30/03/2023 Alexander

How Switzerland does crypto compliance

In a discussion with Ekaterina Anthony and Maxim Kon, board members of the Crypto Valley Association in Switzerland, Pawel Kuskowski asked questions regarding the increasing focus given to crypto by Europe’s Crypto Valley, Switzerland.

Banks supporting crypto

According to Maxim, SEBA Bank and Sygnum bank are the crypto native banks in Switzerland who not only accept clients that have a nexus in crypto but also buy and sell Bitcoin as a banking product.

However, there are several other banks such as InCore Bank and Maerki Baumann Bank who provide fiat rails to the crypto industry in Switzerland. Regional and state-owned banks in Switzerland are also trying to help banks in pursuing their crypto projects but they are more hesitant than others.

Ekaterina explains that the crypto native banks SEBA and Sygnum, unlike the other conventional banks, were founded as crypto banks and were given their licenses at the same time in 2019 with the purpose of comparing and watching how these banks developed their businesses in the crypto realm. However, she elaborates that even though it may seem easy to open bank accounts in Switzerland, there are a lot of restrictions that have been placed on banks dealing with crypto. There are several expenses which must be made to make it compliant including multiple tools, training and education.

The compliance ecosystem

Pawel remarks that Switzerland has been one of the most active countries in terms of crypto and Ekaterina adds that the best thing about crypto regulations in Switzerland is that many tasks can be delegated. This is true especially if it is a startup or a Self Regulatory Organisation (SRO) company needing to outsource compliance functions to external, professional companies who have expertise in the subject. Ekaterina goes on to explain how she and Maxim try to help the ecosystem as board members of the Crypto Valley Association in Switzerland by trying to educate and support the market by:

  1. Organising several educational events;
  2. Promoting businesses and helping them set up;
  3. Providing sufficient training and support to the younger generation interested in the field;
  4. Including international and multicultural companies, conventional and unconventional banks as associates.

There are around 10,000 active members in the association indicating a giant step taken by the association towards promoting crypto in Switzerland. Maxim adds that the reason behind this large number is that it is not only composed of members based in Switzerland. The member base started in Switzerland in 2013 but real blockchain companies, not necessarily FinTech focussed, came to Zug in 2015.

Eventually, the association expanded out from Zug, to Geneva and Lausanne, and then outside of Switzerland. In fact, there are special local communities in North America, South America, Africa, Dubai and even Asia. The Crypto Valley Association aims to involve those who are directly or indirectly connected to blockchain projects and blockchain FinTech companies in order to give a voice to the people and create a network.

Ekaterina says that in addition to the private sector, the Crypto Valley Association also works with regulators, people related to the crypto industry, and provides market feedback on Financial Action Task Force (FATF) amendments. They also have a legal working group and compliance working group that helps industry operators to understand legal aspects relating to crypto.

Types of licensing required to operate

One must understand what their business model is before they think of which licenses they need. Normally, a business model starts with an idea which needs to be analyzed if it is subject to money laundering law. When a company wants to onboard clients and carry out Know Your Client (KYC), it must start with SRO, the minimum license that the company must get. However, it can be considered as more of a membership than a license because that membership will lead to companies being regulated by the Swiss Financial Market Supervisory/Regulatory Authority (FINMA).

FINMA supervises and regulates all SROs and those SROs are basically membership groups which have a lower level of regulation. FINMA dictates the rules that the SRO passes down to smaller companies who fall into the regulatory requirement.

Each SRO has its own regulations based on the FINMA Anti-Money Laundering Ordinance but sometimes there are special rules and an SRO has the right to invent its own rules. Thus, if a company is part of a SRO, they will have to follow the rules of that SRO and once a year they will have to renew their membership, be audited (to check if the company is doing everything right) and attend training. Membership in an SRO will essentially provide a company regulatory status.

If a company is SRO regulated, they must:

  1. Provide their AML policies as a minimum;
  2. Show how they onboard their clients;
  3. List what type of procedures are in place;
  4. Give an interview.

Watch the whole discussion:

Policies and operating procedures

Maxim says that AML policies in and out of Switzerland look the same. Some may be lengthier than others, but they all contain the same elements. Ultimately, it is just a structure of things which need to be done. In the procedural aspect, the company maps out what they are really doing, how they store the data, how they process the data, what rules they are following to identify their clients, the people they are working with, who reviews it, how many people have to review it, how often and how fast. According to Maxim, this is key.

Ekaterina says that in Switzerland, companies can automize all of the processes. Legally, they have guidance on video online identification, allowing companies to have less paperwork but companies must outsource this to other authorized companies. They must also find the right tools that can be creatively managed such as sanction lists, transaction screening, news search and other paid or free tools. This can make the process much faster and cheaper.

Non-Fungible Tokens (NFT)s

According to Maxim, NFTs can be different things. The non-fungibility of a token makes it transferrable and unique. They already exist in many ongoing projects in Switzerland. In fact, there are companies issuing ownership licenses or just licenses of participation as NFTs which are verifiable but it really depends on its purpose. In summary, there is much more to the non-fungibility and transferability of NFT than just showing on Twitter that you own a picture of a monkey.