Tax Implications of Digital Assets in Germany and Austria

This article is the first part of an analysis on the differences in tax implications of digital assets and cryptocurrencies in the German-speaking countries. The article covers three types of qualified investors with three different products in which these investors invest. The first part dealt with Liechtenstein and Switzerland, while the second part refers to Germany and Austria.

The report will treat three different types of qualified investors in four different countries with three different investment products. The facts and circumstances always stay the same, only the residence changes. First of all, we have Lisa who possesses assets worth CHF 10 million and has declared in writing that she wants to be considered as a qualified investor. These are private assets. Her sister Sara did not make such a declaration but possesses the same amount of money. She is not considered to be a qualified investor. Secondly, there is Paul. Paul possesses assets worth CHF 20 million, but half of them are invested through a legal entity: Paul’s Road to Happiness AG. Lastly, there is CryptInvest AG, a bank which buys crypto on behalf of its clients and is considered a legal person. CryptInvest has assets of CHF 50 million and charges a provision of 1% of the amount invested for each of their clients’ asset investment. In addition, the bank charges 1% of the realized capital gain at the time of the sale.

All of them want to invest 10% of their assets in Bitcoin and expect a 50% rise of the investment. However, they are not sure if they should invest this amount directly, via an AIF, or a certificate. It is assumed that they will sell the Bitcoin investment as soon as it has increased by 50%. An AIF is a collective investment that raises capital from some investors to invest it in accordance with the specific investment strategy and with the aim to generate benefits for the investors. A certificate represents the evidence of ownership of a financial security such as a bond or stock market shares in corporation. It depends on the performance of the underlying asset. Furthermore, they have to take the intended time of holding the asset into account when comparing the investment possibilities.

Germany

Lisa and Sara

Lisa and Sara have their residency in Germany. First of all, it can be noted that no wealth tax exists in Germany. Hence, only the income tax has to be examined in order to check if there is a possible tax liability from holding and selling Bitcoin. As explained above, Germany considers Bitcoin to be digital private money. It follows that the sale of Bitcoin is classified as a private speculation. According to Section 23 (1) sentence 1 no. 2 of the German Income Tax Act (Einkommenssteuergesetz — EStG), the sale of Bitcoin is tax exempt if the period between acquisition and sale exceeds one year. However, there is one exception: If ongoing revenue has been earned with this digital currency, the income is subject to tax at the personal tax rate plus an additional solidarity surcharge. Additionally, the speculation period is extended to ten years as the asset served as a source of income. If Lisa or Sara sell Bitcoin within one year after the acquisition, they have to tax the capital gain from the sale with their personal tax rate if the exemption limit of €600 is exceeded. If the gain of €500,000 is their only income, they have to tax it with a tax rate of 45% and subtract €17,078.4, which results in a tax liability of €207,921.6. The amount of €17,078.4 has to be subtracted as the formula to calculate the tax liability — in the case of a taxable income above €270,501 − is: 0.45 × X − 17,078.4 (as 2020). Furthermore, a solidarity surcharge of 5.5%, here €11,435.69, has to be paid.

If they, in contrast, invest in a certificate, they would pay a withholding tax of 25% plus a solidarity surcharge of 5.5% on the withholding tax for both — the capital gains from the sale of the certificate and the current earnings. The duration of the holding of the certificate does not affect the tax liability. The same is true if they invested in an AIF. This would result in a tax liability of €131,875. Therefore, investing via a certificate or AIF is more advantageous in case of a high income from capital gains.

Paul’s Road to Happiness AG

Paul’s investment is considered to be in the business assets of his business. Therefore, there is no income from private sales, but from commercial business. The capital gains have to be taxed as income of Paul’s Road to Happiness AG and with a corporate tax rate of 15% plus solidarity surcharge of 5.5% of the corporate tax. This leads to a tax liability of €158,250. Nothing changes when Paul invests the money via a certificate or an AIF as the income is still considered to be income of the AG from commercial business activity.

Additionally, business tax has to be applied on the taxable income. The tax rate is a federal rate and amounts to 3.5%. The municipal assessment rate comes on top and ranges from 200% to 490% of the 3.5%, with an average rate of 380%. This leads to a tax rate of at least 7%. Hence, there are taxes from business tax worth €70,000 as a minimum. If the assessment rate of the municipality is higher, the tax liability increases as well. With regard to VAT, Germany also states that the exchange from conventional currencies to Bitcoin and vice versa is to be classified as a taxable other service, but tax exempt if used as a means of payment.

CryptInvest AG

CryptInvest AG’s income is also subject to corporate tax. Therefore, the income from the initial investment activity and the income from the participation on the gains are subject to the corporate tax of 15% plus solidarity surcharge of 5.5%. This leads to a tax liability of €11,868.75. Same as in the case of Paul’s Road to Happiness AG,investing the money via a certificate or an AIF does not result in a different tax liability as the generated income is considered to be income related to business activity of CryptInvest AG.
CryptInvest AG is also subject to business tax. As it has a taxable income of €75,000, the business tax liability amounts to at least €5,250.

With regard to VAT, there is no tax liability for the initial investment of the clients’ money and for the capital gains as brokerage of financial assets and income that is based on that activity are tax exempt.

Austria

Lisa and Sara

Lisa and Sara have their residency in Austria. Similar to Germany, the investment in Bitcoin is considered to be an exchange of assets. As long as there is no interest income coming from the crypto asset, as it is the case here, the sale of the asset has to be taxed using the personal tax rate as long as the time period between the acquisition and the sale is less than a year. In this case, it is considered to be a speculative trade. Furthermore, the capital gain has to be more than €440. If it is below this threshold, there is no tax liability. The personal tax rate can amount up to 55%. If Lisa and Sara hold the Bitcoins for more than a year and sell them afterwards, they do not have to pay taxes on the capital gain.

In contrast, if they invest via a certificate or a fund, they have to pay capital gains tax. The tax rate is 27.5%. As they would have capital gains of €500,000, they would have a tax liability of €137,500 when investing via a certificate or a fund. The duration of holding the certificate or fund has no impact on the tax liability.

Paul’s Road to Happiness AG

Bitcoins are assets of the business and are, therefore, considered to be business assets. The income from the sale of such assets is income from business activity and has to be taxed with a tax rate of 25% leading to a tax liability of €25,000. If the investment was made via an AIF or a certificate, the capital gains tax rate of 27.5% has to be applied. This would result in a tax liability of €275,000.

Similar to Germany, there is no VAT as the exchange of legal tenders to Bitcoin is a non-taxable activity according to the European Court of Justice.

CryptInvest AG

As a corporation, CryptInvest AG’s income is subject to a corporate tax rate of 25%. Therefore, the income from the investment activity has to be taxed with 25% resulting in a tax liability of €12,500. The income from the provisions in contrast has to be taxed with 27.5%, which would lead to a tax liability of €6,875. All together the corporation has a tax liability of €19,375. It would make no difference if the investment were to be made via an AIF or a certificate as the income from this investment is still considered to be income from the normal business activity of the corporation and has to be taxed with 25% and 27.5%.
Similar to Germany, brokerage of financial assets is exempt from VAT. Hence, there is no VAT liability for CryptInvest AG.

Conclusion

To summarize, Liechtenstein shows the lowest taxes on Bitcoin for natural and legal persons followed by Switzerland, which depends on the specific canton of residence. Germany and Austria have the highest taxes. However, it should be noted that in Liechtenstein and Switzerland, there is a wealth tax that can lead to high taxes if high amounts of cryptocurrencies are held. In most cases, there are no advantages of holding a certificate or AIF. However, if the investor has its residence in Germany or Austria and holds a digital asset for less than a year, it is advantageous if they invested in an AIF or certificate as long as his personal tax rate is above 27.5% in Austria and 26.375% in Germany. If they hold the digital asset for more than a year, it is better to invest directly. It all depends on the investing horizon and the tax rate, which again depends on the personal income overall.

This article is an extract from the 70+ page Discovering Institutional Demand for Digital Assets research report co-published by the Crypto Research Report and Cointelegraph Consulting, written by eight authors and supported by SIX Digital Exchange, BlockFi, BitmainBlocksize Capital, and Nexo.

