Creating a Decentralized Silicon Valley in Switzerland
Switzerland is positioning itself to become a crucial hub for the global blockchain industry as investment group Crypto Valley Venture Capital (CVVC) reports that the top 50 blockchain-related companies in the country are valued over US$40 billion in 2019.
CVVC Founder and CEO Mathias Ruch told Forkast.News' Editor-in-Chief Angie Lau that the country's regulation and policies helped to create an environment which attracted blockchain-related startups from around the world.
- What makes us unique in the VC environment is that we not only invest in startups, but we also maintain our very own ecosystem. We have a co-working space. We organize conferences. We have a lot of meetups. We have an advisory unit. So we have a deep insight into the national and also global blockchain ecosystem.
- [Blockchain] technology and maybe also cryptocurrencies, are here to stay. They're not going to go away. So you have to deal with that. I think on a global level, we have to come to a global understanding how we want to regulate that technology that knows no borders, that is applicable or easily accessible to many, many people around the globe.
- From a geopolitical perspective, I think and also with the new legal frame framework that we anticipate being implemented in early 2021, I think we will be at the forefront of a blockchain jurisdiction, globally speaking.
Based on figures from the report released in October, there are more than 800 companies using blockchain and cryptocurrency in Switzerland, employing over 4,000 people.
In August, the Swiss Financial Market Supervisory Authority (FINMA) announced new guidelines regarding anti-money laundering rules in the blockchain industry. FINMA also issued banking licences to two new blockchain service providers SEBA Crypto AG and Sygnum AG which work with digital assets.
As companies like Facebook face scrutiny from the US government following their announcement of the Libra cryptocurrency, regulators around the world are now looking for ways to deal with the emerging technology and how it may impact markets and societies
Other amendments to Swiss laws include changing bankruptcy laws to view data as an asset, which also applies to institutions going bankrupt.
See related article: Balancing Innovation and Regulation in Blockchain: Ronald Tucker
Listen to the Podcast
Angie Lau: Welcome to this special edition right here in Switzerland. I'm Forkast News, Editor-in-Chief Angie Lau. At the heart of the action, Crypto Valley right here in Zug. So why has Zug become the center of blockchain innovation and technology growth? Well, on one hand, Zug is historically known as an international financial center, but also its participation in blockchain and its business friendly tax environment is also amplified by the fact that Zug was one of the very first in the world to accept Bitcoin to pay local taxes. Today, this city is now home to eight hundred blockchain companies from around the world. And I'm here with Mathias Ruch, he is founder and CEO of CV VC. CV VC is a firm really that takes a look at blockchain technology. You describe yourself as marrying blockchain technology to traditional venture capital. And you're not only tracking the ecosystem here in Switzerland and Zug, you're also supporting it. Tell us how.
Mathias Ruch: So a slight correction. There are 800 companies in the whole of Switzerland, right? Not only in Zug, there's roughly a bit more than 400 companies in the area of Zug and Zurich, which is really a cluster when it comes to the financial aspects of blockchain. At CV VC, you know, what makes us unique in the VC environment is that we not only invest in startups, but we also maintain our very own ecosystem. We have a co-working space. We organize conferences. We have a lot of meetups. We have an advisory unit. So we have a deep insight into the national and also global blockchain ecosystem. The whole Swiss blockchain ecosystem started to evolve with the Ethereum foundation settling down in 2014 here in Zug. And, you know, after that, you have the foundation structure here that everybody wanted to have as well. And a lot of other projects came here and wanted to have the exact same setup. So network effects kicked in and more and more companies came here. And, you know, out of that, an ecosystem of service providers, of infrastructure, all based on the regulatory environment of Switzerland, brought these companies here to Switzerland so that we end up with over 800 companies today in Switzerland.
Angie Lau: The term Crypto Valley was coined around then as well. And it really kind of hearkens back to Silicon Valley, where you have this intersection of government and business and even education. Is that the same kind of environment that's being fostered here?
Mathias Ruch: Well, I think new part of that fact that the ecosystem is really strong today here in Zug, Switzerland, is based on the fact that the government and the government representatives are very open to new businesses. Right. So even if they don't understand and I'm quite sure that they didn't understand when Vitalik came here in 2014 what the goal of Ethereum was, but they were open to provide the environment they needed at the time, so that's why they chose Zug over Singapore. Now when it comes to ecosystems or areas catering to the needs of startups, I think the future of a Silicon Valley system will be decentralized. So I think there will be many, many jurisdictions able to cater to the different needs of startups, not only Switzerland, not only Singapore, not only Hong Kong, but maybe all of them. And you will choose your jurisdiction according to the nature of your business.
Angie Lau: The companies that are based here, why do they decide to set up shop here?
