* ZKB closed account for 20 cryptocurrency companies

* Second large Swiss bank kicked out a crypto project –

* Switzerland losing crypto “crown” to offshore rivals

* Swiss authorities move to reverse the trend

By Anna Irrera and Brenna Hughes Neghaiwi

NEW YORK/ZURICH, July 19 (Reuters) – Swiss regulators are
stepping up efforts to halt an exodus of cryptocurrency projects
from the country, after two of only a handful of banks active in
the nascent sector shut their doors on it in the last year.

The departures, which industry sources fear will continue,
mean Switzerland is losing business to offshore rivals including
Liechtenstein, Gibraltar and the Cayman Islands, where banks are
more welcoming.

While crypto-related business in Switzerland is tiny
compared with its traditional banking sector, it has grown
rapidly and employs hundreds of people, according to local
officials. Supporters also consider it a key innovation for the
future of global finance.

The wealthy Swiss canton of Zug, for example, has been
dubbed “Crypto Valley”, with 200-300 virtual currency entities
opening there in recent years.

Zug’s finance director, Heinz Taennler, says they may leave
if the government does not take steps to give them access to the
banking system, without which they struggle to function.

“All their banking relationships are going to
Liechtenstein,” he told Reuters. “These are hundreds of jobs
that have been created, and every job is important.”

Thomas Moser, an alternate member of the governing board at
the Swiss National Bank (SNB), said some cryptocurrency
companies had asked the central to intervene.

“They raised concerns about problems with opening bank
accounts, which was a worry for them, and asked for help,” Moser
told Reuters. “I said this was not something the SNB dealt with,
but they should speak with FINMA.

FINMA, Switzerland’s financial market supervisor, has held
discussions with the SNB and bankers’ association on how to make
banks more accessible to cryptocurrency ventures.

“We would not want to close the door on the opportunities
that such innovation (cryptocurrencies) might bring,” Moser

Providing the legal framework to launch ICOs and for banks
to do business with cryptocurrency companies is not easy.

The risk of fraud and lack of transparency about who owns
cryptocurrencies like bitcoin and ether have made regulators
around the world wary. The United States is among countries that
are increasing scrutiny of the sector.


Swiss banks are urging the authorities to give them more
clarity on the rules that apply to cryptocurrency projects
before providing services to the market, and at least two
important players have withdrawn for now.

Zuercher Kantonalbank (ZKB), the fourth largest Swiss bank
and one of the few big banks in the world to welcome issuers of
cryptocurrencies, has closed the accounts of more than 20
companies in the last year, industry sources told Reuters.

A spokesman for ZKB declined to comment on any former or
existing clients relationships, but said the bank does not do
business with any cryptocurrency groups.

Another large Swiss bank kicked out crypto project Smart
Valor at around the same time, said a person familiar with the
project. The source declined to name the bank.

Only a handful of Switzerland’s 250 banks ever allowed
companies to deposit the cash equivalent of cryptocurrencies
raised in ICOs. At least two still do, Reuters has established.

But the involvement of a large bank like ZKB helped to
establish Switzerland as an early cryptocurrency hub.

ZKB and the bank that turned its back on Smart Valor began
shutting their doors in October after a management feud severely
damaged cryptocurrency project Tezos, which had conducted Zug’s
largest ICO, entrepreneurs and advisers said.

Swiss banks are worried because some companies that carried
out ICOs did not do anti-money laundering (AML) checks on their
contributors, industry sources said. This means the banks
themselves could fall foul of AML rules.


“A cautionary response from Swiss banks resulted in a pause
or closure for most projects in the cryptocurrency space,” said
David Henderson, founder of the Swiss Sweetbridge Foundation,
set up to conduct blockchain startup Sweetbridge’s ICO.

Sweetbridge was in the late stages of securing an account
with ZKB, but the application was put on hold a few days after
the Tezos scandal erupted, Henderson said.

The project ultimately decided not to carry out its planned
ICO through the Swiss foundation, setting up entities and bank
accounts in Gibraltar and Liechtenstein instead.

It is difficult for crypto-projects to use the funds they
raise through ICOs if they are locked out of the banking system.

Funds from ICOs are often originally raised in
cryptocurrencies bitcoin and ether, which have limited use as a
means of payment in the broader economy.

“I cannot pay salaries because our money is caught up there.
We cannot move it,” said the founder of a Swiss crypto-firm
which has had accounts closed at three different banks.

The banks have asked the firm to take out its money, but it
is unable to do so without first finding another banking
relationship, the founder added.

At least two Swiss banks are still accepting ICO funds,
according to checks by Reuters.

These are Banca Zarattini, a small bank in the
Italian-language canton Ticino, and Hypothekarbank Lenzburg, a
regional lender located between Zurich and Basel, which recently
began accepting crypto customers.

Banca Zarattini only banks ICO companies with KYC
(know-your-customer) and AML procedures that are in compliance
with Swiss law, it said.

Hypothekarbank Lenzburg said it had started to accept
crytocurrency companies and could charge an initial assessment
fee of up to 2,500 Swiss francs ($2,500).

Bank Frick in Liechtenstein has become a popular alternative
for Swiss entities struggling to secure accounts.

It banks around 160 crypto-enterprises or projects, of which
60 are in the process of setting up an ICO, the bank told
Reuters. The bank, however, declined 90 percent of account
requests from cryptocurrency companies and only accepts ICOs
based onshore in Switzerland or Liechtenstein, it said.


Despite the challenges, Switzerland is working on new rules
to reassure banks and encourage them to accept the accounts of
cryptocurrency companies.

The country has dropped from second place in 2017 to sixth
this year in a country ranking of the sum of ICO funds raised,
according to a study published by PwC and the Crypto Valley
Association in June. The Cayman Islands and British Virgin
Islands topped the list.

In May, Swiss Finance Minister Ueli Maurer invited FINMA,
the central bank and the Swiss Bankers Association (SBA) to a
roundtable discussion on bank accounts for cryptocurrencies.

After the meeting, the SBA set up a working group to compile
a set of checks and conditions that all banks could follow when
opening an account for cryptocurrency firms.

“Banks are currently hesitant to open business accounts for
companies with particular touchpoints to ICOs and
cryptocurrencies – due to risks such as fraud or money
laundering,” SBA said in a statement.

Zug finance director Taennler said the aim set out during
the meeting, which he attended, was to have a set of
FINMA-approved guidelines for assessing prospective
cryptocurrency clients by the year-end.

FINMA has already issued separate guidelines to spell out
how Swiss AML rules and securities regulations apply to various

But securities rules are less stringent in Switzerland than
in the United States, where the Securities and Exchange
Commission has toughened its stance on ICOs.

This makes it more risky for banks in Switzerland to be
involved with ICO projects which may have raised money from U.S.
contributors and could fall under the purview of the SEC.

Switzerland’s authorities have said they want to create
conditions for the country to remain competitive but with no
room for scams or financial crime.

The finance ministry is also looking at the broader legal
framework for blockchain technology and ICOs.

Its findings will be presented to the federal government by
the end of the year and will determine how the technology fits
into existing Swiss laws and regulations.
($1 = 0.9913 Swiss francs)
(Additional reporting by John Revill in Zurich; Editing by Anna
Willard and Mike Collett-White)