17 July 2024
Ian Simpson | 24 min read
Banks who have built a business in crypto and digital assets want to do it “by the rules.” But what does that mean exactly? What are the major considerations and how are regulatory considerations evolving?
In this episode, RULEMATCH Spot On hosts Cornelia Stengel, a partner at Kellerhals Carrard, for an in-depth discussion on legal and regulatory topics from AML and capital requirements to stablecoin classifications and more.
Episode show notes:
(1:55) – Intro and “the big question” about regulation
(5:54) – How banks are thinking (and deciding) about legal and regulatory topics with crypto
(13:28) – Keeping up with regulations
(16:02) – Following BlackRock’s example and tips for banks to “get ahead” with crypto and digital assets
(18:17) – When AML rules are top of mind and technology-agnostic (or not)
(22:27) – Treatment of crypto vs cash transactions
(23:52) – Focus on the Travel Rule and tainted coins
(25:55) – Dealing with custody in the framework of banking law – and its side-effects
(30:04) – The burden of the balance sheet and risk-weighting for crypto
(33:42) – What other jurisdictions are saying about risk-weighting of crypto assets
(34:34) – Deep dive on token classifications and the laws they trigger
(38:31) – Understanding asset tokens
(42:29) – How financial institutions are preparing for tokenization
(43:30) – The alignment of Swiss token classifications with MiCAR and other rules
(46:41) – The (special) treatment of stablecoins in Switzerland
(49:42) – How attractive is Switzerland (still) for doing business in crypto and digital assets?
(50:54) – Looking for maturity with CBDCs
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Episode transcript
One lack of clarity is with regard to stablecoins, because the idea is very clearly that a stable coin needs to be a payment token, because the idea is to build this cash lag. But stable coins are, as their nature needs to, are built up with underlyings.
So they are stable; they need to be stable. And with an underlying, you are immediately in the very broad, in my opinion, too broad definition of a security in Switzerland.
START OF FULL EPISODE:
Ian:
Hello and welcome to another episode of RULEMATCH Spot On. The only podcast focused exclusively on the institutional crypto and digital assets industry.
I’m your host Ian Simpson.
And if you want to know what banks, hedge funds, asset managers and other institutions are doing in crypto and more importantly, how they’re doing it, this is the place for you.
Our guest today is Cornelia Stengel. She is a partner at Kellerhals Carrard, a leading Swiss law firm that advises clients in crypto and digital assets, as well as banking and capital markets.
Cornelia is a member of the executive committee at the Swiss FinTech Innovations. She also works closely with Swiss regulators in the legislation space. She advises Economiesuisse and the Swiss Blockchain Federation.
And most recently, she was appointed a member of the board of directors at St. Galler Kantanallbank.
Cornelia, welcome to RULEMATCH Spot On.
Cornelia:
Thank you very much, Ian.
Ian:
So let’s start with a little bit of a philosophical question, not to get into Aristotle and Nietzsche and Voltaire or something like that.
But there is a question that is kind of floating around in the crypto space and the digital asset space. It gets a lot of headlines sometimes, maybe more so outside of Switzerland in the US, but also in other places.
It’s a question that stirs up a lot of emotions, a lot of controversy even, and I suppose which is also important for financial institutions.
And it is quite simply: Does crypto have a regulation problem?
Is crypto burdened by a lack of regulation or a lack of clarity around regulation? Are there too many punitive regulations or just no regulation at all?
Is this like some big hindrance to the crypto industry or is this feeling just kind of overblown?
Cornelia:
What a nice entry question, Ian.
Of course, we know this question or this discussion in Switzerland for quite a long time now. And starting the DLT legislation, this was one of the big questions, like in the background always. And yes, you have on one side, the ones arguing that almost every regulation will hinder innovation, will hamper the benefits of the whole crypto, economic, the evolving space.
They even see that almost every regulation is some burden, a burdensome path to follow.