Tax Implications of Digital Assets in Switzerland and Liechtenstein

This article is the first part of an analysis on the differences in tax implications of digital assets and cryptocurrencies in the German-speaking countries. The article covers three types of qualified investors with three different products in which these investors invest. The first part deals with Liechtenstein and Switzerland, while the second part refers to Germany and Austria.

The report will treat three different types of qualified investors in four different countries with three different investment products. The facts and circumstances always stay the same, only the residence changes. First of all, we have Lisa who possesses assets worth CHF 10 million and has declared in writing that she wants to be considered as a qualified investor. These are private assets. Her sister Sara did not make such a declaration but possesses the same amount of money. She is not considered to be a qualified investor. Secondly, there is Paul. Paul possesses assets worth CHF 20 million, but half of them are invested through a legal entity: Paul’s Road to Happiness AG. Lastly, there is CryptInvest AG, a bank which buys crypto on behalf of its clients and is considered a legal person. CryptInvest has assets of CHF 50 million and charges a provision of 1% of the amount invested for each of their clients’ asset investment. In addition, the bank charges 1% of the realized capital gain at the time of the sale.

All of them want to invest 10% of their assets in Bitcoin and expect a 50% rise of the investment. However, they are not sure if they should invest this amount directly, via an AIF, or a certificate. It is assumed that they will sell the Bitcoin investment as soon as it has increased by 50%. An AIF is a collective investment that raises capital from some investors to invest it in accordance with the specific investment strategy and with the aim to generate benefits for the investors. A certificate represents the evidence of ownership of a financial security such as a bond or stock market shares in corporation. It depends on the performance of the underlying asset. Furthermore, they have to take the intended time of holding the asset into account when comparing the investment possibilities.

Liechtenstein

Lisa and Sara

Lisa has her residency in Liechtenstein and is, therefore, subject to unlimited tax liability in Liechtenstein. As she invests 10% of her assets in Bitcoin, she invests CHF 1 million in Bitcoin. Apart from wealth tax, which has to be paid on assets in Liechtenstein, individuals have to pay income tax, which will be treated in the following. However, Lisa does not have to pay taxes on her gains from the sale of the Bitcoin as capital gains are tax exempt in Liechtenstein. The duration the asset is held has no impact on taxation. The same applies to Sara. There are no distinctions between Lisa as a qualified investor and Sara as a “normal” investor.

The only difference is that Lisa has more investment possibilities in general because of her classification as a qualified investor.
There are no differences if Lisa and Sara would choose to invest in an AIF or certificate as capital gains from the sale of private assets and profit shares due to shareholdings in legal entities are tax exempt.

As Bitcoin is a payment token, there is also no risk that Lisa and Sara could be subject to VAT. This results from the fact that payment tokens are a pure exchange of currencies due to the missing prerequisites of a service rendered against payment and, therefore, do not fall within the scope of the VAT.

Paul’s Road to Happiness AG

Paul also has his residency in Liechtenstein. He invests CHF 2 million of the business assets in Bitcoin, so the investment is considered to be part of the business assets. As a result, the capital gains linked to the 50% rise have to be taxed with the corporate tax rate of 12.5%. This would lead to a tax liability of CHF 125,000.

If he had invested the same amount in an AIF instead, the annually realized profits of the AIF would be taxed with the tax rate of 12.5%. If the fund were only invested in Bitcoin and were equal to a direct investment in Bitcoin, it would lead to the same tax liability.

If he had invested in a certificate, which represents an investment in a financial security, and sold this certificate with a 50% increase in value, i.e., with a gain of CHF 1 million, he would also have to pay corporate tax of 12.5%. Hence, the different investment structures all lead to the same tax liability.

As Bitcoin is a payment token, there is no VAT. Payment tokens do not fall within the scope of the VAT Act as they are a pure exchange of currencies and miss the prerequisites of a service rendered against payment.

CryptInvest AG

CryptInvest AG is a legal person and has its residency in Liechtenstein. Therefore, the AG is subject to taxation in Liechtenstein. It invests CHF 5 million of their clients’ money into Bitcoin and gets a profit of CHF 50,000 out of these investments plus the profit of the realized capital gain of CHF 25,000. This amount of investment reflects the income of the bank and is subject to corporate tax. The tax rate is 12.5%. Therefore, it has to pay CHF 9,375 in taxes due to the direct investment in Bitcoin. This is also the case if the bank invests in certificates.

If the bank decides to invest the money in a self-administered AIF, the results are the same. Profits from such fund investments are tax exempt. They have to tax the income coming from the general investment activity of CHF 50,000 and the profit of CHF 25,000 which would lead to taxes of CHF 9,375. The income from the AIF is tax exempt on fund level. Therefore, the tax liability equals the tax liability in case of a direct investment.

The sale of shares and the management of investment companies with fixed capital is exempt from VAT according to the VAT Act. This includes the brokerage of securities, book-entry securities, and derivatives as well as units in companies and other associations. Same applies to the sale of AIF shares. Hence, there is no VAT in this context. However, there is turnover tax that has to be paid in relation to paid transfers of shares, obligations, certificates, or shares in collective capital investments of a bank. The tax rate is 1.5%. In this context, this would amount to CHF 50.

Wealth Tax

Liechtenstein and Switzerland have a wealth tax. As part of the wealth tax in Liechtenstein, the assets of natural persons are taxed. In Switzerland, legal persons have to pay capital tax, natural persons wealth tax. Hence, natural persons that hold assets through a legal entity must also pay wealth tax for the holding of this legal entity. In Liechtenstein the tax is based on the value of the assets at the beginning of the fiscal year, in Switzerland on the value at the end of the fiscal year. Therefore, wealth tax results from holding Bitcoin. In the Principality of Liechtenstein, the assets are integrated into the income tax via the target income (Sollertrag). There is, therefore, no separate wealth tax statement as this is part of the income tax. In Liechtenstein, it ranges from 0% to 0.89% depending on the assessment rate of the specific municipality. In Switzerland, the wealth tax also depends on the respective municipality and can be between 0% and 1%.

As we examine the Liechtenstein assessment in this section and Lisa has her residency in Liechtenstein, her wealth of CHF 10 million is subject to wealth tax in Liechtenstein. She first has to determine the so-called “Sollertrag”, which is 4% of the taxable wealth. In this case this would be CHF 400,000. This amount is then taxed within the income tax. The applicable tax rate in this case is 0,08% of the amount minus CHF 6,100. This leads to a tax liability of CHF 25,900. On top of this there is a municipality tax, which is at least 150%. This would lead to taxes worth CHF 38,850. In summary, a total wealth tax of at least CHF 64,750 has to be paid in this case. As Lisa has a wealth of CHF 10 million, the applied tax rate is 0.6%.

Switzerland

Lisa and Sara

In Switzerland, the tax rate depends on the respective canton and the municipality the person lives in. For this report, Zürich has been chosen, where income coming from the sale of private assets is tax exempt. This would mean that Lisa and Sara do not have to pay taxes on the gains coming from the Bitcoin investment as long as they are not classified as private securities dealers. However, the holding of Bitcoin is taxed within the Swiss wealth tax.

Paul’s Road to Happiness AG

In Zürich, capital gains from the sale of business assets are subject to taxes. This also includes income from collective capital investments and certificates. Paul would have capital gains of CHF 1 million and a tax rate of approximately 20% would be applied, which is the profit tax rate. This leads to a tax liability of CHF 200,000 regardless of the time horizon and the investment structure.

CryptInvest AG

The CryptInvest AG is a legal entity and has to pay taxes on its profits like every other entity. As there are no tax exemptions according to the Swiss Tax Law, it also has to pay a profit tax of approximately 20% on its capital gains. In our case the amount of CHF 50,000 plus the amount of CHF 25,000 would be taxed, if we assume no further income or expenses. This leads to a tax liability of CHF 15,000. Additionally, similar to the wealth tax that natural persons have to pay, the AG is subject to capital tax. As Liechtenstein has adopted the tax norms of Switzerland,no VAT has to be paid but a turnover tax of CHF 50.

