Swiss cheese: Confederation’s monetary vision is riddled with holes

Switzerland isn’t so much a country as a polite yet strenuous disagreement that started so long ago nobody remembers what it’s about, and shows no sign of ending anytime soon.

When Julius Caesar stumbled upon the Swiss plateau on his way to the Rubicon, he found a loose alliance of bickering tribes so wary of central authority it imposed the death sentence on anyone who’d declare himself king. The Roman conqueror would have no difficulty identifying the Helvetii today.

Painting by C. Gleyre of Helvetian victory over Romans, 107 b.c.e.

Switzerland has no single head of state. Instead, the seven-member Federal Council serves as a collective executive committee, with the council’s titular president exerting all the authority of a college philosophy department’s chairman. There’s a chancellor too, but this role is more like the British cabinet secretary’s. (No American equivalent exists but, if anyone were really in charge of what Trumpists call “the deep state,” that would be the guy.)

The Federal Council meets in the Swiss capital of … Nah, just kidding. Switzerland has no de jure capital. The government offices are in Bern but, with the confederation’s aforementioned distaste for the trappings of sovereignty, this Pasadena-sized town will only own up to being “the federal city”—and even that’s controversial. So Switzerland, which has four official languages, has no official capital. (German, French and Italian, of course, but there’s also Romansh, the Swiss equivalent of “stuff hillbillies say”. There are eight Romansh dialects, even though it’s spoken by only 60,000 people.)

Not a shot has been fired across the Swiss border since 1860. The only foreign military service allowable under the constitution is to serve as the Pope’s bodyguard. Switzerland never joined NATO, the European Union or the Eurozone. It didn’t gain full United Nations membership until 2002, and then only after 55% of Swiss voters passed a referendum approving the measure. As recently as 1986, 75% voted against it.

Of course, “Swiss bank account” has long been international shorthand for “where rich and powerful people keep their secret money.”

This libertarian wet dream with bobsled tracks sounds like it would be fertile ground for cryptocurrency. You’d think. And you’d be half-right.

First, the good news

To start, the regulatory environment is conducive to crypto-assets. According to India-based Crypto News, Switzerland’s Financial Markets Supervisory Authority (Finma) regulates digital currencies mainly by exception. There’s no license required to trade. Writer Ashish Bhatnagar goes on to delineate Finma’s fairly sophisticated understanding of ICOs, prescribing anti-money laundering rules for true cryptocurrencies, basic securities regulations for coins that entitle bearers to cash flows and leaving utility tokens the hell alone. According to a Lexology post, this bare-bones framework of regulation led to Switzerland’s emergence in 2017 as a leading ICO market, rivaling the U.S. with $800 million of last year’s $4.6 billion market.

Governor Andrea Maechler peers over the stack of official names of her bank

One board member of Switzerland’s central bank, Andrea Maechler, went so far as to tell that privately issued digital currencies are preferable to central bank-issued digital currencies. Granted, Maechler’s status as a member of the Swiss National Bank’s (SNB’s) “enlarged” governing board suggests that she isn’t exactly calling all the shots. Still, it’s refreshing to hear a central banker’s opinion vary so starkly with the stated position of the Bank for International Settlements (BIS), which Your Humble Correspondent reported here. (Keeping with the theme of disunity in Switzerland the BIS is located in Basel, an hour’s drive from the SNB’s headquarters in Bern — and roughly the same distance from the SNB’s other headquarters in Zurich.)

Switzerland’s innovation hub is a fishing village called Zug. It has almost 30,000 residents, 40 of whom are members of its local legislature and five of whom—each from a different political party—are the mayor. The surrounding canton, dubbed Crypto Valley, is the birthplace of Bancor, Jibrel Network, Monaco, ShapeShift and dozens of other promising technologies.

If you only want good news, stop reading

Even so, many recent reports suggest that the experience of working with crypto-assets in Switzerland falls short of expectations formed on the basis of the country’s reputation.

Perhaps a good place to start this discussion is with a broader view of Swiss monetary policy, which they crowdsource.

