Bitcoin wallet startup Xapo recently announced that it has received conditional approval from the Swiss Financial Market Supervisory Authority (FINMA) to operate from Switzerland. Xapo CEO Wences Casares stated that both the company and FINMA have spent, “a tremendous amount of time and resources,” in the two year long approval process.
“This approval is contingent on several factors, including membership in a Self-Regulatory Organization (‘SRO’) but we are optimistic that we will meet the required conditions and be able to serve non-U.S. customers from our headquarters in Switzerland.”
- Wences Casares, Xapo CEO
Having launched in early 2014 with the promise to be the most secure way to store bitcoins, Xapo quickly attracted US$40 million in funding, a record amount for a bitcoin company at the time.
The company initially courted institutional clients, offering them the first organization-level management tools for bitcoin. The California-based startup then launched a retail focused bitcoin Visa debit card, the first of it’s kind.
With their current headquarters currently in Hong Kong, and a smaller office in Palo Alto, California, Xapo’s pioneering has lead to a “fortress” built to protect large amounts of bitcoin, offline, in an underground vault.
When Xapo announced that they were attempting to move their headquarters to Switzerland in May 2015, they cited several reasons, including the country’s privacy, neutrality, and entrepreneurial friendliness. Switzerland has had a global reputation for maintaining financial privacy, and it also has many of the world’s most fortified bunkers to keep valuables secured.
Xapo’s “primary deep cold storage vault” is already in one of them, a retired Swiss Army bunker carved into the Alps near the village of Flüelen. Disconnected USB drives with customers funds are stored in the vault, and are in one of four secure locations on three continents. It takes at least two private keys from separate offices to retrieve funds from deep storage at Xapo.
While moving to Switzerland brings the company headquarters closer to their primary vault, regulations stopped them from completing the move. The company maintained a minimal presence in the country while waiting on FINMA approval.
A year-and-a-half-long negotiation ensued, revolving around whether Xapo requires a banking licence, and 10 million Swiss francs in capital. According to the FINMA fact sheet for bitcoins, last updated in June 2014, the use of bitcoins as a payment method is not state-controlled. Those intending to use bitcoins commercially are obliged to find out whether they are in compliance with licensing requirements under financial market legislation.
If a business is found to operate without a proper license, or Self-Regulatory Organization (SRO) membership, FINMA will launch an investigation. The Authority will take all necessary actions to restore compliance including liquidating the company in violation.
“Any breach of licensing requirements under supervisory law is a criminal offence and FINMA will inform the relevant prosecution authorities accordingly.”
- Swiss Financial Market Supervisory Authority
FINMA assesses each business model individually to determine the type of license required. While there is no licensing requirement for using bitcoin, whether as a paying customer or a merchant receiving the digital currency, trading platforms and Bitcoin service providers will require some sort of license, according to FINRA’s guidelines. Certain commercial activities involving bitcoins may require a banking license such as when the business accepts money on a commercial basis from clients and keeps it in its own accounts.
Xapo has repeatedly argued that its business model does not require a banking license, as it does not accept customer deposits. With the latest conditional approval, FINRA has decided that Xapo is not a bank, but a financial intermediary.
The company does, however, need a financial intermediary license to do business in Switzerland. “Trading with digital currencies (Bitcoin, etc.) and operating a payment system fall under the Anti-Money Laundering Act (AMLA),” FINMA states.
The Swiss AMLA allows two ways for financial intermediaries operating on a commercial basis to comply with due diligence requirements. They can either be directly supervised by FINMA, and hold a FINMA license, or they can become members of a SRO, which are recognized by FINMA. Until that recognition comes, Xapo isn’t hiring more employees than their one local representative, and is not allowed to do business in the country.
An organization is recognized by FINMA as an SRO if it meets a number of criteria, such as having regulations which set out the AMLA due diligence requirements for its members and monitoring to ensure its members comply with them. The FINMA website currently lists 12 recognized SROs. A SRO can impose penalties on its members and suspend them for being non-compliant.
“Although Swiss supervisory law contains no specific provisions on virtual currencies, it is still possible – depending on the business model – for trading in bitcoins to require a licence from FINMA.”
- Swiss Financial Market Supervisory Authority
While Casares said that the regulatory environment for Bitcoin in Switzerland was, “very advanced, perhaps the best in the world" in 2015, when Xapo employees finally arrive in Zug, they are sure to find an environment for Bitcoin unlike any other on Earth.
The national railway system has since become one of the world’s largest Bitcoin vendors, while companies including Blockstream, and Ethereum have moved their headquarters to the small Canton of Zug, which allows its residents to pay for utilities with their bitcoins.