The second part of this analysis will deal with the tax relevance of digital assets and cryptocurrencies in the two EU member states Germany and Austria. As we shall see, these are significantly different from the countries covered here and also more distinctly different from each other than is the case with Liechtenstein and Switzerland.

This article is an extract from the 70+ page Discovering Institutional Demand for Digital Assets research report co-published by the Crypto Research Report and Cointelegraph Consulting, written by eight authors and supported by SIX Digital Exchange, BlockFi, BitmainBlocksize Capital, and Nexo.

Bitcoin as a Payment Coin

What is the difference between Bitcoin as a means of payment and Bitcoin as a speculative object from a tax perspective? And how is it classified as a payment instrument in the various jurisdictions of the DACH region?

The report will explain tax impacts using Bitcoin as an example. Bitcoin is classified as a payment token according to the Swiss Federal Tax Administration (FTA) and the European Court of Justice.30 Despite the fact that a coin or token has already been qualified by the Liechtenstein or Swiss Financial Market Authority, the classification may deviate from the FTA’s criteria for tax purposes.

Therefore, it is important to bear in mind that when considering or examining a token from a tax perspective and evaluating the tax impacts in Liechtenstein or Switzerland, FTA’s classification criteria must always be taken into account. Also, the German Federal Financial Supervisory Authority (BaFin) has classified cryptocurrencies as billing units in accordance with Section 1 (11) of the German Banking Act (Kreditwesengesetz — KWG).31

This means that they are not considered to be legal tender and are, therefore, classified as private money for German tax purposes.32 Austria takes the same perspective and does not accept Bitcoin as a legal tender or financial instrument but as a virtual means of payment.33

The FTA is necessary for Liechtenstein’s value-added tax (VAT) assessment, since the Principality of Liechtenstein and the Swiss Confederation concluded the Customs Treaty on the annexation of the Principality of Liechtenstein to the Swiss customs territory on The FTA is necessary for Liechtenstein’s value-added tax (VAT) assessment, since the Principality of Liechtenstein and the Swiss Confederation concluded the Customs Treaty on the annexation of the Principality of Liechtenstein to the Swiss customs territory on October 28, 1994. For this reason, the substantive Swiss provisions on VAT are relevant and have been incorporated into Liechtenstein law.

Payment coins or token within the meaning of the FTA may be used exclusively as means of payment for the purchase of supplies and/or services from one or more service providers. They, therefore, do not entitle the holder to receive specific or determinable services but merely represent the agreed means of payment. As Bitcoin is used as a means of payment and does not entitle the owner to receive specific services, it is classified as a payment token.

Before evaluating a crypto asset and a case, the type of asset always has to be clarified, because it determines the proper sections of the law. This means that the following assessment cannot be easily transferred to another crypto asset. If assets fall under the classification of a utility or security token, this would lead to different tax assessments. For further information on the taxation of specific crypto assets, contact actus ag.

After this article we will take a closer look at the individual jurisdictions in the DACH region, as promised last week. For this purpose, we will start next week with a detailed analysis of the currently applicable tax law in Liechtenstein with regard to cryptocurrencies.

30 Swiss Federal Tax Administration (EStV), 2019, Working Paper Kryptowährungen, July 2020. Retrieved from https://www.estv.admin.ch/estv/de/home/direkte-bundessteuer/direkte-bundessteuer/fachinformationen/kryptowaehrungen.html; Reichlin Hess Rechtsanwälte, 2019, Besteuerung von Kryptowährungen und anderen Token: Eidgenössische Steuerverwaltung publiziert Arbeitspapier, July 2020, Retrieved from https://www.reichlinhess.ch/2019/10/04/besteuerung-kryptowaehrungen-token-schweiz-arbeitspapier-eidgenoessische-steuerverwaltung/; European Court of Justice preliminary ruling case C-264/14 from October 22, 2015.
31 BaFin, Merkblatt: Zweites Hinweisschreiben zu Prospekt- und Erlaubnispflichten im Zusammenhang mit der Ausgabe sogenannter Krypto-Token; BaFin, Kryptotoken: Beitrag aus dem Jahresbericht 2019 der BaFin,July 2020. Retrieved from https://www.bafin.de/DE/PublikationenDaten/Jahresbericht/Jahresbericht2017/Kapitel2/Kapitel2_7/Kapitel2_7_3/kapitel2_7_3_node.html.
32 Zitzmann, F., 2017, Steuerliche Behandlung der Kryptowährungen, July 21, 2020. Retrieved from
https://www.haufe.de/compliance/management-praxis/steuerliche-behandlung-der-kryptowaehrungen_230130_431018.html.
33 Austrian Federal Ministry of Finance (BMF), Steuerliche Behandlung von Krypto-Assets, July 21, 2020. Retrieved from
https://www.bmf.gv.at/themen/steuern/sparen-veranlagen/Steuerliche-Behandlung-von-Krypto-Assets.html.

This article is an extract from the 70+ page Discovering Institutional Demand for Digital Assets research report co-published by the Crypto Research Report and Cointelegraph Consulting, written by eight authors and supported by SIX Digital Exchange, BlockFi, BitmainBlocksize Capital, and Nexo.

Tax Impacts on Investors Investing in Digital Assets in the DACHLI Region

This article outlines the tax impacts of investing in digital assets for investors in the DACHLI region. Through a series of further articles, we will use case studies to explain the tax implications of purchase, ownership and sale for individuals and legal entities.

Although many people believe that Liechtenstein and Switzerland have the lowest taxes on digital assets for individuals and companies, this is a myth. As long as an investor in Germany or Austria holds onto their digital assets personally, not within a company structure, and for longer than one year, they actually have lower taxes than investors in Switzerland and Liechtenstein. This is because of the bothersome wealth tax in Liechtenstein and Switzerland. On the positive side, Liechtenstein and Switzerland do not have capital gains taxes unlike Germany and Austria.

However, Germany and Austria do not have wealth taxes. So which one outweighs the other? The German and Austrian taxes are more onerous if assets are held for less than one year and less onerous if assets are held for over a year. This is why investors in Germany with a personal tax rate above 26.375% and in Austria above 27.5% actually have a tax advantage of holding a certificate or investing in a regulated fund product like an Alternative Investment Fund (AIF) or Undertakings for the Collective Investment in Transferable Securities fund (UCITS) fund if they want to speculate on short-term moves of the price of digital assets. If the investor’s personal tax rate is lower than those rates, then there is no tax advantage of holding a fund or certificate over holding the digital assets directly.

The following section contributed by Lara Olms and Matthias Langer of actus ag outlines the tax impacts on investors investing in digital assets in the DACHLI region. By using explanatory cases, the consequences on taxation of buying and holding Bitcoin over specific time periods are explained for natural and legal persons. Furthermore, the report treats cases of investors with different residences — namely Liechtenstein, Austria, Germany, and Switzerland — and specific investment strategies and structures: investing directly, via an AIF or a certificate.

Natural and Legal Persons

First of all, the terms legal and natural person as well as the term qualified investor should be defined. For the purpose of taxation, the tax law distinguishes between natural and legal persons. Every individual is a natural person and holds rights and obligations. A legal person such as corporations in contrast arises from a legal act and is considered to be a single individual for legal purposes. Dealing with natural persons, there is another important distinction to be made: It has to be defined if the assets are part of private assets or business assets. Business assets are assets that are used predominantly and directly for the company’s own business.25 Consequently, private assets are defined as assets that have little or no relation to the business of the taxpayer such as his fully privately used residence.

Qualified Investors

Qualified investors are according to Section 10 (3) of the Swiss Collective Investment Schemes Act (Kollektivanlagengesetz — KAG) supervised financial intermediaries such as banks, securities dealers, or asset managers of collective investments as well as companies with professional treasury.26 However, natural persons can also be classified as qualified investors. According to Section 10 (3bis)s of the KAG and Section 6 of the Swiss Collective Investment Schemes Ordinance (Kollektivanlagenverordnung — KKV), high-net-worth individuals can declare that they want to be considered qualified investors.27 They have to confirm in writing that they have the knowledge required to understand the risks of the investments based on personal education and have assets of at least CHF 500,000 according to Section 5 of the Swiss Financial Services Act (FIDLEG).28

Professional Investors

According to the Directive 2004/39/EC of the European Parliament and of the Council, professional investors are “entities which are required to be authorized or regulated to operate in the financial markets” like credit institutions, insurance companies, or pension funds.29 In addition, large companies and “national and regional governments, public bodies that manage public debt, Central Banks, international and supranational institutions” as well as similar institutions are defined as professional investors.