Mathias Ruch: So I think over the past two, three years, we've screened over 5000 startups. And, you know, we've asked them, why do you come here? The answer that we heard most was "because you live in paradise". The fact that they chose, was really based on the legal framework. So we had a regulator, the Swiss regular called FINMA. They communicated with regard to ICOs, to tokens. They released guidelines for ICOs, which which brought some sort of legal certainty to the space. And so if you ask the startups and the companies that settled down here, I think it's mixture, it is not the most progressive legal framework there is currently. We have Malta, Estonia, Gibraltar with probably a bit more progressive frameworks, but it's a very sustainable one. You know, and you can count on it once it's implemented. And already before it's implemented, because we're currently working on a new legal framework, people anticipate how it's going to look like and you can count on that anticipation. And this is probably what brings most of the companies here, combined with the experience and expertise, the Swiss blockchain ecosystem has, given the fact that it has been here for 4 years.
Angie Lau: Yeah, that regulatory framework is so important to grow. I mean, we're at a phase in the cycle of blockchain companies really evolving to the next phase and seeing that the regulatory framework needs to be a foundation for growth. Now, the US has characterized itself as the gold standard when it comes to regulatory compliance and standards. Where does Switzerland fall in that? Are you as strict? Are you less strict? How do you regard the regulatory framework here as it compares to the international landscape?
Mathias Ruch: I mean, the US is a is a special case, let's call it like that, because the fact that in Switzerland the regulator communicated or categorized the tokens into three categories. And if you qualify for one of these categories and you know exactly what law you have to be complying with. Right. So this is probably quite unique and has been communicated in 2017 already, so depending on what the nature of the business is, you know, what you need to do in Switzerland and you have service providers and lawyers and universities, you have talent. So you can set up shop here and start your business. When it comes to the fact that Switzerland is maybe at the heart of Europe and you want to cater to a global community, you always have to be compliant to other jurisdictions as well. So you have to know "can I cater to US clients or can I not? What laws do I have to be compliant with?" So it's it's always whatever business you do, you need to be aware of how the legal framework is abroad. Now, from a geopolitical perspective, I think and also with the new legal frame framework that we anticipate being implemented in early 2021, I think we will be at the forefront of a blockchain jurisdiction, globally speaking.
Angie Lau: And the reason is because you'll be much more specific, companies that come here will be very specific about which laws apply or don't apply to that.
Mathias Ruch: So if you run your business based on blockchain or even on cryptocurrencies out of Switzerland, you're you're stuck with existing law. Right. So that the new law has to be implemented first. Right. But you can anticipate how this is going to look like. Now, I think it's a mixture between that new legal framework that is going to be introduced and the very traditional values and maybe advantages that Switzerland has as a very stable country. You know, you get some sort of legal certainty also within the blockchain space. And it comes with the high cost of living. Maybe not every project can afford to set up shop here, right. But if you're looking for a high quality jurisdiction or high quality of environment and you can afford it, I think it's a very good environment.
Angie Lau: You know, when you talk about regulatory framework and you mentioned that in January 2021, we're going to see some amendments in Swiss law. This really is your other role as chair of the expert council at the Swiss Blockchain Federation, which is what this public private partnership that is evolving this framework language as we speak.
Mathias Ruch: Yes, throughout the whole ICOs, and blockchain craze that, you know, the people involved in this development realized that there needs to be some amendments need to be made within the legal framework. So suddenly a token is being introduced to the economy and also to the legal side of things. How do you deal with that? What is a token? So around the question of tokens, ICOs, and you know, these companies are having trouble getting banked, these were the main issues that we wanted to tackle with initially what was called the blockchain task force. This evolved into the Blockchain Federation, which is a public private partnership, which means that besides private companies. Blockchain companies, non blockchain companies, also the cantons. So the federal, the canton governments and the federal government are supporting these activities. And here we try to really to create legal certainty to increase the competitiveness of Switzerland as a blockchain hub. And one of the activities that we currently have is we support the government when it comes to this new legal framework. So there has been a consultation period for three months where everybody so all interested parties could comment on the suggested legal framework that was presented by the federal government. And they received over 500 comments, so they're now going through that and they're going to create a proposition for the parliament in Switzerland.
Angie Lau: So it looks at three amendments. The civil, legal, private law side, civil code, and then we have bankruptcy, and then what is the third?
Mathias Ruch: The third one is the government will introduce a new license for exchanges, also for crypto exchanges. It's supposed to be a soft license. Easier to be compliant with or to be able to fulfill their requirements. And these are the main aspects. So the number one aspect is, of course, within the civil code, private law to define a token hopefully without having to mention the word token. So technology agnostic. That's what the government is trying to do and it's doing a really good job.
Angie Lau: How does Switzerland compare to the rest of the world? How does Switzerland compare to Asia?
Mathias Ruch: So now I'm back wearing my hat as CV VC because as a venture capitalist, we're also looking into tapping into the other ecosystems that there are. So from a global perspective, we see three ecosystems. The one in Europe, maybe with Switzerland at the heart of it. The Americas and Asia, you might have some even more secluded ecosystems within Asia, such as mainland China and Japan, for example. But, you know, tapping into these ecosystems requires us to really understand the local markets and partner up with existing entrepreneurs and companies in these areas. So maybe to give you a bit of facts and figures with regard to that global setup, we've just finalized our first incubation batch. So for the very early stage companies the pre-seed companies, we have two incubator batches per year out of Switzerland, out of Zug, where up to 20 companies come here for a 10 week program. They get 125K funding in return for 10 percent equity. So we did that, finished in July, and we've chosen twelve companies from over 600. And if you look at these six hundred, we had 20 percent from Switzerland, 20 percent from the US. Another 20 percent from U.K. and then its rest the of world. And if you look more closely, there are some Chinese applications, there's some from India, from Australia, even from Japan. Africa is represented as well, but it's very few. Which which tells us you need to be on location in order to tap into these markets.
