Blockchain, cryptocurrencies and digital assets have sometimes seemed shrouded in a conceptual air of mystery. But, in recent months, they have come to the fore as their purpose in their own right as well as the interlinkages between them have become better understood.

Stefan Schwitter, Head of Investment Solutions at SEBA comments: “The difference between crypto/ blockchain and digital assets and how they play together is often misunderstood. Blockchain has valid case use and is effectively the rails for cryptocurrencies to operate over, so if you buy one type of blockchain, like Ethereum, you also have to use their tokens to store things. Digital assets are the same as physical ones but are held digitally within blockchain and paid for using cryptocurrencies.”

In Switzerland, the industry has a good understanding of the leverage that blockchain and crypto can add. Accordingly, the infrastructure and the accessibility are already well developed.

In terms of regulation too, the Swiss landscape is a supportive one. Schwitter explains: “The Swiss regulator has just passed a blockchain law (The DLT Act) detailing how digital assets can be treated more or less the same as conventional assets. This means that there is now a safe framework within which to operate; there are knowns to work with.”

Switzerland is also home to the so-called Crypto Valley, an internationally recognized ecosystem with active connections to other international centres of blockchain innovation. This ecosystem has attracted many leading cryptographic companies and organizations, such as the respective foundations for Ethereum and Cardano, just to name two. In 2020, the number of companies in Crypto Valley totalled 960 with a combined number of around 5,000 employees.

What’s next? 
As blockchain as a tool develops then people want to have it as a holding. More sophisticated investors such as asset managers and family offices now have as much as 3% to 5% asset allocation. People also want to hold crypto and digital assets.

Indeed, although crypto and digital assets have had bad press, there is massive scope for development. Andrea Aerni, Research Associate Digitalization at the Swiss Bankers’ Association (SBA), comments: “Many cryptoassets are widely perceived as highly speculative. But with the introduction of a value stable, programmable, and trusted digital currency, volatility, the main downside of today’s crypto-asset markets could be absorbed. This hike in stability could promote trust by market participants and enable use-cases which rely on a value stable token for transactions.”

And Marc Seidel, Investment Committee at AltAlpha Digital, comments: “It is worthwhile noting that the world of blockchain does not stop with cryptocurrencies and digital asset trading. Innovative technology applications are now making inroads into the brick-and-mortar world of supply chain management, a great example of that development is the Swiss start-up aXedras, which is solving supply chain and provenance challenges for the global, B2B precious metals markets. Considering that Switzerland is responsible for around 60% of the precious metals being refined globally, that is a crucial hidden champion market to service.”

Infrastructure
Key to the development of investing in digital and crypto is the right underlying infrastructure. This too is in hand. Seidel comments: “A big transaction that recently happened was the sale of the Swiss firm Crypto Finance Group to Deutsche Börse which bought the firm in order to add to its capabilities the trading, brokerage, and custody of digital assets. This was one of the largest transactions within the crypto space and signalled how large established ‘traditional-world’ institutions are looking to enter the digital asset space.”

Aerni points to the recent regulatory approval of exchanges such as Taurus and the Swiss Digital Exchange (SDX) by FINMA, as well as the decision by a large Spanish bank to provide affluent retail customers with cryptoasset services through its Swiss entity in more than 30 countries globally.

“In the future, we will see more and more banks following this example and providing their customers with high-quality services around custody, investment management and trading of digital assets,” he says.

Uptake
Having a robust and accessible infrastructure will further promote take up. Broader uptake is the next step and one of the key areas to focus on is the improvement of accessibility and convenience. The more solutions created that also allow people who still operate within the ‘old world’ to participate in the ‘new world’, the more uptake there will be and the quicker the entry into the mainstream.

Aerni says: “In the past, many innovations in blockchain technology have turned out to be weak when compared to existing solutions and processes. To be successful, innovation must be widely adopted and embraced by a large part of the general population. This is something we see happening only very slowly in Switzerland. Crypto assets and digital assets remain a niche topic, limited to people which already have a nexus to financial services.”

In particular, a crucial hurdle to broader adoption lies in the lack of consumer-facing pain points in a very welldeveloped and widely accessible financial system, says Aerni. “The Swiss payments system is currently being enhanced to be even more frictionless, which further accentuates the lack of necessity for an alternative payment system. In contrast, however, due to its highly skilled and innovative financial market workforce, Switzerland is quickly becoming one of the driving forces in the development of decentralized finance or “DeFi” protocols. “DeFi” applications offer even more potential for continuously improving wealth management-related products and services and satisfying customer demand. It will be interesting to see how banks will position themselves in this arising ecosystem.”

Thus, to develop further, the industry will need to ensure that there is access from an investment viewpoint and that the various component parts are as joined up as the mainstream industry.

Seidel comments: “If you want to participate in this market, everything is ready, whether you are an expert or not. The standard, retail type apps and exchanges are still somewhat clumsy and at times even unreliable. However, in the institutional realm, the Swiss infrastructure, standards and procedures are ready for use – they are operational. And the large players are taking note and moving in rapidly now. For investors wanting to take part in this, it is best to call one of the Swiss hybrid banks or advisors to get started."

Happily, there are lots of people pushing for further development and interconnectivity. The asset owners like asset managers and family offices are buying up all the assets. There are also a broad array of people and institutions advocating for education and exchange within the blockchain space.

One example would be the CryptoFinance conference in St. Moritz next year which will see global leaders within the field come together to learn and exchange ideas, with Switzerland being the host. Attending will be very active individuals such as Alexander Brunner, an MEP, who is also the publisher of the first Swiss Digital Asset and Wealth Management Report 2021. The aim is to bring about industry alignment and discuss controversial topics on a cross border basis.

With that in mind, many in the Swiss industry are hoping that regulation elsewhere catches up with the Swiss model. Schwitter adds: “Switzerland is a forward-looking small country with a large financial service industry and we have thus far been very progressive in this area, we now need the US, Asia and EU to come to the table with their regulatory framework so that the market as a whole can develop. Thus far development really is a mixed bag. Singapore is quite advanced, but China has an outright ban. The EU is working on a framework that should emerge as something similar to the Swiss and the US has said that it will not ban this but has yet to say how it will incorporate it into a regulatory framework.”

The next year will be interesting. Bernadette Leuzinger, CEO at Crypto Finance (Asset Management) AG summarises: “There will be a massive education piece on how crypto assets actually work and we need to be offering not just the means to invest in these assets but also the ecosystem, the infrastructure, the tech stack and the education piece.”

Schwitter says that the industry is too big to ignore. “C-level people have gone from no interest in this at all to wanting to be up to speed and being able to meet client demand. There is now a need to have some sort of exposure so we expect rapid growth.”

Aerni concludes: “From an industry associations’ perspective, we are convinced that there is a lot of potential in combining traditional banking with this emerging asset class. To us, success means that our members are able to provide their clients with an even better and customized experience with regards to their financial needs while maintaining the highest standards concerning regulatory requirements along the lines of AML, KYC and fraud prevention, nationally and internationally. Therefore, we encourage them to embrace the seemingly endless possibilities which arise through applying technological innovation to their existing products and services and by conceptualizing new business opportunities.”

This article was part of The Wealth Mosaic's Swiss WealthTech Landscape Report (2021). Access the full report here.