As an early pioneer Switzerland has emerged a leading jurisdiction in the development of the digital assets market as the country's traditional private banking industry runs out of road.
Structured products are emerging as one of the key vehicles to provide access and exposure to cryptocurrencies and other digital assets, but some markets are ahead of others.
Despite the increasing demand from investors the availability of products and the number of players involved across jurisdictions some markets are well ahead of others - Switzerland leading the pack with the most comprehensive regulatory framework and a growing marketplace for banking and trading digital assets.
Once you have a strong framework the ecosystem will develop - Dr. Martin Liebi
“The Swiss regulator’s approach to the crypto and digital assets world has been quite open,” says Dr. Martin Liebi, attorney-at-law, legal FS regulatory and compliance services and head of capital markets legal, PwC. “The government also sees this space as a strategic new field for the country’s Financial Services industry on the back of traditional private banking having a bit of a downward trend.”
This openness to new projects has also been accompanied with law making which has put in place a regulatory framework that is quite advanced compared to other markets.
“The ecosystem is here and is working. It's not perfect yet but at least you have everything you need to launch a structured product or set up a business,” says Liebi (pictured). “Everything is fully regulated.”
This is also attracting a lot of new business into Switzerland whereas in other markets such as the UK and China in particular it seems that the trend is going in a different direction following recent moves from regulatory authorities to clamp down on crypto activity.
Some countries like China, Hong Kong or the UK have opted for closing-down these activities for domestic players. Other countries like Dubai, Abu Dhabi and others are being more proactive but there are issues as the ecosystem is not there to sustain these activities.
“This is a complex area with many risks (reputational, operational…),” says Liebi, adding, “you need a strong backbone and an active marketplace to support this kind of industry.
“Things are moving quickly but it was not possible to clear or take custody digital assets only a few months back. There is room for improvement, but you need to build the foundations to create a sustainable environment and build the product and platform offering from there.”
Following the recent approval (21 September) of the Six Digital Exchange as the first regulated central securities depository (CSD) for digital assets by the Swiss Financial Market Supervisory Authority (FINMA), and the associated company, SDX Trading, to act as a stock exchange, the Swiss group can also act as a hub for exchanges and multilateral trade facilities (MTFs).
“Once you have a strong framework the ecosystem will develop – we see it in Switzerland with the multiple forms of digital assets reaching the market,” says Liebi.
Actively managed certificates (AMC) and exchange-traded products (ETP) are the preferred way to provide access to digital assets in the country, although investors can also access non-listed products and traditional structures such as reverse convertibles and autocalls.
AMCs are listed on one of the Swiss stock exchanges and can have up to 50 payment tokens as underlyings and can be passive or actively managed products. They do not need authorisation from FINMA, but the trading entity must be authorised as an investment firm.
AMCs also provide a bridge between traditional and new finance as they offer access to new assets via a traditional vehicle.
“AMCs are a good example of combining a traditional type of structure to bring new assets to the market,” says Liebi. “You can offer a digital asset through a fully regulated securitised products that is listed on an exchange and has an ISIN code. This kind of structure allows you to manage actively a portfolio of assets (cryptos) and can be sold in the secondary market.”
According to Liebi, this kind of product that can help to build trust among retail investors before there is a fully developed derivatives market that enables more OTC based transactions.
“We think the product offering will also evolve as the infrastructure improves and more institutional investors get involved. Digital exchanges, listing and direct trading will also help bringing down costs of transacting these new assets,” says Liebi.
Although several smaller banks and asset managers are already active in the digital space, the majority of the institutional investors are approaching this market with caution.
“They don't feel comfortable enough yet to get into this product category. However, the feedback I get is that sooner or later these products will be offered by banks and financial advisers. Investor demand is not going anywhere. If anything, it will be even bigger,” says Liebi.
If we look at the market two to three years ago, it was a completely different landscape but now there is better infrastructure, better quality products, bigger institutions getting involved, and “even traditional players like private banks actually going into the space and offering services and products”.
“There’s a shift from traditional players and also increasing activity from new players that are building up new businesses from a green field, but they need to establish trust, consolidate their operations and so forth,” says Liebi.
At a domestic level, a number of Swiss firms such as Gentwo which provides a platform to launch products including AMCs via securitised special purpose vehicles (SPVs) or Vestr - an independent white-label B2B software provider that facilitates the creation and lifecycle management of AMCs - are capitalising on this shift and playing a leading role in supporting the development of new products.
“At the moment there is a lot marketing out there and you don’t really know what is happening but there is definitely a lot of upside potential for new products as the market is already saturated with ETFs and other products,” says Liebi.
The recent acquisition of Crypto Finance by Deutsche Borse is also good example of traditional players entering the digital assets space by acquisition which suggests there are also new M&A opportunities in the digital assets market.
“We expect further consolidation of the market as many of these businesses have been created to be sold to bigger firms – they are making a use case in terms of flexibility, time to market, etc., and that is appealing for big players seeking to enter the market as it can be costly for a traditional financial firm to build this kind of offering in-house,” concludes Liebi.