The world’s first regulated crypto bank braces for a flood of institutional money

Less than half an hour by train from Zurich, in the center of picturesque Zug, is a century-old building with a frescoed facade, antique wooden ceilings and pastel shutters.

This former town hall would make a welcome stopover for any tour group exploring Switzerland’s rich architectural heritage. Yet everyone who enters and exits its imposing entrance wears formal attire. A futuristic logo sits atop the door – it reads “SEBA BANK” – and a solitary symbol, “₿”, peers out the window at the cobblestone paving of Zug.

You might think that a steel and glass skyscraper would be a more appropriate choice for the headquarters of Switzerland’s first regulated crypto bank. But the founders of SEBA chose these premises for a reason.

It was here, in 2016, that the municipality of Zug became the first municipality in the world to accept taxes in bitcoin – and the new tenants are no less determined to bridge the gap between the traditional economy and the new one. digital.

Päivi Rekonen, chairwoman of SEBA, is the kind of fintech leader whose existence nonagenarian investors like Warren Buffett and Charlie Munger simply won’t acknowledge – steeped in banking experience, devilishly smart and undoubtedly convinced that technology bitcoin and blockchain is reshaping the global financial system.

“We are still, in my opinion, in the early days of this new industry, this universe of digital assets,” Rekonen, who has held leadership positions in a Rolodex of tech and finance giants – Nokia, tells me. , Cisco, Credit Suisse and UBS. in an interview in SEBA’s lavish office.

“Institutional money, as well as professional investors, they have woken up to the reality that market values ​​have skyrocketed – in DeFi (decentralized finance), in NFT (non-fungible tokens), in cryptocurrencies. The data is starting to show that it’s happening, it’s absolutely happening… And if you look at the size of the institutional money basket, we’re just getting started. I think we are at the beginning of an entire industry.

SEBA was founded in 2018 by Guido Bühler, Sébastien Mérillat and Guido Rudolphi.

In 2019, it received a banking and securities trading license from FINMA, the Swiss Financial Market Supervisory Authority, becoming the first regulated bank in the world to specialize solely in digital assets. The other holder was the Zurich company Sygnum. Other regulatory approvals have poured in, including the right to provide institutional-grade digital asset custody to collective investment schemes – another first.

German-speaking Zug was a natural choice for a base of operations; not only because of the local government’s enthusiasm for bitcoin, but also the growing number of blockchain companies that had set up shop in the small town, widely dubbed the “Crypto Valley” of Switzerland (although others municipalities such as Lugano, which speaks Italian, and French-Neuchâtelois are now giving their money’s worth). The Ethereum Foundation – a non-profit organization that promotes the second largest cryptocurrency in the world – was established in Zug in 2014. Today, around half of the approximately 1,000 Swiss crypto start-ups call the city home .

“It was important for us to be in a place where we have access to talent,” says Rekonen. “You want to be where employees also want to be – somewhere with like-minded companies, institutions, associations – so you can learn and you can grow. I think SEBA has chosen the right place to be.

She adds, however, that for any new technology: “When innovations are born, there is often also resistance.” Cryptocurrencies in general and bitcoin in particular continue to be misperceived as Ponzi schemes and money laundering tools by a significant portion of the world’s population. Many governments and regulators – but not Switzerland’s – view the sector with deep suspicion, fearing it is disrupting financial markets and intentionally posing obstacles to investors.

Build trust

“So,” Rekonen says, “you need to start thinking about how do you build trust with the communities you serve, with the customers you want to attract?”

The answer – according to Swiss politicians, anyway – is regulation. The country’s Federal Council, its highest executive body, enacted ten legislative amendments last year, updating the law to clarify how crypto-assets should be treated by regulated entities in custody, securitization, compliance with anti-money laundering rules (AML) and Suite. Combined with the constant flow of authorizations issued by FINMA, this framework ordinance gives legal certainty to the new class of institutional investors who are cautiously entering the market.

“[It means] it takes less time to explain how we do it because they know we are regulated the same way. They know we have the same AML, KYC (Know Your Customer) requirements,” says Rekonen. “So it kind of shortens the discussion and, at the same time, it helps us demystify the subject. Because we don’t have to spend so much time on the trust aspect.

SEBA, like any financial services provider, does not publish details of its customers; Rekonen will only say that most of them can be classified as “early adopters” in space. These include crypto companies that need corporate accounts to link their fiat and digital holdings; minors; founders and early team members of successful crypto projects; and high net worth individuals with professional investment training.