Furthermore, investors such as public sector bodies or private individual investors may be treated as professionals on request. To be qualified as an professional investor, they must satisfy two of the three following criteria: During the last year, the investor carried out transactions on the specific market with an average frequency of ten per quarter; the size of the financial instrument portfolio exceeds € 0.5 million (defined to include deposits and financial instruments); the investor has worked or works at least one year in a professional position in the financial sector that required knowledge of the specific transactions or services.

Another area we have not yet looked at is how payments with bitcoin or other cryptocurrencies are to be treated. If the cryptocurrency is a payment token and is applied in this way, it is treated differently for tax purposes than is the case with investment assets. This is the question we will address next week before we start our series on the individual countries in the DACHLI region.

25 Jonas, M., 2019, Wirtschaftsgüter: Unterscheidung von Privat- und Betriebsvermögen, July 20, 2020. Retrieved from
https://www.steuba.de/einkommensteuer/wirtschaftsgueter-privatvermoegen-betriebsvermoegen/.
26 Swiss Federal Tax Administration (EStV), Kollektivanlagengesetz, July 2020. Retrieved from
https://www.admin.ch/opc/de/classified-compilation/20052154/index.html.
27 Swiss Federal Tax Administration (EStV), Kollektivanlagengesetz; EStV, Kollektivanlagenverordnung, July 2020. Retrieved from
https://www.admin.ch/opc/de/classified-compilation/20140344/index.html.
28 Swiss Federal Tax Administration (EStV), Finanzdienstleistungsgesetz, July 2020. Retrieved from
https://www.admin.ch/opc/de/classified-compilation/20152661/index.html.
29 Official Journal of the European Union, 2004, Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004, August 2020. Retrieved from https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32004L0039&from=DE, pp. 43 – 44.

This article is an extract from the 70+ page Discovering Institutional Demand for Digital Assets research report co-published by the Crypto Research Report and Cointelegraph Consulting, written by eight authors and supported by SIX Digital Exchange, BlockFi, BitmainBlocksize Capital, and Nexo.

Checking the Origin of Digital Assets

If a customer declares the origin of their assets as “Crypto Investments” or wants to directly bring in digital assets, such a transaction constitutes a greater risk than a fiat money investment or transaction. For digital assets, however, unlike the origin of assets in fiat, there is the possibility to actually check all transactions linked to a declared wallet on the blockchain and carry out a wallet screening of the wallet.

At first, the background checks do not differ significantly from traditional fiat money checks. In any case, background information on the investment or receipt of digital assets should be obtained. Among other things, the timing, size, type and service provider used for the transaction play a key role. Needless to say, it makes a difference whether, for example, assets come from a past Initial Coin Offering (ICO), from an earlier mining activity, or an earlier investment.

Wallet Screening and Analysis

In addition to the background checks, it is usually possible to analyze the wallet of the customer by means of wallet screening. So-called wallet analyses can be carried out via various providers. During such analyses, the wallet address is examined with the support of information from databases. The wallet analysis clarifies whether the wallet holds “tainted coins”, i.e., digital assets derived from a tainted source. This could be, for instance, digital assets coming from the darknet, stolen assets, or assets coming from a wallet that is sanctioned and blacklisted. The wallet analysis specifies a risk value that can be used to assess the cleanliness of digital assets. In complex and ambiguous cases, it is worthwhile to prepare a detailed wallet analysis report or have it prepared by a provider. There are various providers that interrelate the results of the wallet screening with the background information. Such a detailed wallet analysis report not only indicates the result in the form of a risk value but also provides the appropriate interpretation of the result by including the customer’s background and information and checking for their plausibility.

Verification of the Beneficial Owner of Digital Assets

In addition to the obligation to identify the beneficial owner according to the existing money laundering regulations, verification checks must also be carried out. In practice, two methods are regularly used for this:

  • Microtransactions
  • Message Signing

Microtransactions are actually small payments from the customer’s wallet to a wallet of the service provider or financial institution, whereby the customer proves that they have access to the private key. It is assumed that the person who has access to the private key is the beneficial owner.

The method of “Message Signing” is somewhat more complicated, but it can also be used to demonstrate that the person with the private key can control the wallet address and is thus the owner of the digital assets. When signing, the customer uses the private key to generate a message agreed in advance between him and the service provider. The service provider can then check whether the private key is really linked to the wallet by using the public key.

In conclusion, should a business wish to enter the digital asset market, be it to serve customers in this domain, to issue products in the form of tokens, or invest in digital assets, it is advisable to carry out an in-depth risk analysis of the new line of business. Once the risks have been identified, measures to reduce these risks have to be implemented, and existing processes as well as internal compliance directives have to be adapted. Among the greater risks in regard to digital assets are compliance risks that need to be understood before entering the market.

This article is an extract from the 70+ page Discovering Institutional Demand for Digital Assets research report co-published by the Crypto Research Report and Cointelegraph Consulting, written by eight authors and supported by SIX Digital Exchange, BlockFi, BitmainBlocksize Capital, and Nexo.

Money Laundering and Terrorist Financing Risks

In the area of digital assets, there are increased risks for companies. This article will take a closer look at risks related to money laundering and terrorist financing.

In general, there are increased risks in business relationships in regard to digital assets. ML/TF risks must be identified, analyzed and ultimately contained by service providers or financial institutions. A service provider or financial institution has the risk of accepting digital assets or fiat assets that fall within money laundering or terrorist financing offences. In addition to the ML/TF risks, there is also a reputation risk to be involved in a money laundering case.

ML/TF Risk in Customer Business Relationships

Onboarding of new customers wishing to contribute digital assets or the tracing of the transferred assets resulting from the exchange of digital assets requires specific clarifications. With regards to digital assets, there are different types of customer groups that pose different risks. If a private individual invested some time ago at a low price in digital assets, held them over the years and then sold them to a broker in the DACHLI region, the ML risk is rather low. The digital assets were purchased with fiat money, e.g., via a bank transaction or a credit card. The person should be able to provide proof of this transaction and the purchase of digital assets. The increase in value of the digital assets over the last few years can be traced, and the trade at a digital asset exchange should also be traceable. Since the assets of this person’s digital asset wallet as well as any transaction can be viewed and traced on the blockchain, they can also be checked for plausibility. In addition, digital assets in a wallet, unlike fiat currencies, can be examined for their risk, e.g., darknet risk, by means of a so-called wallet analysis or wallet screening. Such a case is uncomplicated and rather risk-free, but in reality, there are often far more complex cases which cannot easily be traced and where the origin of assets cannot easily be reconstructed. In such cases, it is advisable in case of doubt not to enter into a business relationship with the customer.

