Hanspeter Rhyner shares the story of Crypto Valley

Transcript

My name is Hanspeter Rhyner, I am the CEO of Zuger Kantonalbank since March 1, 2021. I live here in the middle of Zug, right next to the train station, and I really like it here. Beginnings of the Crypto Boom in 2013 I experienced this very closely. In 2013, a certain Wences Casares contacted me. Wences Casares is a well-known name in this area.

He is a Internet pioneer and he later entered the crypto space. This made me quite proud. I was considered a digital innovator in the banking business. He contacted me, and I had an exciting dinner with him. I asked him, and this is the key scene in this meeting, if he thought the central banks would try to stop these cryptoassets.

He said we were past the point of no return, and this would no longer be possible. When he started in the Internet space, everyone said it would disappear again. Today it is impossible to imagine life without the Internet and email. The same thing would happen with cryptocurrencies. That made me proud, I have to admit. He was at the forefront, made $800 million when he sold his Patagon Limited and he wanted to get to know me and asked me what he should do if he wanted to start a company, that offers payment options with cryptocurrencies.

At this stage there was still huge skepticism here in Switzerland. He eventually founded his company [Xapo] here in Zug, and this is where things come full circle again. The company still exists today because another person was also present at this meeting namely, Olga Feldmeier, because she was the managing director of the company that Wences founded at the time.

There was a third person there, the potential chairman of the board of directors, a US citizen. I still have it in my mind. These people, it was a very exciting experience, this exchange with them. I was torn for a long time, whether it will prevail but this question has now been definitely answered.

We have to look now how we best use it. This was my first point of contact which also led me to continually engage with this topic. Reasons for the Initial Skepticism Why didn't I do anything back then? The skepticism of the decision makers was huge back then in the board of financial institutions toward cryptocurrencies.

As I said, I was torn as to whether Wences was right or the others. Bitcoin in particular repeatedly came under criticism with the argument that only blackmailers used it and criminals, and that the risks of money laundering were huge. These two arguments nipped any good intentions and initiatives in this space in the bud, until it was finally obvious that it would prevail.

You were walking on eggshells but I'm used to that. New ideas initially meet rejection. There are always killer arguments. I tried again and again in the bank to bring up the topic but I realized that I almost put my reputation at risk because it was really labeled as the currency of criminals back then.

That's why it reached a dead end back then. Nevertheless, I followed the development and saw that [Wences] founded his company and others in Zug did a lot of things. First Steps in Innovation I took another stab at innovation. The management, selected people in the bank and an external consultant conducted a workshop.

I remember it like it was yesterday. At that time there was hardly anything. Our idea was to tokenize diamonds. Surprisingly, the idea failed not because of technology. We were not aware at the time that the price of diamonds was far too volatile. Our idea was to offer private customers an opportunity to invest in the diamond market.

That's why we couldn't implement it. But we learned a whole lot. In this innovative environment that we now have again, the experience helped us understand the topic better. When Did Crypto Become Respectable? Respectable... (laughs) I don't know if it's still too early now to say that.

Certain people are still extremely skeptical. I think many people, including experts in the financial sector, have received a strong sign to change their mind to check their opinion when BlackRock changed their mind. For a long time they had said, “don’t invest, hands off!” And now they're starting their first Bitcoin ETF. BlackRock is the largest asset manager in the world.

Philipp Hildebrand, the former president of the SNB holds a leading position there. That's why in my circles, with my peers this sent a strong message. This was a big step toward respectability but also the two institutes in Switzerland, Sygnum and SEBA, that received banking licenses from the FINMA. There were various signs and lighthouse projects that made it possible that you can today bring up the topic without being

labeled perhaps not a criminal but at least thinking in a weird way, I would say. Inspiration by Swiss Crypto Banks SEBA and Sygnum Another special connection is that I was on the Board of Directors at Finnova before my position at Zuger Cantonal Bank. Finnova won the race at both banks, Sygnum and SEBA. I was really happy about that.

This is how I saw that it is possible with the same core banking system that we have at the Cantonal Bank to also map these cryptocurrencies. This is an important technical requirement. When I came to the Zuger Cantonal Bank, we developed the Strategy 2025 and defined individual strategic milestones to achieve the big core topics.

One theme is very clear, we want to increase our earnings in the commission business. This is part of our asset management business. In this context we took a closer look at the topic again. Of course, there were also a lot of conversations with customers. I like to speak to at least one customer per day. This is enormously valuable.

Many wealthy clients have told me that they have around 1-2% invested in digital assets. Just to see how it works and for diversification. This was definitely a motivation for me to start this project. We put together an offer within 11 months. I really have to say this is...

... I don't use this word often, even though some say too often... I am very excited, how we did it and how we worked together in an interdisciplinary and cross-divisional manner in the bank. Of course we needed FINMA approval. We had to update our organizational regulations. The bank council had to sign off on it. That's how we managed as the first Cantonal Bank to offer six cryptocurrencies.

