Crypto Assets – Or How to Link the Old World with the New

Ms. Leuzinger, how can a private person invest in crypto fund products?
You have been able to invest in this area as a qualified investor for quite a while now. This can be done rather simply, as with traditional fund products, through a mandate with your bank.

But that means I would have to have at least two million francs to be able to buy stakes.
Yes, either you have two million in assets or 500,000 francs with written confirmation that you have the necessary financial sector knowledge to recognize the risks associated with the investments.

How about directly investing through your company Crypto Fund AG?
Our approach is quite clear, to connect the “old” world with the “new” world. The process is quite a classic one: You subscribe to the fund through your bank, the security is deposited.

After becoming the first crypto company to receive a FINMA permit as asset manager, what further admission to the financial market are you striving for? Perhaps a banking license?
As an asset manager, we are satisfied with the FINMA license enabling us to manage the fund products. Our sister company, Crypto Broker AG, is pursuing the next step, a securities trader license. Whether we want to apply for a banking license at a later date will depend on further regulatory development.

And what’s your opinion regarding the new FINMA FinTech license, which can be applied for under the revised banking ordinance since the beginning of this year?
The FinTech license is a great thing for the entire ecosystem. While, according to the new regulation, acceptance of deposits from the public is permitted, we are not allowed to pay interest on them nor invest them. That’s not our prime intention, because we are currently focusing our expertise on crypto investments.

With a banking license or fintech permit, it would be possible for you to apply for access to the SIC system through the Swiss National Bank. Wouldn’t it be worth considering having your own SNB sight deposit account?
We have toyed with the idea. It would require a certain payment traffic volume in order to make the operative costs worthwhile. The question of whether it is worth it for us or not will depend on how business develops in the future.

Since last autumn your company has been recognized worldwide as a regulated Swiss funds manager. Do you see yourself as being in a pole position internationally for crypto investments?
Definitely (big smile). We are one of the few companies in Europe with this specialized know-how to have reached this degree of regulation.

And when you look across the pond to America and Asia?
Let's disregard the USA for now. The problem is that most Europeans cannot invest in American vehicles; while  conversely, Americans cannot buy shares in our funds. However, Asia is already an interesting market because the Swiss brand still stands for quality and reliability there.

Where in Asia?
Singapore is particularly active, where regulation is nearly as progressive as it is in Switzerland when it comes to blockchain and crypto technology. We are maintaining close contact with the regulatory authorities both here and there.
 

The Federal Council intends for Switzerland to assume a pioneering role for crypto investments. On the other hand, the Deutsche Bundesbank wants every attempt to regulate cryptocurrency to take place on a global level in order to be effective. How do you feel about this dilemma?
Because technology respects no national borders, uneven development on the national and international levels is really challenging. What matters, at least for today, is the national or local aspect, because there is no international regulation. However, there are also working groups, standards and recommendations. While we are also active internationally, we are headquartered in Switzerland and relate to local laws. The Swiss authorities have established a good foundation and it would be desirable if they would also actively promote this in all possible international organizations. We support such efforts with our expertise and are for regulation in the existing legal landscape without limiting the necessary freedom. We are moving in the right direction in Switzerland.

The Crypto Market Index 10, calculated by SIX and managed by you, measures the top ten largest and most liquid cryptocurrencies and provides the basis for your fund products. Today, the index is at around the same level as it was in autumn 2017, after shooting up nearly fourfold by January 2018. Is this a favorable moment to get into the market?
I find it funny that many compare the current situation to what it was a year ago. If you look at the history over a longer period you can still see an upward trend. Sometimes we are above the trend, sometimes below. The market may be more volatile than traditional stock markets, but all the more thrilling for it. It is very promising for the future, especially in view of the SIX Digital Exchange that is currently being created and where blockchain shares will be traded. Everyone should be aware that we deal with risky assets and that only a relatively small amount of assets should be invested, but the moment to enter the market is certainly not bad today.