ML/TF Risk in Exchange Transactions

A financial institution should be aware of the risk involved in exchange transactions. Such transactions usually take place via digital asset exchanges or brokers. The choice of digital asset exchanges and brokers for an exchange transaction can pose a risk that should not be underestimated. The exchange/broker risk must be analyzed both in terms of the financial institution’s own transactions but also for customer transactions. In addition to the liquidity and default risk of an exchange for digital assets, there may be a significant risk of money laundering. Digital asset exchanges and brokers exist worldwide in various jurisdictions. However, the regulatory treatment of these exchanges and brokers in the various jurisdictions is not standardized and varies greatly. In certain jurisdictions, for example, digital asset exchanges fall within the regulated domain and are even subject to additional licensing, however, in other jurisdictions, digital asset exchanges are hardly regulated or not at all. The lack of licensing or regulation often means that these digital asset exchanges are not regulated in the area of money laundering. Such exchanges have an insufficient customer KYC, no or only weak transaction monitoring in place, and do not or only insufficiently clarify the origin of customers’ assets. In order to assess the exchange risk, the assessment of the exchange involved in a transaction is of great importance in terms of money laundering risks. If a financial institution wants to connect to an exchange to carry out transactions directly and to make investments, a Know Your Exchange (KYE) should definitely be made on the basis of defined criteria. The following criteria are to be taken into account (this list is not exhaustive):

  • Jurisdiction (FATF state vs. non-FATF state)
  • Type of regulation
  • Implementation of local money laundering obligations
  • Execution and result of an AML audit by an external third party

If a client of a financial institution intends to invest using digital assets or fiat assets derived from the exchange, similar exchange risks may exist. The creation of a “whitelist” of exchanges, based on internally defined criteria by the financial institution, may be a risk mitigation measure. This whitelist with the names of exchanges is then communicated to the customer. This essentially means that only assets that have been exchanged on one of these exchanges will be accepted. However, this is only possible if the customer has not yet exchanged their assets. If the customer has already exchanged their assets, they may present a detailed report prepared by a specialised service provider on the background and details of their initial investments in digital assets. If this report is positive and the risks are manageable, the customer and their assets can be accepted.

ML/TF Risk in Transactions

Transactions are exposed to the risk that terrorists and other criminals can have unhindered access to money transfers and moving assets. To prevent this, on June 21, 2019, the FATF adopted — on an international level — recommendations on financial services in the blockchain domain with regards to digital asset transfers. As in the case of a bank transfer, such transfers require the provision of information about the client and the beneficiary. This is aimed at preventing money laundering and terrorist financing. The receiving service provider can thus check the name of the sender against sanctions lists or verify the correctness of the information on the beneficiary.

In August 2019, FINMA emphasized the technology-neutral application of the law. The Anti-Money Laundering Act has been applied to blockchain financial services from the start. The Swiss law already says that service providers and financial institutions supervised by FINMA can only send digital assets to external wallets of their own, already identified customers and can only receive digital assets from these wallets. Digital assets can only be accepted if information about the sender or recipient can be reliably transmitted in the corresponding payment system. This Swiss regulation goes further than the international FATF standard, which provides an exception for transfers to and from unidentified wallets or wallet providers.

The question is how should companies deal with the provenance of digital assets? This is an issue that needs close attention, because carelessness in this area can lead to serious consequences for the parties involved. We will therefore explore this very question in another article next week.

This article is an extract from the 70+ page Discovering Institutional Demand for Digital Assets research report co-published by the Crypto Research Report and Cointelegraph Consulting, written by eight authors and supported by SIX Digital Exchange, BlockFi, BitmainBlocksize Capital, and Nexo.

Applicability of Money Laundering Regulations

Anti-money laundering provisions must be implemented in the area of digital assets in basically the same way as for fiat money, both at EU/EEA level and in Switzerland. This article will therefore look at the various implementations of these provisions in the countries of the DACH region.

Switzerland

In principle, digital assets are divided into three token categories: payment tokens, asset tokens, and utility tokens. The Swiss Money Laundering Act (Geldwäschereigesetz — GwG) applies to payment tokens, which mainly include cryptocurrencies, such as Bitcoin. Asset tokens and utility tokens, on the other hand, are generally not covered by the scope of the GwG.

Anyone who carries out financial intermediary activities in Switzerland is subject to the GwG. A service provider that keeps payment tokens for their customers is generally regarded as a financial intermediary, and the money laundering regulations thus apply to their activities. The same applies to the trader of payment tokens, who exchanges digital assets into fiat and vice versa for their customers, and to the issuer of payment tokens. The applicability of the GwG in relation to digital assets includes compliance with due diligence obligations such as the identification of the contracting party and the clarification of the asset origin (KYC).

Germany

Germany has taken the revision of the 5th EU Anti-Money Laundering Directive as an opportunity to take the EU rules a step further and to fully regulate the “crypto custody business” as a financial service subject to authorization. Since January 1, 2020, “cryptovalues” and the “crypto custody business” are being regulated by the German Banking Act (Kreditwesengesetz — KWG) and are subject to authorization. The crypto custody business entails the custody, management and security of cryptovalues or private keys that serve to hold, store and transfer cryptovalues for others.

For the purposes of this act, cryptovalues are digital representations of a value that has not been issued or guaranteed by any central bank or public body. It does not hold the legal status of a currency or money but is accepted by natural or legal persons as a means of exchange or payment on the basis of an agreement or an actual practice. Furthermore, it serves investment purposes and can be transmitted, stored and traded electronically. In addition to tokens with an exchange and payment function, cryptovalues also include tokens with an investment purpose, e.g., security tokens and asset tokens.

An extension of the number of obligated parties in relation to money laundering regulations applies in particular when it comes to “virtual currencies”. Service providers offering the exchange of virtual currencies into legal tender or other digital assets are subject to money laundering regulations. Also subject to the authorization by the Federal Financial Supervisory Authority (BaFin) are service providers who direct offers from abroad to individuals who are domiciled or habitually resident in Germany using means of distance communication (without physical presence or an intermediary).

BaFin also examines whether a token is a financial instrument in accordance with the Securities Trading Act (Wertpapierhandelsgesetz — WpHG) or the Markets in Financial Instruments Directive (Richtlinie über Märkte für Finanzinstrumente — MiFID II) or a security within the meaning of the Securities Prospectus Act (Wertpapierprospektgesetz — WpPG) or an investment under the Capital Investment Act (Vermögensanlagengesetz — VermAnlG). If this is the case, there are other obligations, such as the prospectus obligation, in addition to the money laundering obligations.

Austria

As part of the implementation of the 5th Anti-Money Laundering Directive, the Financial Markets Money Laundering Act (Finanzmarkt-Geldwäschegesetz —FM-GwG) has been adapted amongst other things. The Financial Market Authority Austria (FMA) is the competent authority for the registration and ongoing supervision of service providers in the field of money laundering and terrorist financing in relation to virtual currencies. Unlike Germany, where the definition of cryptovalues also covers asset tokens, the FM-GwG defines the virtual currency as follows: a digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency and does not possess a legal status of currency or money, but is accepted by natural or legal persons as a means of exchange and which can be transferred, stored and traded electronically. The following services are covered by the registration obligation:

  • Securing of private keys to keep, store and transfer virtual currencies on behalf of a customer (electronic wallet providers);
  • Exchange of virtual currencies into fiat money and vice versa; the exchange of one or more virtual currencies among themselves;
  • Transfer of virtual currencies;
  • Provision of financial services for the issuance and sale of virtual currencies.

The registration obliges the service provider to comply with the FM-GwG. Compliance with the FM-GwG provisions is verified by the FMA as part of its ongoing supervisory activities.

Liechtenstein

As an EEA member, Liechtenstein has also implemented the EU Anti-Money Laundering Directive. The Token and TT Service Providers Act (Token- und VT-Dienstleister-Gesetz — TVTG) has been in force since January 1, 2020 and aims to increase legal certainty in regard to blockchains and counter the abuse of digital assets for money laundering or other criminal purposes. The implementing provisions for the 5th EU Anti-Money Laundering Directive are statutory in the Due Diligence Act (SPG) and the Due Diligence Ordinance (SPV). Service providers who, for example, offer the exchange of fiat into virtual assets or vice versa as well as operators of trading platforms for virtual currencies or tokens, and trustees fall within the scope of the provisions. According to article 2(1)(c) TVTG, tokens are considered to be “an information on a TT system that can represent claims or membership rights towards a person, rights in property or other absolute or relative rights or that can be assigned to one or more TT identifiers.” This definition goes further than the term “virtual currency” and covers a large part of the tokens. The registration obligation as well as the due diligence obligations to prevent money laundering and terrorist financing are linked to the service provided in connection to the token and not to the classification of digital assets as payment, asset or utility tokens as such.

ML/TF Risks have to be identified, analysed and ultimately mitigated by service providers or financial institutions. In next week’s article, we will look at how this is done in concrete terms.

This article is an extract from the 70+ page Discovering Institutional Demand for Digital Assets research report co-published by the Crypto Research Report and Cointelegraph Consulting, written by eight authors and supported by SIX Digital Exchange, BlockFi, BitmainBlocksize Capital, and Nexo.