But the bank’s biggest customers – in terms of assets held, anyway – are already financial institutions.

“Who is the institutional money? It can be a big bank, and the money behind it is that of its customers. These clients are starting to ask, “Is this an asset class that you participate in, that you recognize, that you advise? If the answer is “No, no, no”, then they will say, “Where can I go? »

“So the institutions are starting to get pushed back. And they are looking for answers. If you are a large institution – or even a small institution – you have to ask yourself the question: “Am I going to invest in the infrastructure myself? Will I build my own custody solution, and [interact with] all the cryptographic layers, protocols and processes that come with it – plus my own infrastructure? Or shall I look for a partner?’.

Rekonen strongly implies – without saying it – that the best antidote to crypto-related anxiety is to have a reputable partner to hold your hand. And if you’re going to do that, then a Swiss banking license is considered “a rare stamp of approval.”

SEBA offers a wide range of products adapted to the needs of its individual and business customers. On the simplest level, its trading platform allows users to hold and hedge 14 cryptocurrencies – BTC, ETH, DOT, LTC, XTZ, ADA, XLM, USDC, BCH, SNX, UNI, YFI, LINK and AAVE – in addition to eight fiat balances and the SEBA Gold Token, a digital token backed by Swiss physical gold.

It also offers diversified index trackers such as the SEBAX Exchange Traded Product (ETP). The bank’s research department is constantly evaluating which tokens to include in its flagship index, which includes a basket of seven cryptocurrencies heavily weighted in favor of bitcoin (40.4%) and Ethereum (21%). Holdings are rebalanced on a monthly basis using a rules-based smart beta methodology. Clients can also compile their own basket of crypto-assets using Discretionary Mandates and Actively Managed Certificates (AMC) – the latter available in white label packaging, allowing B2B clients to develop an investment product tailored and regulated crypto for end customers without jumping through any hoops. needed to bring it to market.

In an era of historically low – and, in Switzerland, negative – interest rates, the ability to generate a return by holding cryptocurrencies is particularly alluring. The bank caters to this segment with its SEBA Earn platform, which allows customers to stake three proof-of-stake coins (Polkadot, Tezos, and Cardano) and will soon enable bitcoin and Ethereum proof-of-work lending.

Staking is a process by which coins are locked up on a blockchain – without leaving their digital wallets – in order to facilitate the functioning of the network.

Regulatory limits

These services only scratch the surface of what’s possible in DeFi, but, as Rekonen explains, the bank is being cautious about protocols and smart contracts that push Swiss regulators to the limit. their monitoring capabilities.

“DeFi in a regulated environment is still fairly new, and we’ve taken a very clear position that we’re going to be in the permitted DeFi space,” she says, referring to protocols like AAVE Arc, which use Know Your Business (KYB) verifies that all participants in a liquidity pool are identified and approved. “We actually have some really cool DeFi projects coming up, but I can’t talk about them yet. Once again, we see the demand from the institutions. They say, ‘Listen, I want to understand this, I want to be in it’. But opting for an open DeFi protocol [with unvetted participants] is just a “no” for a large institution. »

In February, SEBA opened its first overseas office – in the Gulf emirate of Abu Dhabi, another crypto-friendly regulatory environment.

The bank has also appointed a managing director for Asia – based in Hong Kong – and now has customers in two dozen countries across five continents. As you would expect for a Swiss financier, Rekonen sees international expansion as a top priority.

“We started here in Zug, and it’s a good place to live,” she says. “But we also have to develop outside. We never imagined that we would just be a local player. From the start, we truly believed it was a global industry – that’s the ethos of bitcoin and blockchain.

Workforce growth of around 100 people could take many forms. SEBA isn’t ruling out acquisitions — and it has the cash to make them, thanks to a 110 million Swiss franc ($116 million) fundraise in January. But for an industry as dynamic as cryptocurrency, Rekonen is rightly focused on the short term.

“We’re a fast-growing startup, but we’re still a startup,” she concludes. “So we have to make choices, and we have to be clear about our areas of intervention and our strategy.

“Where is SEBA and the whole industry in ten years, I don’t even dare to comment on that. I think for now we have our goal. What’s really important for an organization like ours is that when we build our capabilities, we build them with a mindset of scale and a mindset of repeatable models.

Thanks for reading. The next article in this four-part series on Switzerland’s emergence as a bitcoin and blockchain hub is my interview with Mathias Imbach, Managing Director of Sygnum.