Crypto Valley, Switzerland’s answer to Silicon Valley for all things blockchain, is hoping for a “major reset” after the spectacular and sudden downfall of the high-profile crypto exchange FTX.
Switzerland has seen an influx of cryptocurrency and blockchain start-ups in recent years, drawn by advantageous tax rates and rules along with a welcoming political and legal infrastructure.
Well over 1,000 such companies have set up shop in the wealthy Alpine country, most of them south of Zurich in the canton of Zug, which even accepts tax payments in Bitcoin and Ether.
But the dramatic bankruptcy last November of FTX, once the world’s most prominent crypto exchange, followed by that of crypto lender Genesis, put a damper on the frenzied enthusiasm that long characterised the sector.
“A lot of things happened in 2022,” Dirk Klee, head of Bitcoin Suisse, told AFP.
In addition to the FTX debacle, he pointed to the crash last May of so-called stablecoin Terra/Luna, which was supposed to be pegged to the US dollar; the liquidation of the Singapore-based cryptocurrency hedge fund Three Arrows Capital; and the collapse of cryptocurrency investment platform Celsius.
– Billions evaporated –
“These developments have exposed weaknesses of some institutions (that) are not following the regulatory processes yet,” Klee said, but he emphasised it was still a “young sector”.
“What happened was not due to a fault in the technology, but due to poor managerial handling of centralised financial institutions,” he said.
Around $450 billion evaporated in the market turmoil that followed the Terra/Luna crash, while another $200 billion disappeared after FTX went belly-up, according to the Bank for International Settlements.
The downfall of FTX’s co-founder and wunderkind Sam Bankman-Fried “was very bad incident for our space,” said Mathias Ruch, founder and chief of CV VC, a venture capital fund focused on blockchain start-ups.
“This will set us back by at least one or two years,” he predicted.
Last year, 1,135 cryptocurrency and blockchain companies were based in Switzerland and Liechtenstein, up 0.6 percent from 2021, according to a CV VC survey.
But at the same time, the number of so-called unicorns — young companies valued at over $1 billion — dropped to just nine in 2022 from 14 a year earlier, while employment in the sector shrank by four percent to under 6,000 jobs.
– History repeating itself? –
As the crypto winter sets in, most concerns centre around financing.
While the large Taurus crypto platform managed last month to raise funds from large banks including Credit Suisse and Deutsche Bank, smaller start-ups could have a harder time getting “through this difficult period”, warned Jerome Bailly, Vice President of the Crypto Valley Association.
Both Bailly and Ruch compared the upheaval in the sector with the bursting of the dot-com bubble in 2000.
“I think it’s a very similar phase to the internet bubble,” Ruch said. “People got greedy, neglected due diligence, and it’s the small investors… that got hurt.”
“History is repeating itself.”
But this might not be a bad thing for the sector, he suggested, pointing out that tech giants like Google and Amazon had emerged from the dot-com ashes.
“I think the opportunities are huge,” he said.
– ‘Necessary evil’ –
Emi Lorincz, chairwoman of the Crypto Valley Association, agreed.
“I believe that we will see a major reset in the industry,” she told AFP.
The sector is bracing for tighter regulation in the aftermath of the implosions, with the Swiss authorities already starting to harden their tone.
Darko Stefanoski, a partner at the auditing and consulting firm EY, said Switzerland was “on the right track”, with its financial watchdog Finma already setting out rules for the sector.
“This gives security to the companies, to the market and to the customers, because the rules are clear,” he said.
Since crypto is by definition a cross-border business, more regulation elsewhere would “also be good for the Crypto Valley”, he added.
In the meantime, Reda Aboutika, an analyst with X-Trade Brokers, said “a glacial wind” was wafting through the entire industry.
But “it may be the necessary evil needed to clean up the sector”. (AFP)