Complying with AML Laws for Investments in Digital Assets

The following report by Dr Karin Lorez of Scale Compliance GmbH discusses the two most important directives affecting companies in Europe that deal with digital assets. These include the Financial Action Task Force, originating in France, and the EU’s 5th Money Laundering Directive.

The subject of money laundering is often mentioned in connection with digital assets. The Financial Action Task Force (FATF), is an intergovernmental body that sets international standards worldwide for monitoring money laundering and terrorist financing. As a policy maker, the FATF is committed to national legislative and regulatory reform in the fight against money laundering and terrorist financing. Switzerland, Germany and Austria are among the 39 members18 of the FATF and have agreed to implement the FATF Recommendations. Liechtenstein is a member of MONEYVAL (Committee of Experts on the Evaluation of Anti-Money Laundering Measures), which is also a FATF member. The EU has taken into account the recommendations of the FATF in the 5th EU Anti-Money Laundering Directive, which also has been implemented into national law by the respective EU member states.

The FATF has stated in its definition of “virtual assets”19 that the risk of money laundering and terrorist financing (ML/TF) exists as far as virtual or digital assets are concerned. Countries are expected to identify the risks related to virtual assets and their service providers (virtual asset service providers — VASPs) and apply a risk-based approach to tackling ML/TF risks. The FATF Recommendations include, for example, that a financial institution should execute a know your customer (KYC) check of the customer starting at USD/EUR 1,000. In addition, FATF recommends that the virtual asset provider identifies the sender and recipient of digital assets and sends the information to the recipient or their service provider, as in the case of a bank transfer. This so-called “Travel Rule” causes some service providers anguish, because unlike in the banking world, there is no network and standard for the transmission of such data. The FATF members were asked to implement this recommendation in national law by June 2020.

In addition to the FATF, the EU has found that service providers who switch between virtual currencies and fiat money as well as providers of electronic wallets have not been obliged to report suspicious activities in the past. As part of the 5th EU Anti-Money Laundering Directive20, this has been taken into account and the scope extended to include precisely such (service) providers. With regard to the Travel Rule, the EU regulation is not quite as strict and only stipulates that KYC data should only be transferred to the financial supervisory authorities upon request. The 5th EU Anti-Money Laundering Directive was implemented by the EU Member States on January 1, 2020.

In Switzerland, it was only necessary to slightly amend the existing money laundering regulations based on the new FATF Recommendations, as Swiss regulation provides for a technology-neutral application of the law and the law, therefore, also applies to service providers in the field of digital assets. The recommendation on KYC verification from USD/EUR 1,000 was taken up by FINMA, and it was proposed to reduce the current CHF 5,000 to CHF 1,000. It is envisaged that the reduction of the threshold will come into force in the fourth quarter of 2020. In cases, where uncertainties about the applicability of the law arise in the market, the Swiss Financial Market Supervisory Authority FINMA specifies in communications and guidance the applicability of the provisions in order to provide more clarity.

In general, the provisions of money laundering legislation must be implemented in the same way for digital assets as for fiat money, both at EU/EEA level and in Switzerland.

This article is an extract from the 70+ page Discovering Institutional Demand for Digital Assets research report co-published by the Crypto Research Report and Cointelegraph Consulting, written by eight authors and supported by SIX Digital Exchange, BlockFi, BitmainBlocksize Capital, and Nexo.

Bitpanda’s Series A Raised $52 Million

Although cryptocurrency trading is becoming increasingly popular, it is not traditional players from the financial industry that are leading the way in this area, but young companies that have become known as pioneers in their respective sectors. Especially in Austria, there are a number of companies that deserve a special mention.

Although the major banks have not publicly announced products for the digital asset industry, they are experimenting with blockchain technology. Raiffeisen Bank International (RBI) launched a separate blockchain hub, which has the task of analyzing how private and permissioned blockchains can be used to improve processes at the bank. In 2017, RBI joined R3’s global Corda network in order to participate in international developments relating to banking in blockchain. Their current token project REST and the coin project BILLON are being tested internally to understand more about the technology and to potentially implement solutions.

As discussed in the exclusive interview with Raiffeisen in this report, they also invested in the digital asset exchange Bitpanda via the blockchain-focused venture capital firm SpeedInvest. The fintech investment vehicle Speedinvest has a special position in Austria. Not only did they successfully complete three venture capital rounds, the sum of the capital employed reached approximately €190 million in the third round. As a strategic investment, Speedinvest along with RBI and Uniqa, acquired an unknown stake in Bitpanda GmbH in April 2020, propelling even stronger growth for the exchange across Europe.

Founders Paul Klanschek, Eric Demuth, and Christian Trummer
Source: Bitpanda GmbH

Founded in 2014, Coinfinity is a broker and educational center for Bitcoin and blockchain technology based in Graz. They develop products and solutions related to Bitcoin and still operate the first ever Bitcoin machine installed in Austria. In addition, they started Bitcoinbon, which allows people to buy Bitcoins quickly and securely in over 4,000 points of sale in Austria. They also advise decision-makers and offer professional support for entrepreneurs who want to accept Bitcoin as a form of payment. With their branch in Graz, they have successfully established the first Austrian “walk-in office” related to Bitcoin, similar to numerous “Bitcoin embassies” scattered around the world.

They also offer their broker services online for fully verified customers to buy and sell the most popular virtual currencies. At the same time, they personally take care of professional investors and enjoy a high quality processing standard for OTC transactions. They believe that Bitcoin and blockchain technology will change the economy and society significantly in the coming years, and their mission is to make Bitcoin as understandable as possible and to facilitate access to this technology.

Since 2016, ERSTE Group AG has been in partnership with Ripple Labs. They have been investigating how blockchain can be used for the settlement of real-time foreign currency transactions. In addition to their partnership with Ripple Labs, ERSTE conducted one of the first successful placements of a promissory note loan entirely on a private blockchain in 2018. The promissory note was issued by Asfinag, the Austrian motorway administration, and investors invested a total of €20 million. Asfinag was able to successfully sell to three customers: Wiener Städtische Versicherung, Donau-Versicherung, and Hypo Vorarlberg. In 2018, The Austrian Control Bank actually implemented a private blockchain solution notarizing services at federal bond auctions.

This was done to increase the level of data security in the bank. However, no further word on the success of the project or the expansion of the initiative has been communicated. Austrian Post AG, formerly a cooperation partner of BAWAG P.S.K., and Kurant GmbH have been in collaboration since 2019. The now leading European Bitcoin vending machine operator is active in five post office locations across Austria – spanning from Bregenz to Vienna. In terms of inhabitants, Austria has the highest density of machines in the world, which makes buying or selling Bitcoin and altcoins relatively easier. Kurant GmbH has already expanded to Spain, and they plan to further expand to Italy, Greece, and the Netherlands.

“A critical link — perhaps the critical link — in the institutional adoption of Bitcoin is custody. When investors have ready access to regulated custodians whose security and processes they trust, the full potential of this emerging asset class and technology can flourish.”

— Adam White, COO of Bakkt

The aversion to offering digital asset products and services may not be a coincidence. Banks in Austria are supervised by the Financial Market Authority (FMA), and the FMA has not been discreet concerning their negative views on the industry. At the beginning of 2020, the FMA actively contacted all of the banks and inquired as to their involvement in digital assets. They wanted to get an overview of which types of customers, private or companies, are directly or indirectly involved in digital assets. They also reminded the banks of the new requirement for virtual currency service providers to register with the FMA, which has existed since January of 2020. This has translated into extreme caution on the behalf of banks.

Many customers that would like business bank accounts are being turned away if they operate in the digital assets space. Although the general interest of traditional Austrian financial intermediaries has been in the technology of blockchain and not in cryptocurrencies, banks like Raiffeisen International have also engaged in venture capital investments in the blockchain space. Austrians are showing an increasing interest in digital assets, and traditional financial intermediaries must step-up to the business opportunity of offering digital asset products and services. If no Austrian provider can be found, foreign providers will most likely enter the market over the coming years.

