Switzerland dangles carrot for crypto exchanges

The award of a trading license to the SIX Digital Exchange (SDX) coincides with a regulatory backlash against crypto exchanges around the world.

For cryptocurrency enthusiasts, the writing is on the wall: the nimble upstarts may have gained a head start but centralised regulators are queuing up to pull them back.

Some of these crypto exchanges are blazing a trail into new financial territory – branching out from pure cryptocurrency trading into areas like staking, lending and listing DLT securities, such as blockchain-compliant versions of company shares.

This has brought the likes of Coinbase, Binance and Poloniex into conflict with regulators, particularly the US Securities and Exchange Commission (SEC). “I believe we have a crypto market now where many tokens may be unregistered securities,” SEC chairman Gary Gensler recently saidExternal link. “This leaves prices open to manipulation. This leaves investors vulnerable.”

Could Switzerland provide the answer? At first glance this seems unlikely, as large international exchanges found out when they inquired about setting up shop in the Alps.

Strict requirements

“The main reason that there are no large exchanges in Switzerland is not related to trading, but to the custody side of the business on which Swiss banking laws are quite strict,” Dominik Hofmann of the MME law firm told me. 

Crypto exchanges can operate in the European Union as Payment Service Providers under an e-money license.

“Switzerland has no such license, so crypto exchanges that wanted to offer accounts in traditional money or pooled custody of cryptocurrencies needed to become fully-fledged banks, apply for a fintech banking license, collaborate with existing banks or otherwise design their setup in a way to avoid Swiss banking regulation,” says Hofmann.

Swiss-headquartered exchanges like Smart Valor, Lykke and Swissborg have been forced to trade out of Liechtenstein, Britain and Estonia. “It was a big mistake to think that the regulator would understand and welcome the potential of this new technology. I was completely wrong. It was just a disaster,” says Lykke founder Richard Olsen.

“Game changer”

But Swiss lawmakers have pushed through a series of legal reforms this year to encourage the trading of digital stocks, bonds and other securities out of Switzerland. August 1 saw the introduction of a new DLT trading system license.

The legal reforms are designed to accommodate blockchain-compliant company shares, real estate and art rather than bitcoin. But Hofmann believes the Swiss DLT trading system license is a perfect fit for crypto exchanges that want to add this new class of digital security to their trading options. Particularly as such exchanges would have direct access to the general public.

“It’s a game changer,” Hofmann said. “If you want to establish an integrated exchange that also offers trading in DLT securities then Switzerland is now the first place to come.”

The updated Swiss laws have also opened the doors for bespoke DLT security trading venues. These include Sygnum bank’s SygnEx platform, the TDX Digital eXchange from Taurus, and the anticipated DLT platform from the Cantonal Bank of Bern.  Lykke has also applied for a securities dealer license to join this group. It’s now become even simpler to trade securities on the blockchain out of Switzerland.

Broken bicycle

Switzerland has regulatory competition. Liechtenstein has had its DLT legal framework in place for a couple of years. The EU is plotting its own course along the same lines – with the DLT Pilot Regime and other laws in the pipeline.

Richard Olsen thinks the growing maze of regulations and laws has simply made things “more confusing”. He believes DLT has the potential to fix the “broken bicycle” of traditional finance by making it, cheaper, more transparent and approachable for the general public. A type of IKEA finance, as he puts it.

“We need a top strategic view to say: ‘Look, this is a marvellous technology, how can we radically get it implemented?’,” he says. “We need an overarching simplification”.

But others may disagree. DLT trading platforms no longer have to go through the cumbersome four-year process as SDX for a traditional exchange license.

It’s become a whole lot simpler to trade securities on the blockchain out of Switzerland.