Which Swiss company is making money in crypto? Part 2 of 2
In my first post I looked at several regulated Swiss crypto business models and their business performance. In this second part I summarize the key learnings.
Business model first
Often when new technologies surface, be it crypto, blockchain or AI, a hype takes place and everyone expects the world to suddenly change to the good. And amazingly making everyone wealthy in the process. Just look at AI funding rounds and you understand what I mean.
However, down the road a hard truth always surfaces: a new technology alone does not result in economic success, only a successful business model does.
Often new technologies are applied to all sort of business cases, going up against entrenched and well-financed incumbents that have an existing customer base. This is never a walk in the park.
It is easy to say a new technology is disruptive, however often the status quo prevails much longer than expected (hello banks).
Creating a successful and lasting new business model takes much more than just a new technology. Clients are sticky. Regulations are hard. Building distribution is challenging.
The blockchain technology is a good case in point. The early crypto community propagated that bitcoin will kill all banks. Not really.
In my previous posts I highlighted that current winners in crypto are companies such as Swissquote that offer a new digital asset class to existing customers or private bank Maerki Baumann that offers crypto services to a crypto-native clientele. Both are extending their current business model into a new asset class, not creating a new business model.
Neither of them wants to disrupt traditional finance. They just want to earn money.
The heavy costs of regulations
An industry expert confided to me that building a new crypto infrastructure from scratch on the blockchain is very, very capital intensive. We are talking a three-digit millions sum and counting.
One key cost factor are regulatory and licensing requirements.
A standard Swiss FINMA fintech license (a banking license light) costs north of CHF 100,000.
Obviously, the newer and more unproven a business case, such creating a new blockchain-based exchange, results in higher costs due to the higher level of uncertainty. Being a first-mover in finance can turn out to be very costly.
Timing matters
It is well-known fact among startups that building a new business takes longer and costs more than expected. This certainly is true in regulated crypto.
Writing code is fast, creating a new business model and obtaining regulatory approval is not.
In Switzerland many crypto projects were started during or after the ICO craze of 2017. Back then, funding was ample and the enthusiasm was high.
Today, circumstances have changed and investors want to see client traction, revenues and a path to profitability.
Fundraising by issuing a coin is not a business model, as many crypto projects have learned painfully.
Building a crypto offering, from an off-to-shelf approach to building in-house, is costly: IT developers, lawyers for licensing and regulatory compliance, capital etc.
How fast an investment will result in a return for investors depends on the time-scale and also on market-conditions. Often, services were initiated during the crypto craze of 2017 and 2018. This was followed by a downturn in 2022 and 2023. As a result, profitability got pushed out.
Therefore, market timing matters and once the tide changes, startups run the risks of becoming starved of funds.
First-mover disadvantage
Everyone is familiar with the first-mover concept. Fast is bester. Not necessarily.
The assumption is that being a first-mover allows to grab market share and service an underserved clientele, creating network effects.
However, in highly regulated industries (such as finance), the counter argument is that it is easier to be a fast-follower and build on the experience (and investments) of fast movers. First movers pay the price of establishing standards and operating models.
It really depends if you have an existing client base or if you want to cater to new clients.
For example, a Cantonal bank rolling out a limited crypto offering to its retail clients is relatively low risks and low costs. It is a just adding a new asset class.
Creating new services from the bottom up, such as custody, is a different ball game and the current few providers in effect have an oligopoly.
Disruption versus value-chain expansion
The origins of crypto are rooted in the libertarian cypherpunk community in California. Not surprisingly early crypto believers were gunning for the destruction of banks and the democratization of the financial system, prying it from the greedy hands of bankers.
This libertarian mindset resulted in highly innovative products such as various layer-1 blockchains such as Ethereum, stablecoins such as Tether or decentralized crypto exchanges such as Uniswap.
No wonder that traditional banks initially were highly skeptical of crypto, classifying it as an outright scam or worse.
However, crypto as an asset class has gained acceptance and the demand from the client side increased. Banks slowly caught on (hey, they also want to make money from crypto).
Instead of aiming for the destruction of the current financial system, Swiss banks agnostically started to offer services for this new asset class by simply expanding their current custody and trading services. Obviously, this is a much lower risk approach than creating a disruptive startup.
As highlighted in my recent second Swiss Digital Asset Custody Report banks and other financial intermediaries are steadily expanding their services along the value-chain.[1]
Another clear trend is that crypto providers (in particular banks) are expanding their service offering for example to staking. This goes hand-in-hand with an increasing maturity and the solidification of their business models.
The commercial importance of staking
Not too long ago the Swiss regulator FINMA issued a guideline on staking, that was very restrictive. So strict in fact, that only banks would have been able to offer staking services. This generated a big uproar in the Swiss crypto ecosystem, lobbying the regulator to update the guidelines. After intensive discussions, this is what happened.[2]
The strong pushback by the Swiss crypto industry showcased how important staking as a revenue driver has become. It is the equivalent of earning an interest on bank deposits.
With clear guidelines on staking, Switzerland has still the lead towards the EU. In the new EU MiCA guidelines there is no provision on staking, putting the European ecosystem at a disadvantage.
The Swiss staking guideline is a clear competitive advantage of Switzerland over the EU.
Years to profitability
The ICO fundraising craze of 2017 made crypto investments look like a short route to riches. Investors expected 100x returns in a couple of months.
It was too good to be true and ended with a heavy-handed crack-down by regulators.
A typical startup, if successful, takes at least 5-7 years before an exit. Sygnum Bank just announced its first half-year profit for 2024, five years after getting its license (or longer since start).[3] The profits were a result of a strong increase in trading, reflecting the overall crypto market growth.
Reaching break-even might take even longer, as several large European fintechs have shown.
The same logic applies to crypto startups. It takes a couple of years for winners to emerge.
Switzerland had the first successful exits with Metaco and Crypto Finance being sold to Ripple or Deutsche Börse respectively.
For the rest of the industry, reaching profitability depends on additional funding, global expansion and an overall crypto market growth.
Outgrowing Switzerland built on private banking legacy
With the progressing maturity of the Swiss crypto ecosystem, competition at home is increasing. In the face of heavy investments into new services and infrastructure, Swiss companies are forced to look abroad.
As sign of this is that more and more banks are expanding to other crypto ecosystems: from Hongkong (Amina Bank), to Singapore (Sygnum Bank) and the Middle East (both Amina and Sygnum). Sygnum Bank recently announced that they will increase their footprint in Europe in order to tap the large EU market.[4]
This global expansion is built on Switzerland’s strong heritage in private banking.
In essence, private banking is the safekeeping and management of financial assets. Extending these services to crypto and digital asset is a natural evolution that is now accelerating.
ANNOUNCEMENT: I will be hosting small expert roundtables to explore commercial topics of crypto and digital assets in the near future. Send me a personal message if you want to be shortlisted!
[1] https://www.homeofblockchain.swiss/reports
[2] https://www.bdo.ch/de-ch/publikationen/publikationen/staking-von-kryptowaehrungen
[3] https://www.linkedin.com/posts/sygnumofficial_bitcoin-ethereum-crypto-activity-7222085177760477184-FILj?utm_source=share&utm_medium=member_desktop
[4] https://www.finews.ch/news/banken/63699-sygnum-1-halbjahr-2024-profitabilitaet-assets-wachstum-krypto-sommer-martin-burgherr