The future of crypto legislation: Switzerland's lessons for Ukraine

Business and government collaboration for the formation of the crypto legislation. Switzerland’s case

• It wasn’t easy to discuss Bitcoin with the Switzerland Financial Market Supervisory Authority (FINMA) in 2017 when the ICO (Initial Coin Offering) boom occurred. But the crucial part of this progress was the education of the regulator and identification and mitigation of the potential financial risks. FINMA has a specific dedicated Fintech Desk with the younger and tech-savvy economists and lawyers working at it. They are open, flexible and interested in the development of the fintech market. So if someone has a fintech or blockchain project, they can email them, and the specialists from the Fintech Desk will help to navigate through the regulatory framework.
• Switzerland has a technology-neutral approach in legislation which is why on the crypto or fintech projects, the existing laws apply. It’s a lawyer’s job to make the project fit into it. The regulator only steps in and gives some guidelines if there is a lack of regulation.

The importance of opening a bank account for the crypto business

• The main challenge for crypto entrepreneurs at the first stages of the legalisation of their business is opening a bank account for paying the bills, salaries, office rental and making other payments. In each jurisdiction, it’s really crucial to educate the space of traditional institutions such as banks. Otherwise, the crypto space will die.
• The problem with the opening of bank accounts is common for many jurisdictions, even in Switzerland. There are only a few banks that onboard crypto or blockchain companies. Things to improve is banks make sure to understand that all crypto-related risks are manageable. Because if a company can’t open a bank account, it can’t do business.
• The risks associated with cryptocurrency transactions are sometimes easier to identify and mitigate than with cash. And usually when banks hear crypto, they think it’s money laundering. But there are tools to screen the client’s wallets. And if the client is able to explain and prove the source of the funds, the bank gets a client who is even safer than one with the cash.

The future of the crypto legislation and how it affects the development of the global fintech market

• Trends in cryptocurrency markets are moving in the direction of legal regulation. We have international bodies such as FATF that are strong in combating money laundering and push forward crypto regulation recommendations. One of them is a KYC (Know Your Customer) procedure that is very important.
• In 2017, during the ICO boom, many сrypto projects didn’t perform a KYC. But some projects issued means of payments that fall under the KYC/AML regulation. So the projects would need to gather all KYC information from the people to whom they sold the tokens retrospectively which is quite impossible. In general, the minimum KYC requirements for all the projects are gathering client’s names, emails, and passport data. This is a minimum basic.
• Swiss Financial Market regulator issued in 2018 the ICO guidelines clarifying that there are different types of tokens. It has brought clarity to the market and also attention from crypto startups all around the world. So the regulation is a kind of promotion and marketing for the country.
• The crypto regulation makes things easier to move because one of the core messages of cryptocurrencies is to move borders in value transfer. And if there would be a global standard, it would be much easier to make such transfers from country to country with maybe no additional taxes and limits.

Examples of the failed regulation of the crypto space

• If the government implements the regulation but doesn’t stick to it, that’s not good for the market because it’s hard to do business when one day crypto projects are welcomed, and another are banned.
• Another problem could be when the requirements for startups are so high so it just kills the market.
• There are a lot of countries that are very relaxed towards crypto. Still, sometimes companies use or misuse relaxed regulation, so a problem with money laundering arises. That makes the regulator ban or shut down the crypto companies.

How the Decentralised Finance projects (Defi) and Decentralised Autonomous Organisations (DAO) could be regulated

• Decentralised projects are projects based on decentralised open-sourced architecture and are running on smart contracts with no central management. They should be treated differently than centralised projects. But what is missing right now is the regulator’s guidelines regarding what the decentralised project is and what is not. We have the Decentralised Finance (Defi) already here, and this is a vast market with a capitalisation of around $74 bln. But the regulator hasn’t made a state about it right now. We could see the same thing during the ICO boom. People just doing projects, but in the end, this business could be in a regulated zone, and entrepreneurs just don’t know all the risks.
• In Switzerland, DAO, the decentralised organisations ruled by code, that do not have any central government, are often structured as an association. Associations are governed by members that are close to the blockchain’s and crypto’s member-based communities. As an example, whoever holds a token is a member of a DAO. And the holder of the token can also vote on decisions within the organization. And their decisions are legally binding.

The approaches for introducing cryptocurrencies into banking services

• Crypto companies can show financial institutions that there is a huge market, bringing more money to banks.
• There are different layers of banking services for the crypto space. The first one is opening a bank account for crypto businesses for fiat transactions. The second layer offers wallet solutions, so people can hold crypto assets on their bank wallet without dealing with private keys. And the third one is to work with exchanges, like Kraken or Binance, that includes the crypto and fiat exchange transactions. Some banks in Switzerland have already had all these different types of services.
• Banks should become comfortable with cryptocurrency. They should understand that blockchain is secure and transparent.
• The regulator could take steps towards creating the guidelines on requirements for banks that want to work in this field. For example, the framework with an appropriate package of tools for performing AML, KYC and other procedures.
• First of all, a business should show the risks and how to mitigate them. The clients are not alike; there are e.g. private crypto investors, crypto businesses, crypto exchanges. And they all have different risks. So education for bank employees is a key point here.

How effective are public-private partnerships in the Central Bank Digital Currency (CBDC) development

• Central Bank Digital Currency is a digital currency that, unlike the bitcoin, is issued by a central bank, backed 1 to 1 with the national currency and recognised as a means of payments. The development of CBDC could rely on the Central Bank or private fintech companies. The thing is, the regulator should observe and supervise but not operate as a market participant. So the private companies can develop for the government CBDC audited by a community of trusted banking experts. Otherwise, when the Central bank is trying to develop CBDC by itself it’s corruption.
• Government can use or misuse the CBDC to have access to all transactions between people. This is a huge problem for personal data, as the government will thus have complete control over people’s payment transactions and funds.

What is the future of money and mining

• Crypto mining is not really a green topic. But there are people who try to bring a more sustainable approach to the development of this industry. There is a huge trend, and people recognise the need for it, although many crypto farms use solar and hydropower renewable energy in their work. The mining may be regulated in the future, and the watchdogs have it on the agenda as the green finances become more popular, and there are a lot of DeFi projects in this sphere.
• In the future, we would have a lot of currencies like fiat and digital fiat. Therefore, people will be able to choose the most convenient type of payment for goods and services.
• Money could become invisible. There would be no need to interact with a phone or credit card. All the payment сould be instant, borderless, frictionless, and seamless, and even chairs or coffee machines could make remittances. Even now, if you tell Alexa to buy any item just by voice, it will automatically purchase it through your Google Payment account whenever the seller and buyer are located.