Important was also to do this in our existing bank environment. Customers can do this using e-banking or mobile banking. It will then be displayed in their portfolio, just like stocks or bonds. You don't have to worry about the private key. This is our big achievement, you could say that. The Crypto Product of the Zuger Cantonal Bank Since October 2023, we offer

our clients to trade six cryptocurrencies. When selecting the currencies, we paid attention to their liquidity. They have to meet certain conditions, and they are not the most exotic ones. They are Bitcoin, Ethereum, Ripple and three others that all have a good market capitalization. We offer our customers the opportunity to buy and sell these six currencies in a secure environment.

The currency itself it is volatile. You shouldn't associate “safe” with it. But we stand for a safe and secure transaction process without errors. Customers don't have to take care of the private key. We handle this in the background together with Sygnum and Swisscom. It's cool that we have this cooperation. It is also very important, that we offer this in “execution-only” mode.

We do not offer advice. The customer decides which cryptocurrencies to buy. We set it up in a way that you can also buy fractions of only 0.3 bitcoins, for instance. It offers many possibilities to invest in digital assets in a safe and secure environment. The Development of the Product We asked many customers which currencies we should offer.

We also have some employees here who are deep in this topic. Some of them even took further training classes even though they don't necessarily need it in their job. This helped us to build our opinion on the right product to offer. We started the project and developed the details of our product in constant exchange with our internal experts

and with our customers who already have experience in this space. That's how we developed it. This is called "digital assets", so it was also a digital transformation project. Many interfaces/APIs were necessary. This is always a challenge. We actually wanted to be ready sooner, but a company that should have developed an interface lacked the resources.

And also the permits from the FINMA, they always take more time. But none of this held up our project for long. Have Cryptocurrencies Arrived in the Financial Sector? Yes, you can say that crypto has arrived in the financial sector. But you have to understand how exactly they arrived. It's still a big question if they will one day become a currency like the dollar, euro or Swiss franc, that is still unclear.

But they are an asset class to invest in, and you still have to be aware what you invest in. You must understand that the price is volatile. You have to be aware of the risks. Since we launched our offering, how has Bitcoin performed? This shows you that there is a lot of potential here. One saying always applies: “There’s no free lunch.” If someone takes a risk, then there is also the possibility to make a good return.

If it's only a small allocation in a portfolio in the single-digit percentage range, then I don't think you're taking uncalculated risks. You can do this to gain experience. That is why the process that has begun now will continue in the future. I am convinced that this topic will definitely be part of banking before long, also in consultations with our clients it will come up as a topic, I am convinced about that.

Competition Between Brypto and Banks I have a deja vu experience here. When I started the digital transformation of the banking business people were not yet aware of digital transformation in general. Many predicted huge disruption to the point where banks would be no longer in need. But I think it was Bill Gates, who said, not entirely sure who it was, but he said, "There will always be a need for banking, but not banks."

Many start-ups and fintechs emerged which many viewed as potential disruption of the banking business. On the other hand, if the wind of change is blowing don't build a wall against it. Better set up a windmill. When we reached out to these fintechs and held innovation workshops we learned a lot from each other.

They thought completely differently. The requirements that an established organization has to grapple with didn't apply to them, so they could build from scratch in the green field. The mutual knowledge exchange was extremely good. What happened back repeats now with cryptoassets. In the end, we move closer together. Fintechs have realized that sooner or later they need banks to scale up their business. Banke realized they shouldn't view fintechs as the enemy but better focus on synergies.

That's the better way, and it happens exactly the same way here. You shouldn't consider [cryptoassets] as the enemy who takes something away from you but as an opportunity. If you work together, something new can emerge, that you don't even see at first. Regulation and Pioneering Role There is another parallel here.

In the early days of digital transformation, I was at a round table in Bern. Ueli Maurer was there, Mark Branson from the FINMA and the State Secretary of the SIF, Jörg Gasser. It was an incredible round table. I was quite proud to be there, too. Within a very short time, the Fintech regulation came together that enabled start-ups to build in a sandbox without immediately needing a banking license.

That was the topic back then and now today there is the example of staking, in which a nascent industry has been hampered in Switzerland because we didn't fight the regulator. The Blockchain Federation and their president, Heinz Tännler recognized this. I'm amazed at what was achieved and that FINMA went back to the drawing board. Now we have a result that we can live with.

At least we don't kill an innovative development right at the onset in Switzerland. We are world champions in patents and innovation in Switzerland, but whenever an innovation is about to take off the technology goes abroad, such as nanotechnology. We have to be careful that that doesn't happen here. We have such good conditions and top people well-trained people and secure IT systems.

Our infrastructure is so mature that we can take on a pioneering role. We have to be careful that we keep this role now. Other financial centers are not asleep, that's how it always is.