Angie Lau: And it also speaks to the competitive nature of the blocking industry. I mean, you're competing with these VCs and incubators and accelerators in Asia. How competitive would you say Switzerland is? What are things that Switzerland can provide that people may not necessarily realize as being a competitive advantage, being in Switzerland?
Mathias Ruch: This is really one of the most important topics there is for Switzerland and I think for Europe as a whole compared to Asia and the US. Let me tell you a story or just give you some numbers again. In 1989 the World Wide Web. As we know today, you know the face of the Internet was invented in Switzerland, in Geneva at CERN. Right. Zero is the number of companies with a global magnitude that evolved out of this opportunity right now exactly 30 years later, 2019, again a technology of global scale is emerging out of Switzerland, but this time we don't want to miss out this opportunity. So what it means compared to Asia and us with very established venture ecosystems. And if you look at venture capital and you know how much money goes into a venture capital in these various regions, we still have to catch up heavily. And especially Switzerland. You know, when it comes to digitization, we almost slept throughout the whole dotcom boom. Gladly or happily, we are now awake. And we tried to get this opportunity right this time, but we have to catch up. You know, there's not that there's not enough venture capital available in Switzerland, especially the mentality where we're a nation of entrepreneurs. If you look back, we don't have natural resources except for water. So we need to have those ideas and those brains from abroad to inspire us and to create the ecosystems that we have today. So it's not really an accident that something like crypto valley is happening in Switzerland. But in my opinion, thinking big, that's not really a strength of Switzerland.
Angie Lau: Capital is one thing. But right now, it seems that the environment must be incubated really by regulatory reform in framework. That's what Switzerland is working on. That's what a lot of jurisdictions are working on. Do you think that you'll have the framework strong enough to withstand, sustain against stricter jurisdictions like the United States, the "gold standard of regulatory framework?"
Mathias Ruch: That's a good question. You know, if you look what's happening also with regard to, for example, for Libra entering this space, what's happening and the concerns that the Senate in the US have risen based on the fact that this might threaten established systems, there's good and bad to things like that. I think on a global level, the global community has to somewhat come up with rules how to deal with this. Also, parts of economy, of the economy of society are going to be affected by the fact that you are going to have digital representations of assets in the future. And, you know, this technology and maybe also cryptocurrencies, they are here to stay. They're not going to go away. So you have to deal with that. I think on a global level, we have to come to a global understanding how we want to regulate that technology that knows no borders, that is applicable or easily accessible to many, many people around the globe. They will build stuff, they will build products, they will build applications, they will build protocols. They will launch cryptocurrencies, as we have seen. And of course, you have to put that in a global perspective also with regard to what it means to society, to a democracy, to a nation and to an economy.
Angie Lau: What do you think the biggest obstacles are to mainstream adoption as you see it?
Mathias Ruch: Well, so let's take the cryptocurrencies. I don't think that my mom could download a wallet, handle the private keys and actually, you know, do a transaction. So it starts with that. So on the other side, who knows what technology is behind the Internet today? Does anybody know about TCP IP? I don't think so. And I don't think that you need to know about that. So blockchain and the technology aspects of this movement, I think that it's actually it's a movement. It will go into the background.
Angie Lau: So you're saying it's gone beyond the protocol level, the network level, it's diving straight into the applications?
Mathias Ruch: No, I think it's both. So also, if you look again, if we look into the following that we have for the startups that we are choosing for the programs, still the majority of use cases that are being presented or industry sectors are in the financial sector, it's roughly a third. Also, one of the biggest sectors is the platform and protocol sector. Roughly, I would say 10 to 15 percent. And if you look more closely, you can see there is two parts of protocols or infrastructure layers being built. One is let's create the next generation of blockchain, blockchain 3-4-5 or whatever you want to call it. And the other ones are very specific blockchain just tackling a specific issue in the blockchain for data analytics, for example. It's simply much lighter. So that's the two directions we see. I personally don't think that we have seen the Google of blockchain already. So there has still to be, you know, a lot of developments need to happen that, you know, technology, the issues with the technology is known. They can be solved. They are being solved. And but we still need to reach institutional grade and enterprise grade level off of the infrastructure as well.
Angie Lau: Well, just as the then the name represents, from what I understand, Zug means "pull", once upon a time it was pulling fish out of the river, and now it seems in 2019 we are pulling talent and pulling ideas into the blockchain industry to really continue to fuel crypto valley in the blockchain industry. Thank you so much Mathias, great understanding and great insights from Switzerland.