On the other hand, and count me on this side, there are those who see the necessity or the essential need for regulation to sort of have a clear way, a path for traditional institutions, for institutional investors to enter the space.
I think this is to protect all the market participants and also the financial stability.
It’s necessary.
It creates legitimacy also for a new idea, for a new business model we could say.
And I think in the end it will promote innovation if you have a clear regulatory framework.
Ian:
And so would you say in this sense Switzerland is pretty well-positioned when you talk about a clear regulatory framework and the ability to build businesses and business models with crypto assets or on blockchain technology?
Cornelia:
Yes, I think Switzerland did very early on a good job in the regulatory space. We have a crypto friendly framework until now.
Government or the regulatory bodies, but also the authorities, the FINMA created a framework and gave guidelines such as the DLT legislation on different types of laws, then all the guidelines from FINMA circulars we have on the ICO since very early on, the token classification, now for staking recently.
So the whole government or authorities are putting together a framework that is useful for the whole industry.
Ian:
Okay. So, you know, we’re going to be talking about things in the context of financial institutions, since that’s the focus of the podcast and you’ve worked with banks and others in the space. From your perspective, as these financial institutions think about doing business in crypto, there are different things from a legal regulatory standpoint that they have to take into consideration.
Can you just kind of walk us through what those things are and maybe even in a ranking, what is most important, where do they start?
Help us to understand that.
Cornelia:
Yeah, we advise several or are advising several Swiss banks with very different backgrounds, very different business models at the beginning.
So for each bank, I think that it wouldn’t be the same importance to each topic, but at the core of most of these projects, I think is first of all, a decision on what crypto assets you want to have in your offering, with what crypto assets you are dealing.
So the big difference there is between the payment tokens in Switzerland, either in Bitcoin or on the other side, more the security asset token part.
This decision leads the way on which path, the foundation of everything.
If you have taken this decision, then the second step would be you design your project or your offering in a way that you can have the deposits off balance sheet.
As a bank, you don’t want to really have all these assets on your balance sheet.
We come later to this topic with capital requirements.
So you try to build up the setup of the whole project in a way that all the assets are clearly off balance sheets or depository values, which leads to the fact that you have to design all the contracts in this regard.
Contracts with providers, with your customers, all the internal documentation takes this fact into account.
Ian:
And makes a lot of work for the lawyers.
Cornelia:
Yeah. The work we have anyway, either if you decide to have it on balance sheet or off-balance sheet, you have to design those contracts, but you have to be very careful that the contract fits your business model or the setup you have in mind.
For example, if you design this DARP, this Digital Asset Resolution Plan that FINMA is asking for.
This is the paper telling you what happens in a bankruptcy case. This is very decisive if you have the assets on or off your balance sheet. This would be the second point
Ian:
And also a fundamental decision.
Cornelia:
Also a fundamental decision, yes.
Then third thing and this is, I put it on the third place, maybe it could be on first too – is AML and KYC, so anti-money laundering law and know-your-customer compliance.
I think both of these topics are paramount.
For a bank in Switzerland, you just need to have or to be compliant with AML laws.
You have to verify your customers, you have to know where the funds are from, you have to monitor the transaction and so on. And in difference to the fiat world, we need to really monitor and to really know what’s happening in the crypto space.
We need special tools and we need the skills. So you have to train your people. You have to know which tool for which task and so on. This is a third very important topic.
Ian:
And these projects are coming together, I imagine it takes a long time for a bank to go through these steps to make these decisions. Can you give us some insights, you know, how these projects move along and how fast even the banks do this?
Cornelia:
Yeah, this also depends a lot on the bank. We have seen projects within one year.
And it depends a lot on what you want to offer. So we see like, let’s say three stages of offering.
For example, starting with only storage, custody of crypto assets, maybe trading of crypto assets, but you as a customer are not able to transfer your own funds into the bank’s account or transfer it out again.
