On the Watch for Predators in ‘Crypto Valley’ Switzerland

By Robert Sanchez, ACSS Reporter
May 28, 2022

Switzerland has expressed neutrality in international conflicts for more than 200 years. But this tradition has wavered: it has condemned Russia’s invasion of Ukraine and taken measures against Russia-based persons and entities.

As a leading banking and financial center, Switzerland has the power to make its actions felt. A challenge for Swiss regulators is to target accounts affiliated with persons and entities designated in the country’s latest sanction programs.

A booming sector of Swiss financial services is cryptocurrency finance, which has taken hold in the “Crypto Valley.” Several virtual asset service providers (VASPs), cryptocurrency wallet services, blockchain technology developers, and other related services call Switzerland home, making it a banking hub for crypto finance and fiat currency. As such, regulators need to understand the compliance framework of the Swiss crypto sector.

Status of Russian Entities

Switzerland has adopted European Union sanctions that target named Russian individuals, entities, and their respective bank accounts and assets. The sanctioned entities include four major Russian banks: VTB Bank, Bank Otkritie, Sovcombank and Novikombank. On the crypto end, Switzerland’s federal department of finance has stated that to preserve the integrity of its blockchain industry it will freeze Russian crypto assets.

One entity that has remained untouched by Switzerland’s sanctioning authorities and other western states’ is Gazprombank. The bank is responsible for finances and transactions affiliated with Russian energy giant Gazprom. It also offers banking services to individuals for personal finance.

Gazprom is one of world’s largest natural gas exporters and has been an energy supplier for European countries, in which Gazprom and Gazprombank have been allowed to operate on different bases. Gazprombank Switzerland Ltd is a subsidiary of the main banking service based in Zurich. It provides corporate and personal financial services and uniquely provides crypto financial services.

Gazprombank Switzerland Ltd has a crypto and blockchain services department, which “allows [the bank] to make transactions with cryptocurrencies as easy as transactions with traditional assets,” according to Roman Abdulin, CEO at Gazprombank in November 2020. Abdulin stated that “[…] digital assets will become increasingly important for our clients and the global economy. We are pleased to work together with leading Swiss-based entities on the further development of the Swiss and global crypto and blockchain ecosystem.”

Gazprombank Switzerland poses questions for western regulators given its proximity to Gazprombank and Gazprom. European states designated as “hostile nations” by Putin are required to make payments to Gazprom via Gazprombank in rubles. The presence and operation of Gazprombank and its subsidiaries in western Europe are a unique gray area for sanctions protocols. Concerns with fiat currencies carry over to the crypto space.

Gazprombank Switzerland, by providing crypto finance services, is liable to mitigate the risks associated with cryptocurrency transactions in both sanctions compliance and illicit activity. The extent of the sanctions effects on the crypto services of Gazprombank Switzerland is uncertain. Western-based cryptocurrency regulatory bodies are likely to remain vigilant of the gas giant’s banking arm operating in the west, with concerns of possible avenues for currency exchange or sanction evasion. However, Gazprombank Switzerland must comply with strong regulations for its cryptocurrency services. Notably, the subsidiary is affiliated with compliance-focused institutions that are instrumental to the Swiss cryptocurrency regulatory environment: FINMA and OpenVASP. These institutions have shaped the Swiss crypto community to become leaders in regulatory practices.

Cryptocurrency Industry Regulations

The Swiss Financial Market Supervisory Authority, known as FINMA, is the Swiss government body responsible for financial regulation. FINMA oversees the supervision of banks, insurance companies, stock exchanges and securities dealers, and other financial intermediaries in Switzerland.

FINMA’s responsibilities for digital assets and cryptocurrency are authorizing trading and registration of crypto investment funds and service providers. Along with many regulatory bodies, FINMA is concerned that virtual currencies facilitate anonymity and cross-border asset transfers, knowing cryptocurrency is a popular medium for money laundering and terrorism financing.

VASPs must obtain certifications from FINMA to operate within the country and provide crypto financial services. FINMA applies a “same risks, same rules” principle, in which digital assets must match the existing provisions of financial market laws.

FINMA’s requirements include measures designed to mitigate the unique risks of crypto assets. For example, a certified service provider may only conduct transactions and invest in established crypto assets with a sufficiently large trading volume. This is significant because crypto coins and tokens with large market caps are usually traded and hosted by large exchanges with nuanced regulatory protocols.

With the combined know-your-customer information of large regulated exchanges in the international crypto space, FINMA can endorse crypto investment funds and service providers with more trust when they deal in only high-volume, popular coins. The inverse would be the use of low volume “alt-coins”, or alternative coins. The reason for the aversion to low-volume coins is that they are more volatile, can rapidly lose value, and can be more difficult to trace compared with high-volume coins on the Bitcoin or Ethereum blockchains.

