How are crypto-assets regulated and safeguarded? The focus is on Switzerland
The rate at which the crypto-asset ecosystem is evolving requires regulation to ensure strong, transparent and secure markets. BBVA is the first bank in the eurozone, through its subsidiary in Switzerland, to offer a cryptocurrency custody service.
An interesting fact: as of mid-March 2023, the total market capitalisation of the cryptocurrency market reached $1.16 trillion. The growing importance of crypto-assets is calling for a regulatory framework that enhances trust, a regulation that aims to make markets more transparent and secure. And the first steps are being taken in Switzerland.
BBVA, through its subsidiary in Switzerland, became the first bank in the euro area to offer a cryptocurrency (Bitcoin and Ethereum) custody service. The idea first started in 2018, the first tests were done in 2020 and in 2021 the escrow service was launched at the same time as the Swiss DLT (Distributed Ledger Technology) regulation, the so-called blockchain law, came into force. How regulated is the crypto market? Why Switzerland? What will the Markets in Crypto-assets (MiCA) regulation bring?
What is crypto-asset custody?
Custody banking is a mechanism whereby a bank takes over the safekeeping of the customer’s holdings, be they euros, shares, funds or, in this case, cryptocurrencies. “BBVA customers in Switzerland have the option to safeguard their Bitcoins and Ethers in their portfolios, conveniently and securely,” explains Alfonso Gómez, BBVA Switzerland’s President and COO. This Bitcoin (BTC) and Ethereum and (ETH) custody service allows customers to trade these assets 24/7, not unlike trading with a wallet of euros and a bank card. “In some Swiss municipalities, such as Lugano or Zug, it is already possible for citizens to pay their taxes in Bitcoin (Lugano and Zug), Tether (Lugano), or Ether (Zug). The city of Lugano even has its own legal tender token, the local cryptocurrency LVGA,” says the bank’s CEO.
Switzerland has been known for years for its crypto regulation, which, although it still needs to be expanded and requires more work, is certainly one of the most advanced. Perhaps this is due, as Gómez points out, to the fact that its government system is based on decentralisation, without a head of state, just as happens in a blockchain.” Here are some relevant dates to understand the progress of this regulation.
The Wild West of cryptocurrencies
The canton of Zug, just a few kilometres from Zurich, has been known as Crypto Valley since 2014, when decentralist Johann Gevers popularised the idea of Ethereum co-founder Mihai Alisie. In fact, in 2017 the Crypto Valley Association (CVA), to which BBVA Switzerland belongs, was founded with the aim of “supporting the development of technologies and businesses related to blockchain and the crypto ecosystem”.
That same year, the Federal Government defined virtual currencies not as currencies, but as “digital representations of value that can be traded on the Internet,” de facto including them within the concept of assets. This small historical period in Switzerland has often been called the ‘Wild West’ of crypto, but it only lasted three or four years.
The first Swiss regulations
In 2017, the Swiss Financial Market Supervisory Authority (FINMA) granted the country’s first cryptocurrency asset management permit; and in 2021 it regulated the Crypto Market Index Fund, the first crypto fund. In the meantime, in 2018, FINMA established three different categories of blockchain tokens according to their purpose and economic function, as part of its non-binding regulation on Initial Coin Offerings (ICOs):
Payment tokens are synonymous with cryptocurrencies and have no further functions or links to other development projects. In some cases, tokens can only develop the necessary functionality and become accepted as a means of payment for a period of time.
Utility tokens are tokens intended to provide digital access to an application or service.
Asset tokens represent physical assets such as shares in actual underlying physical assets, businesses or profit streams, or an entitlement to dividends or interest payments. In terms of their economic function, tokens are analogous to shares, bonds or derivatives.
Tough regulation and a solid future
Passed in 2020, but effective from 1 February 2021, the blockchain law –formally known as the Federal Law to Developments in Distributed Electronic Register Technology (DLT)– regulates book-based securities via blockchain. It highlights the regulation of elements such as tokenisation, DLT licensing and collective ownership.
Among other things, the blockchain law regulates what happens in the event of a custodian’s bankruptcy: crypto-assets must remain constantly available to customers. For crypto custody services, such as the one offered by BBVA Switzerland, this was a turning point. Alfonso Gómez highlights “the legal certainty that allows innovation and growth in this industry” when countries set standards.
In 2022, the Swiss Financial Stability Board pointed out the need and intention to regulate cryptocurrencies following the ‘same activity, same risk, same regulation’ pattern present at the heart of BBVA and in the European Commission’s Regulation on Markets in Crypto-assets (MiCA) framework.
A changing market with continuous learning
The idea of cryptocurrencies is not new. It was being discussed in academic circles as early as the 1980s, and in 1998 Wei Dai presented the B-money. But it was not until 2009, when Satoshi Nakamoto published his paper on the Bitcoin blockchain network, that the basis for a new economy was formed.
Since then, cryptocurrencies have evolved at cruise speed, with their ups and downs, although if there is one thing the experts agree on, then it is the need to keep up to date. “70% of the staff have been trained and continue to take courses on a frequent basis, as it is a subject that requires constant updating,” says Alfonso Gómez with regard to staff education.
In addition, “we also focus on educating our customers on this topic” because it is important for them to have access to first-hand information and, at the same time, to be able to understand trends and opportunities. “As a bank we have a responsibility to create new investment avenues for our customers,” explains the CEO of BBVA Switzerland.
For example, customers need to understand what tokenisation (the process of digitally representing real-world assets or objects) is, what Ethereum’s role is in the economy, what smart contracts are and how they work, and why Switzerland acts as an innovation hub.
MiCA, the future European framework for crypto regulation
The European Union, through the Commission, proposed in 2020 an amendment to Directive (EU) 2019/1937 to include crypto-asset markets in the Union’s regulation, which has shown itself to be standardising in other related matters (as was the case with PSD2). What is the new European framework for crypto regulation?
The MiCA proposal aims to create a consistent regulatory framework for crypto-assets across EU member states, covering issuers of unbacked crypto-assets, stablecoins, trading platforms or wallets where crypto-assets are stored.
Like Switzerland, the EU aims to protect investors while preserving financial stability, enabling innovation and promoting the appeal of the crypto-asset sector. Although it will not be approved until 2024, it is expected to set some guidelines and perhaps allow for the consolidation of standards.