So it’s like a closed environment there. This would be like a first step or first phase. Then we have like a second phase, which would be probably staking. If you’re depositing, you either, you know, it would make sense to stake them also. So this would be a next step there.
We see that you have to close contracts with providing partners or build up a really IT environment which needs time.
And third step would be like the transfer in and out of your funds so that the bank receives from foreign parties, from exchanges and so on, receives funds on behalf of their customers and sends it out again.
Ian:
And so that closed loop or that closed circle, that is kind of the safe first step from the bank’s perspective.
Cornelia:
I would say so.
Ian:
Is that mostly from an AML perspective or why is it that way in the first step?
Cornelia:
It’s an AML perspective for sure. And I think you can build up, mostly banks are partnering up with already involved banks in this space.
They can learn a lot and it’s like a safe environment because you don’t have to risk that some tainted coins enter your space.
So yeah, you can build up the skills, your team, your IT systems and already offer something. So this is a nice first step.
Ian:
Who you know is who you’re happy to do business with, I guess that extends to banks as well among themselves, with themselves.
Cornelia
Yes. All like a regulated institution. So that’s an important part.
Ian:
Of course, with staking and with other things crypto moves very quickly and sometimes regulation keeps up with that but also regulations develop.
How are institutions keeping up with the developing regulatory landscape? Because it is developing and changing in all the time.
Cornelia:
Listening to your podcast would be a start…
Ian:
Ah good, good. Excellent recommendation.
Cornelia:
I think engaging with regulators, if you see business ideas, if you see offerings, interesting offerings, partner up with providers in your space, this would be like the first very important step to monitor a bit the landscape.
Banks always have to take this decision on what they are doing themselves and what part of the whole offering can be outsourced or as done with a partner.
For example, the compliance services can be like outsourced because there we already have really specialized teams.
They have a good feeling about how to discover illicit transactions, how to react on different transaction frameworks.
This would be one possibility.
I think in the meantime, we shouldn’t forget that we have to look forward to opportunities to potential new businesses.
And for this, I think it would be a good idea for some banks also to participate in PoCs and projects with a bit of bigger horizon.
Like, I don’t know, with the national bank, the Helvetia project on CBDCs or with the Swiss Banking Association, like a project on deposit tokens.
Such projects give a really good possibility to interact, to exchange ideas, to discuss some challenges, to find solutions that one team in one bank maybe is not able to find.
Ian:
It is a global ecosystem and a lot happening. So it’s much bigger than any one particular bank or institution. At the same time, you’re saying that you can do that in order to get started and move forward. I wonder or we wonder sometimes if it’s not fair to say that those who start with crypto – even a small, limited offering of trading, custody of cryptocurrencies will almost for sure be the first ones to move into tokenized assets or bigger things, bigger long-term business opportunities.
Do you think that’s fair to say or what do you think?
Cornelia:
I assume you’re right. You’re right. Yeah, I think this is probably a secure, conservative path to go.
Ian:
I can imagine it would be hard to imagine a bank, say a cantonal bank in Switzerland, offering tokenized assets if they don’t even know how to handle private keys or things like this.
So those things kind of go hand in hand.
If you think about BlackRock, right, they were an example of moving pretty quickly from offering a Bitcoin spot ETF to then quickly a tokenized fund.
And now it sounds like Larry Fink has other things going forward and forward. So when you say solve that first step, then I guess you can move forward pretty quickly.
Cornelia:
And you mentioned the two legs we see now, no? The industry on the security side, as you mentioned, BlackRock and the banks, where that the starting point is like offering custody services and so on.
Both sides need each other and building up then the whole ecosystem. So I think it’s not too bad if we have like puzzle pieces all around and then get at the end like the whole ecosystem together.
Ian:
Let’s go back to this topic.
And you alluded to the fact that it could be maybe top of mind for financial institutions. AML, anti -money laundering, always a big topic in banks.
