Proliferating ‘crypto foundations’ cause concern

A warm Swiss welcome has attracted some of the world's biggest ICOs in the last 12 months. Keystone

Tezos was one of 35 blockchain foundations set up in Zug’s Crypto Valley at the height of the initial coin offering (ICO) crowdfunding explosion last year. But this might represent a high-water mark as the authorities tackle controversies that have trailed in their wake.

In its annual report, SwissFoundations says that the financial and foundation regulators are more closely scrutinising so-called ‘crypto foundations’ following a high-profile corporate governance row at the Zug-based Tezos Foundation, which was set up to manage the $232 million (CHF231 million) raised by its ICO last year.

The annual report states that since the formation of the Ethereum Foundation in 2014, there are now around 40 such bodies in canton Zug. The vast majority (35) were founded last year as ICOs raised more than $4 billion (CHF3.9 billion) globally, and some CHF850 million in Switzerland.

These comprised the vast majority of all the 47 foundations set up in the canton last year, fueling a 15% increase in formations in Zug – an increase that is well above the national average of 1.3%. The report does not say how much money is being held in these foundations.

Blockchain foundations are charged with spending the assets raised from ICOs on research into the new technology and the applications that run on these platforms.

But the practice of turning foundations into the piggybanks of blockchain start-ups had raised eyebrows even before the Tezos scandal, which was finally resolved in February. This is because of the blurring of philanthropic and commercial lines of some projects. While such platforms claim to serve a social function by improving technology, they can also come with the allure of large financial windfalls for their founders and early investors.

“In the coming years sooner or later there will be more regulation for blockchain foundations in Switzerland but now it’s a little bit the ‘Wild West’,” Georg von Schnurbein, director of the Center for Philanthropy Studies at the University of Basel, told swissinfo.ch.

In the last 12 months, Switzerland has gone out of its way to attract cryptocurrency start-ups, with Economics Minister Johann Schneider-Ammann in January declaring his ambition of turning the country into a “Crypto Nation”.

The financial regulator has also led the way in setting up a regulatory framework for crypto companies. This has helped attract many of the largest global ICOs to Switzerland.