Crypto piggybank foundations proliferate in Zug

The piggybanks are full, but will the multi-millions benefit Switzerland? Keystone

Around a quarter of the $1.5 billion (CHF1.45 billion) raised by cryptocurrency crowdfunding ventures this year has found its way to Swiss foundations. Many people on social media channels are crying foul, but is there anything sinister behind half a billion dollars finding its way into such structures in the last few years?

What’s been happening?

This year, new cryptocurrency projects have stumbled on a rich source of seed capital – crowdfunding. This helps emerging ideas to get off the ground by bypassing cautious venture capitalists and tapping into a growing grassroots enthusiasm for cryptocurrencies.

The idea is not exactly new, but the so-called ‘initial coin offering’ (ICO) model has exploded this year. In the whole of 2016, some $222 million was raised in this fashion. In the first half of 2017, the volume of funds raised has already exceeded $1.5 billion.

For example, Tezos raised $232 million in a few days, beating the $150 million accumulated by the Bancor ICO some weeks before.

What’s this got to do with Switzerland?

These start-ups obviously need a place to house their newly acquired funds while they actually produce the innovations they have promised. Why not a bank account? Because they say they are non-profit, open source ventures working for the public good. Some even issue tokens to people who contributed to the crowdfund raise.

Switzerland, and especially canton Zug, has forged a growing reputation as a global cryptocurrency centre. The Zug-based cryptocurrency advisory service Bitcoin Suisse has been involved in several ICOs and estimates a quarter of the global capital raised now sits in Swiss foundations – that’s more than half a billion dollars over the last couple of years.

Switzerland has an established foundation model that support NGOs, charities and other entities. Foundations separate the funds from the people running the organisations, a way of making sure donations are not syphoned off into the wrong pockets. Independent officers manage the funds according to the organisation’s charter and not at the whim of individuals.

Law firm MME Legal says it has helped 13 crypto foundations to set up in Switzerland so far, and is advising around 10 more such entities.

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So what’s the problem?

Even from the beginning, when the Ethereum Foundation set up in Zug in 2014, social media posts challenged the motivation of setting up foundations as piggy banks for cryptocurrency ventures. 

Some posts question the necessity of raising such large funds – hundreds of millions of dollars in extreme cases. There is also annoyance that some foundations are tasked with handing out large piles of tokens to the project founders – as is the case with Tezos. 

Critics in general fear some cloak and dagger motive behind hoarding funds in a foundation in the famously secretive Swiss jurisdiction. A common post might read: “Switzerland is reinventing banking secrecy with cryptocurrencies”.

Beyond social media, some industry experts are concerned about potential business failures or even fraud.

What’s the response from cryptocurrency start-ups?

“The Ethereum fundraiser, which helped Ethereum blossom into a successful project with a vibrant community, was decried as ‘unconscionable’ by many a keyboard warrior,” says the Tezos foundation in a statement. “Tezos’s founders do not share this vocal minority’s ethos, nor do we ask that those who embrace it take part of in the Tezos fundraiser. We suggest instead that they find, and contribute to, a project which does share their values.”

Tezos, along with other foundations have countered criticism by promising high levels of transparency. Along with a detailed explanation of what rewards go to founders, several say they will give regular updates on spending and project development. Swiss fintech start-up Lykke, for example, recently published an independent audit into its foundation.

What do the Swiss regulators say?

It’s “business as usual” for Switzerland’s Foundation Supervisory Authority, which regulates how well these entities stick to the demands of their charters. The agency has no particular reservations about the wave of crypto foundations or the new form of business they are in. In fact, they are allowed to make profits and distribute funds. 

At the end of 2016, Switzerland hosted more than 13,000 foundations. Collectively, they managed some CHF70 billion in 2015, according to the Neue Zürcher Zeitung newspaper. It’s up to cantons to check out the legality of foundations before allowing them to register. Supervision of their activities is then undertaken by either cantonal or federal authorities.

What have industry insiders got to say?

Zug-based Crypto Valley President Oliver Bussmann believes the industry should formulate a self-regulatory code of conduct to protect investors from the ICO boom. “Setting up a foundation is almost like setting up a charity to capture donations. Most investors don’t understand that they are donating funds to a non-profit organisation that has limited interest in increasing value of token. There might be disappointment if investors don’t read the small print,” he told swissinfo.ch.

“Investors have to do their homework. ICOs are high risk investments and people shouldn’t get in unless they understand the business. Twenty years ago, 80% of internet start-ups did not survive.”

Bussmann also wants foundations to create more jobs in Switzerland. “They are leveraging the Swiss legal environment to issue the tokens, but the development is not located in Switzerland. They create a lot of business for lawyers and consultants, but we want research and sustainable business models operating out of Switzerland, generating jobs.”

David Siegel, founder of cryptocurrency platform Pillar Project, will soon set up a foundation following a $21 million ICO in July. “Open source is by definition non-profit,” he told swissinfo.ch. “Entities with such a model are eligible for tax exempt status. We don’t have shareholders or beneficial owners and we don’t have any profit model. We want to change the world and are committed to public ownership. We are the same type of organization as the Red Cross.”

He does not yet know where the foundation will be situated, but believes the Swiss authorities supervise such entities closely.

“There is a lot of regulatory oversight of Swiss foundations,” he told swissinfo.ch. “You have to explain everything to the regulator – they virtually take a seat on your board. This is designed to stop people using foundations just to squirrel away money and pay executives $2 million a year.”

Siegel added that the crowdfunding ICO model will transform both the way seed capital is raised by start-ups and the type of entities they create.

“Regulators should really keep an open mind about this new technology,” he said. “They should focus on creating a new framework rather than trying to pack the new model into the old framework and put things back 20 or 30 years.”

“Crypto anarchists are here to stay. If any jurisdiction over-regulates then we can move away and create our currency elsewhere. There are a million ways to get around the rules.”