Both the market and the technology have developed faster in the field of cryptocurrencies than was the case with state reactions to this phenomenon. However, there are now also regulatory efforts to create a framework that does not hinder innovation, but at the same time is also intended to react to illegal processes in this area. This is the subject we will be looking at in next week’s post.

This article is an extract from the 70+ page Discovering Institutional Demand for Digital Assets research report co-published by the Crypto Research Report and Cointelegraph Consulting, written by eight authors and supported by SIX Digital Exchange, BlockFi, BitmainBlocksize Capital, and Nexo.

Actively Managed Structured Products for Professional Investors

Because of different requirements, professional investors can only make limited use of the same financial infrastructure that is used by private investors. A forerunner in this respect is the SEBA Bank AG, but other institutions now also offer products that are relevant for professional investors.

SEBA Bank AG is one of the world’s first banks dedicated to the digital asset industry. In addition to SEBA Bank AG’s banking services, SEBA offers a full range of products including directional exposure via tracker certificates, smart beta certificates on an actively-managed index of cryptocurrencies, and capital protected products. In addition, yield enhancement certificates like the Dual Currency Certificate, with which they started our product campaign in July 2020, are available. The relatively high volatility of Bitcoin deters many investors. Indeed, Bitcoin volatility has run as high as ten times that of equities. By the same token, by selling high volatility, a very attractive target yield can be generated. A yield enhancement product like the SEBA Bank Dual Currency Certificate on BTC/USD does exactly that: By selling a put option on BTC/USD, it harvests the inherent Bitcoin volatility and pays it out as an attractive yield to the product holder.

As digital assets emerge as a new asset class, many professional investors like family offices, HNWIs, and independent wealth managers are looking to build exposure. This new asset class offers significant diversification benefits due to low correlations to traditional assets and entirely new performance drivers. Many professional and institutional investors thus look to invest a single digit percentage of their assets in cryptocurrencies in order to tap this new diversification and performance potential. Based on this industry tailwind, SEBA Bank has enhanced its product capabilities to offer clients a variety of investment solutions and pay-offs on Bitcoin and other cryptocurrencies.

“SEBA aims to provide corporate financing, including advising on initial coin offerings, and other cryptocurrency and banking services to traditional corporate clients and cryptocurrency groups.”

— Reuters

Similar to Bank Vontobel, Leonteq is a traditional company that moved into the digital asset space with certificates. Leonteq’s most popular crypto certificate is its reverse convertible on Bitcoin that can be purchased on the SIX Swiss Exchange. Reverse convertibles are particularly suitable for investors who want to generate a guaranteed income over a certain period of time. Anyone who buys a reverse convertible on Bitcoin agrees to deliver the underlying asset, such as Bitcoin, on a specific, predetermined date in the future. At the same time, the buyer is compensated with a fixed coupon.

From the buyer’s perspective, a reverse convertible on Bitcoin works as follows: If the Bitcoin price at maturity is at or above the agreed strike price, the investor gets back 100% of their initial investment, which is also called the principal. In such a scenario, the investor would be in the money. However, if the Bitcoin price is below the agreed strike price at maturity, the investor participates to a certain extent in the negative performance of the underlying asset, in this case Bitcoin. At some point, the investor will be out of the money. This is the case, when the coupon is not able to compensate for the loss that the investor is incurring on the collateral that is being eaten away by the falling Bitcoin price.

The following table should help as an illustration

Source: Cointelegraph Research

Let’s suppose an investor entered a reverse convertible at a Bitcoin price of $9,000. At maturity, if the reverse convertible is redeemed at a Bitcoin price of $11,000, the investor gets 100% of his initially placed collateral as well as the agreed coupon. Notice that the coupon is fixed, even when the Bitcoin price rises and is higher at maturity compared to when the reverse convertible was bought. If the Bitcoin price at maturity drops below $9,000, the investor will not be refunded the entire collateral that he put up. Up until a Bitcoin price of $7,582, he won’t lose any money though, because the agreed coupon is able to compensate for the loss he is incurring because of a falling Bitcoin price. Once the Bitcoin price drops below $7,582 at maturity, the investor will lose money overall.

However, reverse convertibles are not only bought for speculative reasons. By buying a reverse convertible for a premium, the buyer can earn a regular income over the time the reverse convertible is running. This way, they can potentially keep their Bitcoin ,granted the Bitcoin price at maturity stays at or above the agreed strike price, but still earn a yield on it.

An investment in a reverse convertible on Bitcoin thus carries the risk of a capital loss at maturity. So all of the principal or parts of it could be lost. In addition, there is also the risk that if Bitcoin experiences an increase in value and the strike price at maturity is ultimately higher than the initial price, the investor will not benefit from this price increase. The investor’s total return is limited to the guaranteed interest rate of the coupon payment. Against this backdrop, it makes sense that reverse convertibles on Bitcoin are primarily suitable for investors when the Bitcoin market is stagnant or slightly declining in price. Leonteq’s launched structured offering was not only a novelty for Switzerland, but it was also the first reverse convertible on Bitcoin in the world that could be traded on a stock exchange, thus giving a broad investor audience access to such a product.

This innovation was launched at a time when the environment for cryptocurrencies was anything but easy. After a considerable rally in the first half of the year with a price premium of almost 200%, there was a correction to below $7,000, but the risk profile of the reverse convertible enabled the investor to achieve an absolute return of 10% in the first three months of the year. Looking at the product from the time of issue at the end of September 2019 onwards, investors were able to contain their losses significantly compared to a direct investment thanks to the attractive coupon of the reverse convertible.

Leonteq is now one of the leading issuers of yield enhancement products listed on the SIX Swiss Exchange with a market share of around 30% (measured by the traded turnover of products issued by Leonteq and its issuing partners). Leonteq also offers short tracker certificates on Bitcoin as well as tracker certificates and actively managed certificates on Ether, Bitcoin Cash, Litecoin, and Ripple on the SIX Swiss Exchange. Leonteq’s technology platform processes more than 100,000 customer transactions with a transaction volume of over CHF 15 billion per year and has one of the largest universes of structured products with over 2,000 underlyings and 90 payoffs.

For the most part, these offerings are very new and are being expanded all the time, which is another indication of the growth potential that many professional investors attribute to this innovative industry sector. Another form of investment that is also relevant in this respect is the investment in companies from this sector. Therefore the next article will discuss a recent investments in this form.

This article is an extract from the 70+ page Discovering Institutional Demand for Digital Assets research report co-published by the Crypto Research Report and Cointelegraph Consulting, written by eight authors and supported by SIX Digital Exchange, BlockFi, BitmainBlocksize Capital, and Nexo.

Passive and Active Structured Retail Products

Due to the friendly regulatory landscape, Switzerland in particular has seen the development of a market for both passively-structured and actively-managed crypto products for retail investors. This article will take a closer look at 21Shares and other providers in this area, along with their efforts to operate in the EU as well.

If you are looking at the landscape of financial instruments with Bitcoin and other digital assets as underlyings, 21Shares created the first crypto basket ETP (exchange traded product) on the regulated market of the largest Swiss stock exchange in 2018. Since then, 21Shares has issued a total of 11 institutional-grade passive investment trackers with the largest single assets (Bitcoin, Ethereum, Ripple, Tezos, etc.), different index baskets of digital assets, and the world’s first inverse Bitcoin ETP on four different stock exchanges in Switzerland and the EU.

Notably, the 21Shares crypto ETPs are the most readily available crypto products on the market, as any institution with access to Deutsche Börse XETRA or SIX Swiss Exchange can easily access the ETPs. This includes all the large Swiss and European online brokers such as Interactive Broker, Swissquote, Comdirect, etc. This is particularly relevant as it gives retail clients without the proper know-how to set up accounts with unregulated crypto exchanges the ability to participate in this novel asset class. Furthermore, all 21Shares ETPs are 100% collateralized at all times and custodied with independent custodians in order to give institutional clients safer access and reduce the counterparty risk often associated with other financial products.