In general, these regulations, and maybe you speak mostly from the Swiss perspective, have kind of a technology agnostic application, or at least that’s the theory, the idea.
Would you say that regulators in the case of crypto assets and Switzerland have done a good job of doing that with this kind of neutral approach towards this new technology and new assets?
Cornelia:
Yeah, I think this is a very important point for the whole Swiss way of doing legislation for innovation.
In this DLT legislation, this is, I call it legislation because it’s not a law.
There are several laws within this package and there was adoption on really small pieces of the whole law.
So what what this approach allows is that you have your legislation, you have set the goal as a legislator, you have said, “Okay, I don’t want to have money laundering and terrorist financing. So that’s the principle.”
And then you set some rules, of course, to have to identify your customers and you have to monitor your transactions, first of all.
But you don’t tell the participants, the market participants, “Okay, you need to do this on Excel or on blockchain.”
That’s not the important part of the game. The important part is that you hinder or you detect illicit financial movements.
And I think if you talk about AML, it starts right at the beginning. You could ask, okay, such a digital asset.
Is it part of the AML legislation?
I wrote two years ago, I wrote a scientific text exactly on this question because there were a lot of people saying, “Bitcoin, there’s nothing behind it.”
If you tell an AML compliance officer that it’s nothing…
Ian:
So what should they do with it?
Cornelia:
Yeah, nothing to do then.
I found out that of course digital assets are part of this legislation. They fall into the scope of AML law and with this the second step is clear.
You have to follow the rules of the law and it does depend if the asset works on an Excel sheet, in a core banking system or on blockchain. This is the approach.
It’s a clever way to do legislation because it allows to move on pretty fast.
We were fast with the DLT legislation in Switzerland.
Ian:
For sure.
When you compare this legislation as it’s applied to crypto versus fiat transactions, crypto transactions, how does that look?
I think maybe some people in the industry have a strong opinion about that, but I’d be interested to hear how you see it.
Cornelia:
I think the application, yeah, there are quite big differences. Some of the differences are clear and logical because the technological neutral or technology and technology agnostic approach doesn’t say everything has to be handled the same way.
But it says if it works the same way, then you have to follow the same rules.
So, if there are differences and between crypto and cash, for example, you have differences, you have also like to handle it differently.
And for example, we have these risk assessments and also for crypto in its digital form.
So it’s a global, very fast possibility to move assets. And this imposes higher risks than, for example, cash.
And with this background, you can argue that some differences in treating those different assets are okay.
Ian:
Justified.
Cornelia:
Yeah, justified.
Ian:
When we talk about transactions and back and forth, there’s also the topic of monitoring those. That’s a big, some people would say burden. It’s a challenge for banks.
Then there is something that applies to wire transfers and knowing who it came from and where it is going to originate or beneficiary information, sometimes called the Travel Rule.
This has been a topic and has been talked about before with relation to crypto.
Where are things now and where are, most importantly, where are financial institutions with this topic as the industry grows?
Cornelia:
Yes. We have very sophisticated tools already on the market for this transaction monitoring you need to do with fiat and of course with crypto like the same way.
But with crypto you have a different traceability.
On a blockchain you see so many details and you have to know how to analyze, how to use all this data. And there are really good tools now on the market to help the staff, helping the compliance officers to detect really illicit transaction or tainted coins.
So I think this is the whole industry or it’s like a part of this ecosystem also matures with the whole ecosystem, with the evolution, with the entrance of traditional banks.
They know their transaction monitoring as it worked since years and now have to additionally use other tools to also be able to detect or monitor this new form of transactions.
Ian:
When it comes to Switzerland in the global space, I mean there’s similarities and differences from the regulatory perspective.
One thing that stands out a little bit is that Switzerland, as I understand, you’re the expert and I’m asking the questions, has no specific license for custody of assets in general, right?
A custody license.
We talked about that being kind of one of the first fundamental steps for a bank.
So what is the side effect of this?