Furthermore, FINMA-certified entities can interact with established counterparties and platforms based in a member country of the Financial Action Task Force (FATF) and are subject to corresponding anti-money laundering regulations. FINMA serves as Switzerland’s financial investigatory body and is responsible for the country’s investigations of crime involving virtual currencies or other blockchain-based applications, including compliance with service providers.

OpenVASP and an Enhanced Travel Rule

The OpenVASP Association is a non-profit organization based in Zug, Switzerland. Several prominent Swiss-based VASPs are members, along with others from abroad. OpenVASP has the goal of establishing and maintaining an open protocol for the transmission of transaction information between VASPs and other parties. Specifically, this goal is to ensure compliance with Recommendation 16 of the Financial Action Task Force (FATF), known as the “travel rule.”

FATF’s travel rule states: “Countries should ensure that originating VASPs obtain and hold required and accurate originator information and required beneficiary information on virtual asset transfers.” The rule helps ensure the risk of anonymity associated with crypto transactions is mitigated from one VASP to another. In other words, if a person was to send cryptocurrency from a wallet enabled by a VASP in compliance with the travel rule, that VASP is obliged to share the following information with the receiving VASP:

  • the name of the originator, the person sending funds;
  • the originator account number where such an account is used to process the transaction;
  • the originator’s address, national identity number, customer identification number, or date and place of birth;
  • the name of the beneficiary; and
  • the beneficiary account number where such an account is used to process the transaction.

The travel rule is vital in assisting blockchain analytics and investigations. Removing anonymity can allow for law enforcement and regulatory entities to attribute illicit finance to a person or entity. FINMA recognizes the importance of this oversight and goes a step further by requiring enhanced protocols on FATF’s recommendation.

FINMA requires that an additional layer of information be attributed. The information of third parties or that of a customer’s private crypto wallet, once removed from the main transaction, is required by FINMA’s enhanced due diligence protocol. Such oversight allows for a broader look at where funds are coming from and where they are going.

The travel rule and the FINMA protocols can enable regulators to discover whether Switzerland-based crypto services serve as waypoints for funds from sanctioned countries, even if Switzerland is not the final destination.

Education Vital Going Forward

“Switzerland tends to be more neutral than the EU on the sanctions front,” says Chris McAteer, co-founder of the OpenVASP Association and senior compliance adviser with the Swiss-based SIX Digital Exchange. “Certainly there is a lot of education that needs to take place. People have struggled a lot within the community just to simply understand what industries are sanctioned, whether we are remaining with list-based sanctions, and how to incorporate that into practices. In the meantime, most experts in the field understand that it’s simply a matter of ensuring that the screening tools we have are updated.

“In the AML space, that simply translates to making sure you use blockchain analytics for high-risk transactions to understand the following. First, what is the destination wallet of a transaction; second, with whom it is associated; third, who is the beneficial owner; and fourth, who is the controlling party of the wallet?”

Ms McAteer says that FINMA regulations requiring strong know-your-customer protocols for crypto services have been in place for years and that Swiss VASPs have the infrastructure and experience for obtaining the information on parties and beneficiaries affiliated with transactions. She recognizes that regardless of regulation, cryptocurrency constantly presents evolving challenges. “Swiss service providers freezing the crypto assets of Russian oligarchs definitely has an impact, but as we all know, it is very easy in the crypto space to open up another wallet with another provider with another name.”

This is an accepted reality for crypto compliance in any country. What sets Switzerland apart is its enhanced identification of users through its own and adopted norms. “The fact that protocols such as those set forth by OpenVASP have emanated from Switzerland are indicators that Swiss VASPs are taking compliance seriously and that the Swiss crypto community is a hub for compliance.”

Nuanced Regulation Mitigates Risk

Switzerland’s regulatory practices for cryptocurrency are proactive. Extensive compliance with the FATF’s travel rule and further due diligence are necessary for effective investigations and attribution to detect sanctions evasion.

The presence of Gazprombank Switzerland’s crypto and blockchain services department provides work for regulators in Switzerland and beyond. As integral entities in international energy, Gazprom and Gazprombank have avoided the full financial burn presented by sanctions. The Gazprombank Switzerland Ltd cryptocurrency services remain an interesting topic, because of the company’s proximity to the Russian state and because blockchain-enabled finances have at times a reputation for enabling anonymity of funds and their destinations.

This, however, speaks to the public trust in institutions such as OpenVASP and the protocols of FINMA. Switzerland’s public and private sectors have demonstarated through established protocols a desire to stay vigilant in curbing factors that facilitate money laundering and sanction evasion. Regulators worldwide should understand the protocols that allow Switzerland to remain a hub for compliant crypto financial services and aim to learn more about risks and mitigation in this ever-developing industry.

Recent Articles