Source: Cointelegraph Research

“Cryptocurrencies offer experienced investors a new way of diversifying their portfolios. With the listing, we are increasing the selection of asset classes on the Vienna Stock Exchange. Investors can also benefit from the advantages of the stock exchange in crypto trading: monitored and transparent trading with real-time information and secure processing via their securities account.”

– Thomas Rainer, Head of Business Development at the Vienna Stock Exchange

RETAIL AND ACTIVELY MANAGED STRUCTURED PRODUCTS

In addition to actively managed structured products for professional investors, Switzerland has become home to the world’s first actively managed Exchange Traded Product featuring cryptocurrencies as the underlying asset class. Launched in summer of 2020, the Bitcoin Capital Active ETP allows retail and institutional investors in Switzerland and, after approval of the prospectus in the EU, across selected EU jurisdictions to invest in digital assets via a certificate structure. The product is issued by Bitcoin Capital AG and managed by FiCAS AG, a Swiss-based crypto asset manager. Its investment objective is to increase the net asset value of the ETP by trading Bitcoin against carefully selected altcoins from the top 15 coins. Their strategy also involves moving in and out of fiat depending on the trading signals they analyze.

Actively Managed Digital Asset Investment Vehicles’ Assets under Management

Source: Cointelegraph Research

The product is similar to a structured product, but it is not a certificate. Unlike certificates, ETPs are also designed for retail distribution.

Exchange Traded Products are collateralized, non-interest paying debt securities designed to replicate the performance of the underlying assets. ETPs trade on exchanges similar to stocks meaning their prices can fluctuate intraday. ETPs are structured and operate very similarly to traditional Exchange Traded Funds (ETFs). However, contrary to ETFs, ETPs are debt securities issued by a Special Purpose Vehicle (SPV).

Currently, their AUM is CHF 3.2 million. They launched with CHF 2 million on July 15, 2020, so their assets have already increased by more than 50% since their launch. On the launch date, the issue price of each security was CHF 100, and the product as of today is trading at CHF 109 representing a 9% increase in value within six weeks. More information on the FiCAS ETP can be found on the historical chart on the SIX Swiss Exchange.

Their fees include a 2% management fee per annum and a 20% performance above a high water mark (HWM). The fees will be collected quarterly and this will reset the HWM to the new level. Storage of the assets is diversified across five custodians including Crypto Broker AG, Sygnum Bank AG, Coinbase, Bitstamp, and Kraken, and they plan to further diversify by adding further custodians.

This article has so far only dealt with products for private investors. Institutional investors, however, have different requirements for investment products, which is why next week’s article will deal with these very products, focusing in particular on the SEBA Bank AG.

This article is an extract from the 70+ page Discovering Institutional Demand for Digital Assets research report co-published by the Crypto Research Report and Cointelegraph Consulting, written by eight authors and supported by SIX Digital Exchange, BlockFi, BitmainBlocksize Capital, and Nexo.

Regulated Crypto Funds

Long gone are the days when cryptocurrencies only attracted the interest of private investors. Although the field of digital assets remains uncharted territory for many institutions, the number of professional actors is nevertheless growing steadily. In this article, we will look at a few of the most prominent regulated crypto funds.

One of the most famous crypto funds in the world hails from the Swiss firm Crypto Finance AG. Crypto Finance AG is a fintech company that provides institutional and professional investors with products and services in the digital asset space. Founded in June 2017, the Zurich-based company has 40 employees and three operationalsubsidiaries including Crypto Fund AG, Crypto Broker AG, and Crypto Storage AG. With just over 50% of the overall Crypto Finance Group business linked to international clients, Crypto Finance is continuing international expansion and product and service development.

Crypto Fund AG offers an active as well as a passive investment approach for crypto assets. The passive approach tracks the performance of the Crypto Market Index 10 (the “CMI10”), which is independently calculated and maintained by the SIX Swiss Exchange. The Index does not include privacy coins like Monero, indexed crypto assets, or pegged crypto assets, such as gold-backed stablecoins. Indexed crypto assets refer to crypto assets which are, for example, based on a basket of other crypto assets such as a “fund token” or similar. These are excluded as they are an indirect representation of other assets, similar to pegged assets. Furthermore, crypto assets which cannot be safely stored in an institutional-grade storage solution are also excluded. This may be an issue when a crypto asset based on a new blockchain would be eligible for an index where storage of that asset is
only possible via exchanges.

The fund employs a strategy involving automated trading algorithms that take long and short positions on Bitcoin. Assets under management in the active strategy are currently at €25 million, and the year to date return is between 33% and 40% — dependent on the share class. The active strategy is deployed with Bitcoin futures only. Crypto asset custody is, therefore, not a necessity. For the passive strategy, crypto assets are stored with the depositary, Bank Frick. The fund does not self-custody any crypto assets. Both funds are alternative investment funds (AIFs) administered by CAIAC Fund Management AG in Liechtenstein.

Domiciled in Liechtenstein, SwissRex AG operates a crypto fund with a British Virgin Islands (BVI) structure and a tracker certificate setup by GenTwo Digital AG and MTCM Investments AG. The main advantage of the certificate is that it can be subscribed without any problems via any bank thanks to its Swiss VALOR number. The VALOR number, which is incorporated in the Swiss ISIN number, is a code which uniquely identifies listed securities and financial instruments in Switzerland. Both products are distributed to qualified investors by Crypto Consulting AG in Switzerland.

Fundamental analysis of crypto tokens forms the basis for the investment decisions of their actively managed crypto fund. The strategy gives the investor access to a diversified basket of Bitcoin and altcoins (alternative coins). The tokens are analyzed on a daily basis, and the positioning is actively managed. The strategy takes care of the timing for the investor. The exposure is determined on the basis of valuation models and the cycle model described below and ranges between -20% and 120%. In February, the allocation was reduced to 50% due to a slight overvaluation and the hype around the Bitcoin halving. It was increased to 100% again during the correction that the Corona crisis caused. In addition, the choice of individual tokens is of great importance. The largest 50 tokens are analyzed, and a fair value is calculated. On this basis, 10 tokens, of which the greatest potential is expected, are purchased and stored safely. The asset allocation mixed with the right choice of altcoins contributed to a fund performance of 120% in 2020 (net in CHF as of July 28, 2020). Bitcoin generated a return of 49% over the same period. The AUM now stands at CHF 8 million.

SwissRex distinguishes four phases in the cycle of crypto tokens: the beginning of a bull market, the outperformance of altcoins, the hype, and the bear market. When investors seek exposure to crypto again after a prolonged downtrend, they typically buy Bitcoin, as it is the most liquid and best known of all tokens. Since Bitcoin is one of the few tokens that are trending up in this first phase, altcoins are sold and the correlation between Bitcoin and altcoins can be negative for a short period of time. Through these shifts, high quality altcoins become bargains and value investors make their first purchases. Individual altcoins show better returns than Bitcoin in this second phase. As soon as Bitcoin reaches a new high, the third phase begins; the masses start buying crypto. Since Bitcoin already seems expensive, purchases are made in the second and third phase.

The most important decision is when to exit the market in order to have as little exposure as possible in the fourth phase, the bear market.

SwissRex differentiates between three categories of tokens: stores of value, currencies, and securities. As there are no cash flows for securities and currencies, the analysis must be based directly on supply and demand. On the supply side, velocity and inflation are important, while on the demand side the adoption rate is estimated using an S curve. The fair value is calculated and multiplied by an individual success rate that weighs factors such as liquidity, trading venues, and the survival chances of the start-up. For tokens with security character, traditional valuation methods such as a dividend discount model are used.

The fund’s assets are held with Crypto Broker AG and Bitcoin Suisse AG on segregated accounts with individual client wallets. They also hold a small part on a few exchanges which passed their due diligence process for trades in tokens and futures that aren’t covered by their storage providers.

Among the terms that are mentioned quite often in connection with cryptocurrencies and digital assets are ETPs and ETFs, but how is their market availability at the moment? Next week, we will look into this in detail in another article!

This article is an extract from the 70+ page Discovering Institutional Demand for Digital Assets research report co-published by the Crypto Research Report and Cointelegraph Consulting, written by eight authors and supported by SIX Digital Exchange, BlockFi, BitmainBlocksize Capital, and Nexo.