Could a side effect be that anything you take in then as a crypto asset is considered a deposit, considered public money, therefore triggering huge other regulations and licenses.
It seems a bit complicated or suboptimal.
Cornelia:
Yeah, it’s a really good question and it really is a Swiss specialty, let’s say.
Ian:
In a less than positive sense, maybe. I don’t know.
Cornelia:
It makes things a bit complicated also for the for the regulator or the legislator because you’re right, a lot of financial market regulation depends on the question whether you take deposits from the public or not.
So this is one of the main topics in banking law, taking deposits, yes or no?
This leads then to the definition of banking, fintech or banking license, fintech license or nothing.
And this again leads to the question of these capital requirements, for example, other burdensome license requirements and so on.
But there are so many exceptions to this rule. It’s not you take deposits from the public and it’s like no question anymore, you need a banking or fintech license. But it’s almost the other way around.
We have five, six, seven, eight. We have so many exemptions to this rule that it’s quite difficult to navigate through this legal framework.
In the end, we can, for example, say that in Switzerland, you don’t have really, or you don’t need a license for, for example, payment system providers or payment service providers.
There is not a license, as you called it, for example, only for the custody. There are many different ways out of this banking license topic.
But then you’re in a free room for foreign companies to very easily enter the Swiss market, but not the other way around because all around us they have, for example, licenses for payment service provider and so on, e -money license and all these different types of license.
Ian:
And so is there some progress or some thoughts about how this might develop over time?
Cornelia:
Yes, yes. Right now, we had in December, I think we had first workshops and expert rounds on this topic and SIF, the State Secretariat for International Finance, is working on a proposal we call it “Normenkonzept”, like a draft of the legislation for improving or adapting this situation.
There were, at the workshops, there were very different options in discussion.
Yeah, we’re pretty curious on which side the SIF will go and what the proposal will be.
Ian:
I won’t ask you to look into the crystal ball about when that will happen exactly, but…
Cornelia:
Yeah, yeah. They told us May, so it would be this month, maybe June.
Ian:
Okay, maybe today. Soon.
Cornelia:
Who knows? Who knows?
Ian:
You alluded to the topic of capital requirements.
And I know the people over at UBS have this on their mind right now, but also more generally across the crypto space when it comes to financial institutions, it’s a big topic.
And this maybe is where this term, even “punitive regulation,” comes into play sometimes.
Thinking about risk-weighted assets and what banks are required if they hold crypto on their balance sheet.
What is the state of play right now?
What are people thinking about this?
Cornelia:
Yes, this is really a big issue, a big topic.
I was a member of a working group at the Swiss Blockchain Federation and we wrote a position paper on this new Basel crypto standard.
I have to read the numbers to tell you right, the risk weight of 1250 percent.
It’s the highest, it’s huge, it’s the highest known under these Basel regulations.
This results in capital requirements of 130 to 160 percent of the book value of these crypto assets.
Okay, taking into account the capital buffer, but it’s just not plausible, a loss event in such a size you just can’t imagine.
Although certainly we know that with crypto there is increased risk and so on, but this loss event is not really plausible.
It would also be a contradiction to the Swiss way, “the Swiss path” until now because Switzerland has been very positive, supportive until now to have an environment, to have a crypto ecosystem.
So this would be a total contradiction to this path until now. It also is not technology neutral.
It’s not even a regulation, it’s a guideline or standard.
Because very different profiles are like treated in the same way. There are, for example, the risk profile of a stablecoin, which has then the same risk weight, would be treated just the same way as every crypto asset, which means…
Yeah, the fact that they are similar to, let’s say, money market funds is just ignored.
And it’s just because they are built up on a certain technology, they are treated totally different.
Ian
Let’s see. Yeah, I mean, as bigger players, even like BlackRock and others, start to do business, and perhaps the pressure will build against that set of things.