In the rules for your index, it says that trading can be discontinued in the event of a significant drop in turnover. What does that mean? 
Here, we are following the practices of traditional markets, where it is customary to automatically suspend trading for a few minutes in the event of strong downward movements, for example. In our case, the index is only compiled by SIX during the daytime, but cryptoassets are traded around the clock. This means that it is up to us to intervene in a serious situation so that index participants are not disadvantaged in the event of market distortions.

In January 2019, trading was discontinued with the cryptocurrency Ethereum Classic because it fell victim to manipulation. What impact would the end of one of the ten index currencies have on the fund?
We removed Ethereum Classic from the index a month before this due to lack of compliance with our liquidity requirements. The index does not require that there always be ten currencies present. There are currently seven. What is important is that the currencies meet the objective requirements. For example, that they are traded on several exchanges and are liquid. Incidentally, trading in Ethereum Classic has not been discontinued everywhere and the currency has not ceased to exist.

Institutional investors are among the leading capital market participants. What development, in your opinion, must the crypto industry still undergo so that institutions such as the Swiss Old age and survivors' insurance (OASI) become your customers?
That is already possible today, from a purely objective perspective. Keyword diversification: since they are virtually uncorrelated to traditional investments, they are suitable as alternative assets in current portfolios; an investment in the future. However, it is also clear that trust in new investment vehicles in the crypto sector must be further strengthened. We hope that larger financial institutions will climb on board through strong partners such as SIX.

Speaking of trust. It is not great everywhere. Nouriel Roubini, a well-known US economist, who forecasted the financial crisis and subsequent recession ten years ago, recently stated that blockchain was most useless and over-hyped technology ever. What do you say to the critics?
There are two sides to that issue, one that finds blockchain to be fantastic, and the other holding the opposite opinion. The new technology has great potential in any case. It is the first time we are able to directly exchange assets without an intermediary, in which the assets cannot be copied, counterfeited or stolen. Otherwise, most critical voices arise from the Western world, where we generally have well-functioning, stable systems which somehow or other offer a future guarantee, because we trust the institutions that are behind the systems. That is not the case in other countries, especially where there is widespread corruption or horrendous inflation. It is precisely in these countries that blockchain is very interesting for the population.
 

The Bank for International Settlements (BIS) recently conducted a survey among central banks and learned that two banks will soon make central bank money digitally widely accessible, including Sweden. What do you make of this?
It’s extremely exciting: in terms of confidence, for digitalization itself, and especially for daily payment traffic as well. It primarily depends on how it is designed. In Sweden, where a great deal is already paid for digitally, the rate of cash usage is falling steeply. For consumers, it makes little difference whether digital payment is with or without blockchain. The more digital money there is in circulation, the greater the user confidence in new technologies will grow.

In what aspect of payments can you imagine blockchain technology really being successful?
I think it certainly will play a major role in transaction processing, especially for back-office processes downstream from payment initiation. This includes card payments and customer credit transfers among banks.

Credit transfers in Switzerland are usually processed in real time through the SIC system. With a blockchain-based technology, the validation of a payment takes up to an hour.
This applies to money transfers. Things look quite different though for securities. A transaction there conducted through blockchain is processed faster than through the banking system. But there are also other types of blockchains that are less open, meaning they function in a less decentralized manner enabling transactions to be processed more quickly. There is ongoing research into what such a blockchain platform for interbank payments might look like.

And what about scalability? Visa alone processes more than 1,700 transactions per second in the card business. Is blockchain in its current state able to handle a bulk payment system?
Here too, it depends on what you mean by a blockchain. For example, the emphasis in the Bitcoin blockchain is decentralization and censoring resistance. There are already protocols like Lightning Network, based on bitcoin as a second level, which are able to process many more transactions per second. Then there are other blockchains that are less decentralized, such as between banks, which deliver a much higher throughput rate. To be considered for each application is the initial position and the goal, along with the premises to be aimed for. There is no universal solution.