Switzerland offers excellent framework conditions and ecosystems in the blockchain and crypto sector, deserves international recognition as a hub and avant-garde (see more in a previous article). One would think that everything is in place to attract crypto companies, especially startups, if it weren't for the fact that blockchain founders simply can't find banks within the country's borders to open a business account, on which every company ultimately depends.
Focal point of the problem lies on startups. In general, these already have a hard time to open a bank account in the Swiss banking landscape due to a lack of cash flow or company history. However, if they are active in the blockchain and crypto environment, the problem becomes even more acute.
The founders are literally knocking dozens of Swiss traditional bank doors, before they would find out that only the banks next door, i.e. in Liechtenstein would welcome them.
WHY IS THAT ? Does anybody have an idea ?
- Is it that there is a lack of regulatory guidance?
- Is it that the crypto / blockchain business is too young and risky for incumbent banks to understand and manage?
- Is it that the business case behind onboarding / growing crypto businesses looks unattractive?
- Is it just inertia to change internal processes or in general to adopt to the blockchain and crypto megatrend?
- Any other reasons, you could think of?
The poll on LinkedIn runs during 2 weeks from 17/09/2021 until 02/10/2021: Link
Now, here is what I have found out:
Preliminary, let me narrow down the scope of the problem:
- Startups as these usually lack a business history and a solid measurable cash-flow. More mature businesses, including young companies in a growth phase, in contrast, have better chances to be accepted
- Companies active in the blockchain and crypto space. And we are not talking about crypto service providers or virtual asset service providers ("VASP"), which, in general, require a respective FINMA license for their business. The main focus lies on opening of business accounts in the context of which only fiat currency is received or transferred, but the company applying for the account is active in the DLT industry.
Lack of regulatory guidance?
First some basics on the regulatory risk. Banks are in general, and in the crypto-business even more, exposed to money laundering and terrorist financing risks of their clients. The respective regulations can be in general referred to as AML (anti money laundering). Which need to be observed by the banks, initially when on-boarding a client and opening an account including KYC check (know your client) and subsequently ongoing relationship review and transaction surveillance. There is a multitude of specific regulations, in brief the FATF recommendations (Financial Action Task Force) regarded as the international minimum standard and as such also accepted by its member states, incl. Switzerland. Further, the various formal national regulations primarily the Swiss AML act and ordinances and the current CBD 20 (Swiss banks’ code of conduct with regard to the exercise of due diligence) of the Swiss Banking association.
These regulations are well known, adhered to and respective controls established by the Swiss banks.
Beyond, and as part of the first mover role taken by Switzerland as crypto nation, there are very specific additional standards set out to address specify respective rules to the crypto-related business. These recommendations are addressing particularly the opening of business accounts for companies active in the DLT (Distributed Ledger Technology) and purely transferring fiat currency (no cryptocurrencies) over the bank account:
- CMTA (Capital Markets and Technology Association) AML Standards for Digital Assets, from October 2018 and updated in 2020, here
- SBA (Swiss Banking Association) guidelines on opening corporate accounts for DLT, also referred to by the FINMA, from 2018 and updated August 2019, here
With all of these regulations and additional recommendations in place, Swiss banks should have sufficient clarity to embark on the crypto-journey.
Too young and risky for banks to handle or an inertia to adopt?
It is evident that incumbent banks still shy away from engaging in the crypto and blockchain business given its relatively young and also shaken history. More background over the Swiss digital asset ecosystem and the existing traditional banks already represented in my previous post from last week (here).
Whether, blockchain-related business is considered as too risky or it is just inertia of the bank to now trigger a strategic move, which in the end will be unavoidable anyway, is thereby not essential. More relevant is, that there are examples of traditional early adopter Swiss banks banks, which offer a home for startup businesses active in the blockchain, DLT, crypto or token-space. This is noteworthy, as they do so since 2019 already as a means and market signal to underlie their digital forward-looking strategy. And the number such banks is strikingly and stable low since.
I could identify only 2 traditional Swiss banks, and not counting the two (FINMA regulated) crypto banks SEBA and Sygnum. These focus on institutional and partially professional private banking clients and offer crypto custody, trading / brokerage, investments and lending. Hence, startups are clearly out of their scope, and also the offered services are not the ones seeked for them. Startups just require a bank account to pay their bills, salaries and receive their income.
Maerki Baumann & Co. AG
Maerki Baumann has been offering business accounts for blockchain and crypto companies since April 2019. In many senses. The bank holds a FINMA licence to offer the trading and custody of cryptocurrencies as well as other digital assets (tokens). With its clear strategy, Maerki Baumann is particularly also tapping into a new business area of "younger, tech-savvy client segments as well as private and institutional clients who would like to seek out new sources of return in the digital sphere or further diversify their portfolios" as can be read on its homepage. Again, congratulation for such foresight.
Hypothekarbank ("Hypi") Lenzburg
The other of the just 2 banks, I could identify is Hypothekarbank Lenzburg. That bank seems to be in many cases a pioneer. Not only can it be seen as a leader in open banking und in offering Banking-as-a-Service. Its own BaaS Finstar is an accounting and payment processing solution and meanwhile operational with many other Swiss financial service companies. Beyond, it is even used by a first bank in Europe. "Hypi" Lenzburg thereby demonstrates its footprint as a fully digital player in the field. Further, the bank, led by CEO Marianne Wildli, is avantgarde in a field other traditional banks are lagging behind; with a 43% share of women. It looks that this banks does many things different than other incumbents and it does it successfully (more here Moneytoday, 14.07.2021).
But that aside, Hypi Lenzburg, was the first Swiss bank to welcome local startups since mid of 2018. It does so as per an elder statement of Wildli "as a bank that is technologically oriented itself and pursues a strategy of cooperation in the fintech sector, it is also a question of credibility to cooperate with the young industry of crypto and blockchain companies in Switzerland" (see Finews article).
Both examples demonstrate that there is a way where there is a will.
Unattractive business case considering risk / reward
As mentioned further up, startup business per se is usually not of the most attractive one for banks. Inherent risks and returns are not measurable in a 0815 fashion. It requires bit more effort to asses and on the other hand side, returns might look opaque at an early stage, where cashflow might be low or even not existing. Even more so, for crypto or blockchain companies. Banks still do hard to really understand the new business and need to build up respective knowledge and expertise.
The biggest burden obviously, is the additional due diligence effort required for blockchain companies to be on-boarded and equipped with a business banking account. But, who says that the requesting startup would not be willing to pay for the related cost? Hypi Lenzburg e.g. charges the due diligence cost to the prospecting client.
As shown above, it is not impossible at all, it is a matter of will and a respective strategy. The 2 shown examples demonstrate that - out of different reasons - blockchain / crypto startup businesses can also be seen as a case for the banks to grow, both, with regard to experience and with regard to returns. Sure, it takes time, but better start today before it becomes mainstream.
Ultimately, this article highlights a still missing puzzle piece to complement the grand existing Swiss blockchain ecosystem and framework. It shows that avantgarde players partially fill the gap, but this is by far not enough.
Unless also other banks step in, CryptoNationSwitzerland will not be complete. Best, if at least one of the big Swiss banks, UBS or Credit Suisse would take a respective stance. That would lead to a clear signal for more crypto businesses and with it talents locate in Switzerland.
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