But yeah, it certainly is a burden in the mind anyway of bankers and financial institutions
Staying on the topic…
Maybe first of all, just on that topic in the conversations you’ve had, do you have a sense also outside of Switzerland how other banking sectors or ecosystems are trying to deal with this or thinking about this as like the Swiss Blockchain Federation been in touch with other places?
Cornelia:
Yes, yes, they have been in touch and I think there were about, I don’t know the number exactly, 17 or something statements on this Basel crypto standard.
And I think 13 or 14 mentioned this problem or were against such risk weights or such a classification…this crypto space apart from the fiat world.
Ian:
Okay. Yeah, it will be interesting to keep an eye on that. You mentioned classifications and if we stay in Switzerland, then talking about FINMA, the financial regulator here, really maybe didn’t get enough praise back in the day for being quite quick inn bringing guidelines around tokens with token classifications, utility, payment and asset tokens.
Just looking back now, even if I remember back to 2017, 2018 and then how quickly that came, how significant do you think this has been for the industry that this, shall we say, “clarity” was there early on?
Cornelia:
It was very, very important. You can’t imagine the importance of this clarification. Until now, we are like secure in some part of the crypto world. We know either Bitcoin counts towards the payment tokens or does count to the securities or asset tokens.
And we are able to also set up the projects along these lines. If you’re not clear whether something falls within the scope of payment tokens, which means AML, KYC and so on, or the securities field, which means then civil law requirements like prospectus and so on.
Also financial markets laws regarding trading of these…
So if you don’t know which field in which field you are acting, you’re not able to follow the rules and the project would be stopped.
You’re not able to develop a compliant ecosystem or compliance setup.
So this was really important and FINMA did a really good job on this, yes.
Ian:
And just to clarify, I understand you’re talking about even projects with banks, right? Because I can imagine if there was no classification at all or a very hazy, unclear classification, a bank wouldn’t even start to think about…
Cornelia:
Some would think about some projects, but in the end, they would ask some lawyers, okay, are you sure that we are in the payment token area or in the security token area?
And if there is no guideline, you can’t be sure and then the project would be dead.
And that’s not possible for a traditional bank or an institutional investor to proceed.
Ian:
And I suppose that’s why we have actually in Switzerland, quite a number of banks who already have started with an offering.
Cornelia:
Yes, because they know, “We are in the field of the payment tokens with this and here we have all the guidelines and the requirements ready, so let’s do this.”
So this is, yeah, I think this was a really important point.
Cornelia:
And just one more follow up on that. Has that clarification, classification changed at all from FINMA standpoint until…
now or that really has been pretty consistent? It has been consistent in my opinion. I don’t know from a case that would have not followed these guidelines.
I think they are pretty well in this path.
Ian:
Okay. So utility tokens were a big topic, shall we say, back early on.
Very, very interesting, innovative and many people liked that.
Payment tokens seem a bit more boring, but okay, clearly Bitcoin, Ether, payment tokens, that clarity doesn’t seem to be there yet across the ocean, shall we say.
But now getting to asset tokens. I mean, everybody said this is super cool that we have this classification, all of these things we can do.
Not much has actually happened in this space – so far, maybe for various reasons, different pieces of the ecosystem missing or whatever. But diving down into the details, like how do these asset tokens actually work?
And in the Swiss understanding, how or what laws do they trigger in different cases and how would a bank, for instance, deal with that?
Cornelia:
Yeah. As we talked in the beginning, you have like these two legs. You have the payment, the cash leg, and on the other side you have the asset leg, the security leg, and it works in a way that you tokenize. It’s a token in the end. You tokenize an underlying asset.
You could imagine it as a container containing some sort of claim, let’s say.
For example, a participation in a physical object or in, for example, in gold or a participation for company, for example, a share would be like inside or would be in this container, in this token.
And then the facilitation would be that you can exchange the cash-leg token, so the payment token, with this digital assets, the tokenized underlying in a very easy way, you know.
These atomic swaps use it in smart contracts and so on.
So this is the idea, the ecosystem.
