
physical hubs with well-crafted rules and a
critical masswill continue to seem attrac-
tive. But crypto-currencies’ intrinsically
decentralised nature means that eventual-
ly the benefits of being partof a cluster
may weaken. Unless Zug continues to
court them, only the vaults carved into the
Swiss granite will stand the test of time. 7Digital currencyTales from the crypto-nation
ZUG
A banking centre seeks to reinvent itself