The World’s First Regulated Crypto Bank Braces For Flood Of Institutional Money

Less than half an hour by train from Zürich, in the center of the picturesque city of Zug, is a centuries-old building with a frescoed façade, ancient wooden ceilings and pastel-colored shutters.

This old town hall would be a welcome stop for any tour group exploring Switzerland’s rich architectural heritage. However, everyone who enters and exits its imposing entrance is dressed in formal attire. A futuristic logo sits above the door, it says ‘Seba Bank’, and a lone symbol, ‘₿’, peers through the window onto Zug’s cobbled pavement.

You might think that a steel and glass skyscraper would be a more suitable option 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 local government of Zug became the first municipality in the world to accept taxes in bitcoin, and the new tenants are no less determined to marry the traditional economy with the new digital one.

Päivi Rekonen, chairwoman of Seba, is the kind of fintech leader that nonagenarian investors like Warren Buffett and Charlie Munger simply wouldn’t acknowledge existed: steeped in banking expertise, fiendishly intelligent, and convinced beyond a shadow of a doubt that bitcoin technology and blockchain are 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 top positions in a Rolodex of tech and financial giants: Nokia, Cisco, Credit Suisse and UBS, tells me. in an interview in Seba’s luxurious office.

“Institutional money, and also professional investors, have woken up to the reality that market values ​​have skyrocketed: in DeFi (Decentralized Finance), in NFTs (Non-Fungible Tokens), in cryptocurrencies. The data is beginning to show that this is happening, absolutely this is happening… And if you look at the size of the bucket of institutional money, we’re just at the beginning. 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 broker license from FINMA, the Swiss Financial Market Authority, becoming the first jointly regulated bank anywhere in the world to specialize solely in digital assets. The other licensee was Sygnum, based in Zurich. More regulatory approvals have come, 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 because of the growing number of blockchain companies that had established themselves in the small town, widely known as Switzerland’s “Crypto Valley” (although other municipalities such as Lugano Italian and French -speaking Neuchâtel are now giving him a run for his money). The Ethereum Foundation, a non-profit organization that promotes the world’s second-largest cryptocurrency, was established in Zug in 2014. Today, about half of Switzerland’s roughly 1,000 crypto startups call the city home.

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

He adds, however, that for any new technology: “When innovations are born, there is also often resistance.” Cryptocurrencies in general and bitcoin in particular continue to be mistakenly perceived as Ponzi schemes and tools for money laundering by a considerable part of the world’s population. Many governments and regulators, though not Switzerland’s, view the sector with deep mistrust, fearing its potential to disrupt financial markets and intentionally hobbling investors.

building trust

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

The answer, according to Swiss politicians, however, is regulation. The country’s Federal Council, its highest executive body, enacted ten legislative amendments last year, updating the law to detail how regulated entities must handle crypto assets when it comes to custody, securitization, anti-money laundering compliance ( AML) and soon. Combined with the steady stream of licenses issued by FINMA, this blanket ordinance provides legal certainty to the new class of institutional investors cautiously dipping into the market.

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

Seba, like any financial services provider, does not publish details about its clients; Rekonen will just say that most of them can be classified as “early adopters” in the space. They include crypto companies that need corporate accounts to pool their fiat and digital holdings; miners; founders and early team members of successful crypto projects; and high net worth individuals with professional investment experience.

But the bank’s main clients, in terms of assets held, are already financial institutions.

“Who is institutional money? It could be a big bank, and the money behind it is that of its clients. Those clients are starting to ask, ‘Is this an asset class that you participate in, acknowledge, advise on?’ If the answer is, ‘No, no, no,’ then they’ll say, ‘Well, where can I go?’

“So the institutions are starting to get that pushback. And they are looking for answers. If you are a large institution, or even a small institution, you need to ask yourself the question: ‘Am I going to invest in the infrastructure myself? Am I going to build my own escrow solution and [interact with] all the cryptographic layers and the protocols and processes that come with it, plus my own infrastructure? Or am I going to find a partner?’”.

The best antidote to anxiety about the cryptosphere, Rekonen suggests, without saying so, is to have a trusted partner to hold your hand. And if he’s going to do that, then a Swiss banking license is considered “a rare seal of approval.”

Seba has a wide range of products adapted to the needs of its private customers and companies. At the simplest end, their 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 physical Swiss gold.

It also offers diversified index trackers, such as Sebax’s Exchange Traded Product (ETP). The bank’s research department continually evaluates the tokens for inclusion in its main index, which comprises a basket of seven cryptocurrencies heavily weighted in favor of bitcoin (40.4%) and Ethereum (21%). Holdings are rebalanced monthly according to a rules-based smart beta methodology. Clients can also build their own basket of crypto assets using discretionary mandates and Actively Managed Certificates (AMC), the latter available in white-label wrappers, allowing B2B clients to develop a customized, regulated crypto investment product for end customers without going through for all the rings. necessary 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 attractive. 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 proof-of-work bitcoin and Ethereum lending.

Staking is a process by which coins are locked in a chain of blocks, although without leaving their digital wallets, to facilitate the operation of the network.

Regulatory limits

These services only scratch the surface of what is possible in the DeFi space, but as Rekonen explains, the bank treads carefully when it comes to protocols and smart contracts that push Swiss regulators to the limits of their oversight capabilities. .

“DeFi in a regulated environment is still fairly new, and we have very clearly taken the position that we are going to be in the permissioned DeFi space,” he says, referring to protocols like AAVE Arc, which use Know Your Business (KYB). ) checks to ensure that all participants in a liquidity pool are identified and approved. “In fact, we have some very interesting DeFi projects coming up, but I can’t talk about them yet. Again, we see the demand of the institutions. They’re saying, ‘Look, I want to understand this, I want to be in this.’ But opting for an open DeFi protocol [with unvetted participants] it’s just a ‘no’ for a great institution”.

In February, Seba opened its first foreign 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 clients in two dozen countries spread over five continents. As you would expect from a Swiss financier, Rekonen sees international expansion as a top priority.

“We started here in Zug, and it’s a good place to be,” she says. “But we also need to grow outside. We never imagined that we would be just a local player. From the beginning, we really believed that this was a global industry – that is the philosophy of bitcoin and blockchain.”

The growth of the workforce of about 100 people could take many forms. Seba isn’t ruling out acquisitions, and he has the cash to make them, thanks to a 110 million Swiss franc ($116 million) fundraiser in January. But for an industry as dynamic as crypto, Rekonen rightly focuses on the short term.

“We are a fast-growing startup, but we are still a startup,” he concludes. “So we have to make decisions, and we have to be clear on our focus areas 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 focus. What is really important for an organization like ours is that when we build our capabilities, we build them with the mindset of scale and the mindset of replicable models.”

Thank you for reading. The next article in this four-part series on Switzerland’s emerging role as a bitcoin and blockchain hub will be my interview with Mathias Imbach, CEO of Sygnum. It will be published on Wednesday, April 27.