And I think as we have some sort of cash leg that it’s not really the cash leg we imagine, maybe there we need some sort of more feasible sort of token. This cash leg needs to be built up a bit more, a bit better, evolve or mature a bit.
Then we will see that the tokenization of the underlyings of the assets, shares and so on will be very fast.
So the possibilities are all here. It’s just that you have to build up the ecosystem. You need both legs.
And you need an exchange.
You need what you are doing and what you are offering.
You need a place where you can do the trading.
Ian:
And just going back to that about the underlines and that can be, as you say, an equity that could be a commodity, that could be bond.
Cornelia:
Bond, derivative, whatever you… It’s like the economic function is like this “ever known type.”
Ian:
But that doesn’t do away with all of the requirements that apply to those underlines as well.
Cornelia:
Exactly the way it worked with bonds and so on until now. It’s exactly the same.
And so on…
So you need the prospectus for example.
You need to have all the security law requirements for the trading, you need a trading venue that works properly and so on.
The same as for traditional assets, let’s say.
Ian:
And how are financial institutions or the ones that you talked to thinking about that “marriage” of the underlines with the tokenized form, are they starting to build the processes and the expertise to work with that?
Cornelia:
Yes, I see different projects on this.
Probably tokenization of assets was very long time more in the non -bank space.
So….
Ian:
Art, wine, things like this.
Cornelia:
Yes, I would assume that it stays like this. And banks are more the cash-leg part or building up this part of the ecosystem, but everybody is keen to do it and to profit from the effectiveness of the new system.
Ian:
It seems like Larry Fink and BlackRock think that it might be funds and so on and so forth.
Cornelia:
Yeah, for example.
Ian:
And now, stepping out a bit more internationally, these classifications, of course, are different in different places. If you look across Europe, and there’s this famous MiCA coming very soon, but then just more generally, legislation, how do those classifications compare?
Just on a high level, not going too deep.
And do you think there might be a convergence eventually towards the Swiss perspective as kind of one of the older and more established standards, or is that too hopeful?
Cornelia:
I hope so, in the end.
What we see is it’s really the projects are struggling with the different types of classifications.
And yeah, I could take out an example. It’s quite a funny experience. We had a project, a client from Australia, and they wanted to come over to Europe, to Switzerland, and they said, “Okay, the important thing is – we are just doing payment tokens.”
And we said, “Okay, very good. We have a very clear framework, all fine. We can provide you with the guidelines for AML compliance and so on and so on.”
And then he said, “Okay, it will be USDC because in Australia, it’s very clear these are payment tokens and we can’t do Bitcoin.”
And we said, “Okay. Interesting. It’s a bit the other way around in Switzerland.”
We are also of the opinion that USDC works as a payment token, but there we don’t have this clear, strict guideline from FINMA, but we have it for Bitcoin.
It would be easy to start with Bitcoin for you.
And he said, “Yeah, but Bitcoin, but Bitcoin and what are we doing in Australia? And we have to set up a different also that protocol.”
Everything is different for them.
And of course, with Europe the same.
Here we have the same problem as also the fiat financial market has. If you want to serve Europe from a non-EU country, it’s almost impossible.
We have now these ESMA guidelines.
I would say it’s impossible to build up something in Switzerland and then we don’t have a passporting system.
So we are not able to really serve the European market from here. This is not a crypto-related problem or topic, but because of the global aspect or the global idea of a crypto economy, this is…
Yeah, it’s very tough for the project owner or also the strategic movement how to build up now the projects or like globally.
Ian:
Yeah, yeah. You touched on stable coins there. Let’s double click on that topic just for a minute.
They’re becoming more and more popular. USDC is gaining in popularity. USDT has its issues.
How are stablecoins treated in Switzerland and what are the prospects for them going forward?
And yeah, you mentioned this cash side or this maybe stablecoin side of things as the ecosystem develops.
How do you see that?