Your Humble Correspondent has previously stated on this blog that “a sovereign state has the right and responsibility to pursue a monetary policy”. The broader point was that this doesn’t mean the government needs to own the money by way of granting that exclusive privilege to its central bank. And yet that’s exactly the question Swiss voters will decide by referendum June 11. Vollgeld, the German term for “sovereign money” or, more loosely, “fixing what isn’t broken,” is the proposition that the SNB, and only the SNB, should control the money supply.

Vollgeld apparently defines the private banks’ ability to leverage fractional reserves into loans as creating money—as opposed to creating credit, which is how the rest of the world sees it. If the measure passes, then every centime loaned out will be backed by a centime held in reserve. The goal for Vollgeld supporters is to ensure that there’s never another credit bubble like the one that exacerbated economic crises in 2008 or 1929. Whether or not starving small- and medium-sized businesses of operating capital every day to potentially avoid a once-a-century systemic meltdown is the open question. (Bloomberg has a good, quick read on all this.)

This is a swiss franc
This isn’t

And let’s be clear: We’re talking about policies regulating the Swiss franc, not dogecoin. That the definition of fiat currency comes down to a popular vote of 8.4 million people who can’t agree on either a language or a capital can be either a good thing or a bad thing depending on your point of view. But it’s bound to have repercussions on how crypto-assets are treated, and we’ll all find that out together.

The private banks don’t want Vollgeld. Not even the SNB, which would be granted extraordinary powers under the initiative wants it.

This isn’t to say the private banks are necessarily digital asset fans. The biggest of them is particularly nervous about cryptocurrencies.

“We do not recommend or trade cryptocurrencies. Cryptocurrencies are not money,” UBS chairman Axel Weber told Business Insider’s Ben Moshinsky. “Another problem of cryptocurrencies is the anonymity of the owner. … [O]ur obligations as a financial firm dealing with cryptocurrencies, as far as [know-your-client (KYC)] and [anti-money laundering] is concerned, are the same as when we are dealing with any other asset.”

Mixed signals come from the regulator as well as the private sector. In February, Finma issued an 11-page set of guidelines intended to clarify how it was going to regulate cryptocurrency. does a commendable job breaking down how it had the opposite effect.

“ICOs must use a Swiss company to perform KYC on all ICO participants, which is where the problems have started.” Kai Sedgwick reports. “With only a handful of companies in a position to perform such checks, these entities effectively hold a monopoly. The average cost for a KYC check ranges from between $0.60 to $2 within the ICO space — but Switzerland is an exception. Accredited bodies are charging up to $25 per check, leaving projects that have already made the decision to host their crowdsale in Switzerland in an awkward position.”

Some objections to Switzerland’s characteristically chaotic approach to crypto-asset regulation are less tangible and more visceral. Tim Draper— who bought BTC 30,000 the U.S. Marshals nabbed in the Silk Road raids—is particularly unimpressed with Switzerland’s approach to crypto-assets.

Rule #11: If you mention Draper, you have to run a photo of him

The celebri-vestor told a Swiss crowd in March, “You had the tiger by the tail, everyone was going to do their ICOs through you, and all you had to do was make it easier for everybody. Instead, the regulatory bodies got in there, they made it tougher, they put more and more barriers up, so people went to Singapore and Gibraltar and Cayman and to other places.”

His rant was light on specifics. The only exposure Draper had to Swiss crypto-asset regulation Your Humble Correspondent could identify involved the sketchy execution of the Tezos ICO last year. But it was Draper’s partners who moved the token’s issuing body from the U.S. to Switzerland to avoid having to conform to more stringent American regulations. And according to the (San Mateo, Calif.) Daily Journal, Draper himself is only out about $1.5 million. Why are American billionaires so thin-skinned lately?

Then again, who cares? Your Humble Correspondent wishes he had Draper’s problems. (“Dad, can you lend me some money to buy Skype? You can’t expect me to buy my own companies—I’m only 50.”) There are plenty of other voices sounding the alarm over Switzerland’s inconsistent support for disruptive technologies.

If the Swiss themselves find themselves disrupted, they’ll have no one to blame but themselves. Or, more likely, each other.