Fabien Aepli “It’s time for Switzerland to expand its horizons and introduce DeFi to institutional players”

Leaders League: How do you view MiCA’s impact on the industry, and should we welcome its arrival?
Fabien Aepli: MiCA provides a unified set of rules for crypto-assets within the European Union. Its aim is to streamline regulations, making them consistent across member states, which should simplify the process for launching international projects in the crypto sphere. A prominent sentiment in our field is that regulatory ambiguity is detrimental to the industry, so having clear guidelines makes a welcome change.

MiCA’s regulation resembles regulations applicable in the traditional finance world, including in areas like organization, governance and funding requirements, risk and compliance management. This may encourage institutional investors to participate more actively in the crypto market.

Abbate Francesco: I believe it’s a positive development. The primary benefit is harmonization. Having a unified monitoring system across the EU is crucial for businesses aiming to expand and engage with users at a European level. Knowing in advance what the regulator stipulates is essential.

The framework will indeed foster greater involvement from institutional investors. They’ll have increased confidence, knowing they’re adhering to rules that align more with rules they are accustomed to. Moreover, MiCA will enhance transparency concerning fees and operations of businesses in the exchange sector, bolstering consumer protection and the industry’s credibility.

One notable provision from MiCA is the prohibition of algorithmic stablecoins, which have been at the heart of major setbacks, such as the Terra-Luna ecosystem collapse. Their elimination could be beneficial for the sector. Additionally, there’s now a mandate for stablecoins to be 100% backed by a Fiat asset. Notable cryptocurrencies like Ultimate Secure Cash (USC) and USDT (Tether) already assert compliance with this, but having it legislated is pivotal.

MiCA is an EU regulation, what will its impact likely be for Swiss projects?
F.Aepli: Even though MiCA won’t be directly applicable in Switzerland, most of Swiss projects are international by nature and will inevitably feel its influence or actually fall under its scope. Plus, many of us in Switzerland see the value in being “MiCA-compliant” right from the start. This isn’t the first time an EU financial law has a ripple effect here. MiFID (Markets in Financial Instruments Directive) is a telling example, although the context is different. When MiFID I and II came around, they greatly influenced the making of new financial services laws here in Switzerland. But as of now, we don’t have an ongoing specific legislative process for crypto-assets like MiCA. And there’s a shared belief too, like the idea that financial laws should be consistent, regardless of the technology or nature of the activity.

Financial laws should be consistent, regardless of the technology or nature of the activity

Switzerland is often touted as crypto-friendly. How accurate is this? 
F. Aepli: There are a couple of things worth noting. Firstly, there’s what’s now a bit outdatedly named “Guidelines for enquiries regarding the regulatory framework for initial coin offerings (ICOs)” from FINMA – our Swiss Financial Market Supervisory Authority – back in 2018. Then we’ve got the Distributed Ledger Technology (DLT) Act from 2021. This act fine-tuned existing laws with some principle-based provisions, making it possible, for instance, to introduce blockchain-based securities that don’t require the written form to be transferred.

Now, it’s important to understand that our Swiss regulations aren’t quite like MiCA. For instance, our FINMA guidelines on ICOs talk about three types of tokens: payment tokens, utility tokens, and asset tokens, not to mention hybrid forms. MiCA sees things differently. It talks about e-money tokens, which are tied to an official currency; asset-referenced tokens, which cover crypto-assets backed by other assets; and then every other crypto-asset that doesn’t fit these categories, like utility tokens.

So, if you’re embarking on a project and both EU and Swiss laws come into play, you’ve got to be aware of these different classifications. Each has its implications. And, if you’re ever in doubt, the advice is to go with the classification that has the toughest regulations. It’s always a safer bet!

F. Abbate: Switzerland stands out as a prime hub for the crypto business, primarily due to its clear regulatory framework. Clarity is crucial for entrepreneurs. When you’re determining where to establish your venture, understanding what to expect from government and regulatory bodies is paramount. This predictability, even if not always agreeable, provides certainty. Switzerland has been ahead of the game since 2018, when they first laid out the token classification differentiating between utility and security. This gave both investors and entrepreneurs a distinct framework. While many saw this as a favorable structure, I believe it wasn’t necessarily the most conducive. It was, however, transparent, leading businesses to flock here, confident they were on firm regulatory ground. Conversely, in places like the US, the shifting legal landscape is often a concern for companies who strives to be compliant

Additionally, Switzerland is a magnet for top-tier talent. Institutions like the EPFL (Ecole Polytechnique Federal de Lausanne) and the ETH in Zurich have bred a pool of brilliant minds in the crypto arena. This, paired with the cumulative effect of numerous companies setting up shop here, has created a thriving ecosystem with robust foundations.

The tax incentive – averaging around 14% across cantons – though not as minimal as Dubai, is a fair trade-off for the benefits of such a vibrant ecosystem.

But I believe the real strength of Switzerland lies in its reputation. In the early days of industry, many smaller countries aimed to be the hub for businesses, both in Europe and globally. However, aligning with such countries might compromise your company’s reputation. For growing firms, especially those aiming for IPOs or larger investment rounds, having the backing of a highly respected A+ country like Switzerland is invaluable. The Swiss government indirectly offers this badge of credibility and reputation to businesses established here.

Switzerland stands out as a prime hub for the crypto business, due to its clear regulatory framework.

Are there potential drawbacks or concerns with MiCA?
F. Aepli: There are. While the primary intent is to protect investors, history has shown that financial regulations can sometimes stifle the sector. They can make financial services less accessible and more expensive, leaving a significant portion of the population underbanked. There are also concerns about how MiCA will affect decentralized finance, or DeFi. MiCA’s guidelines seem to suggest that only fully decentralized services, without intermediaries, will be outside its purview. It’s still uncertain how this will be implemented and what adaptations DeFi players will need to make.

What role can play Switzerland in the evolving world of crypto finance?
F. Abbate: Switzerland has always been a leading financial hub, known for its banks and wealth managers, with the latter being unparalleled globally. People worldwide recognize Switzerland as the premier destination for wealth management. One of the most captivating developments in the crypto space is decentralized finance (DeFi), which empowers users to conduct operations like peer-to-peer lending using automated market makers and protocols such as Aave. This is a sector brimming with potential.

Yet, traditional financial institutions have found DeFi somewhat enigmatic. In my view, it’s time for Switzerland to expand its horizons and introduce DeFi to institutional players. I envision Switzerland pioneering the offering of DeFi products with enhanced user experience and guarantees, which are currently challenging areas.

By blending the strengths of traditional finance, our existing assets under management (AUM), and new technologies, Switzerland can create a promising fusion for the future.

Interview by Aude Ghespière.