Cornelia:
I think in Switzerland we have one lack of clarity with regard to the stablecoins because the idea is very clearly that a stablecoin needs to be a payment token, because the idea is to build this cash leg.
But stablecoins are, as their nature needs to, are built up with underlyings.
So they are stable, they need to be stable. And with an underlying, you are immediately in the very broad, in my opinion, too broad definition for a security in Switzerland.
We already have scientific works on this question or on this issue and there are opinions in the market already in the scientific part of the market which are of the opinion that a stablecoin is a payment token, even though it would probably or in some way fulfil the securities definition. This is also my opinion.
But yeah, however, a clarification from legislator in this point…
It only would need a small one sentence: “But a payment token is not a security”
Or something like this would be very helpful in this part, to progress on this project.
Ian:
And is there some movement on that space or can you say anything about that?
Cornelia:
Yeah, I think the State Secretariat for International Finance in this project to improve this or adapting this landscape has this point or this issue in mind.
Ian:
You mentioned the project that you’re working with coming in from Australia and obviously very interested in Switzerland because of many things.
And we remember again back to 2017 when many ICO projects came here.
How is that, you know, how is the attractiveness of the space in Switzerland and are there issues with that even from a financial systems perspective?
Even legally for these companies that come here?
Cornelia:
I think Switzerland did a lot really good at the beginning, very early on. Now other countries are following and we have this “contra moving.”
For example, in the EU where is seems that these spaces should be separated.
Crypto space and fiat space.
What Switzerland wanted was to build up an ecosystem where you can play on both sides, on the crypto and the fiat world. And I think…
Yeah, we will see in which direction everything goes.
I hope that this Swiss way will evolve and mature and get some followers in the world.
Ian:
Maybe very quickly, you mentioned earlier these projects, CBDCs and some things you’ve been involved with there. Is that progressing? Is that something to keep an eye on in the next year or two?
And will that solve any of the issues that we see?
Cornelia:
I think these are like infrastructure projects, no?
These are really big projects and need a lot of time, a lot of involvement of banks, but also I think, for example, the Swiss National Bank is working in different projects with the BIS also.
We do a study from TA-Swiss on a digital franc.
So there are many different projects working on the economics. (It’s not only the legal part…) it’s also the economic part and how it would fit in our ecosystem, how people would react.
So this is a very interesting movement to, yeah, I think, we have to follow.
Ian:
Okay. Is there excitement about it or just kind of more, “let’s wait and see?”
Cornelia:
It depends on who you are asking. I see you’re excited.
Yeah. I love the projects because I love innovating projects. But there are many, many opinions that “we don’t need it, we don’t see the use cases. There are risks for financial stability or there are…different ways you could build up such an infrastructure, such a new tokenized franc.”
Depending on which model you choose, you have totally different results for financial stability, for banks as their intermediation role could be in question.
For a national bank who could be like some sort of “lender of last resort” with the money CBDC or retail CBDC just directly to the national bank and so on.
So there are very different opinions on this.
Ian:
But as you say, probably with the potential to greatly influence what the next step will be for banks and financial institutions. their financial, their institutional clients.
I mean, going forward, if there are tokenized funds and then there is a CBDC and then we have crypto and all of these things, pieces of the puzzle coming together the next 10 years could be quite interesting.
Cornelia:
Yes, it will be. It will be interesting. I’m sure. Yes, I think.
I think this is the ecosystem everybody’s building up now. We build up these different puzzle pieces, and if it works together, if it gets the whole picture or the whole ecosystems it will flourish.
Ian:
Very, very good. Cornelia, it’s been super interesting to talk to you today. Thank you for all your insights. I know that you have ongoing things that are developing, maybe some of them you can talk about more later on.
So maybe we’ll come back for another episode sometime down the road. Thank you very much.
Ian:
Thank you very much for the invitation.
Cornelia:
It was a pleasure.
Ian:
And look forward to speaking again soon.