Cryptocurrency Services

What is a cryptocurrency?

What today is referred to as crypto currency of cryptocurrency is a digital asset, designed to work as medium of exchange that uses strong cryptography to secure financial transactions, control the creation of additional units, and verify the transfer of assets. Cryptocurrency is a type of digital currency, also referred to as virtual currency or alternative currency.

Cryptocurrencies use decentralized control as opposed to centralized electronic money and central banking systems. The decentralized control of each cryptocurrency works through distributed ledged technology, typically a blockchain, that serves as a public financial transaction database.

According to Jan Lansky, a cryptocurrency is a system that meets the following 6 conditions:

The system does note require a central authority, distributed achieve consensus on its state.

The system keeps an overview of cryptocurrency units and their ownership.

The system defines whether new cryptocurrency units can be created. If new cryptocurrency units can be created, the system defines the circumstances of their origin and how to determine the ownership of these new units.

Ownership of cryptocurrency units can be proved exclusively cryptographically.

The system allows transactions to be performed in which ownership of the cryptographic units is changed. A transaction statements can only be issued by an entity proving the current ownership of these units.

If 2 different instructions for changing the ownership of the same cryptographic units are simultaneously entered, the system performs at most of them.

This raises yet another important question, which has been asked by many since the inception of the cryptos, what are they in fact: an asset, a commodity, a security, or perhaps a currency?

Today the crypto world can be broken down between several leading states and everyone else. The US and Switzerland seem to be topping the charts in both departments, therefore let us look at how these 2 market leaders define this product. According to the US standard, all tokens are being treated as securities, as per the current communications. Switzerland on the other hand takes a merely different approach, and defines all tokens as assets. What does it mean to us, its regular users. Well to be honest not much at present, as the debate is still ongoing and each state is trying to govern according to its perception of the topic and best interest, however the imminent future and the final definition and classification of the cryptos will be decisive as far as potential regulatory framework, possible tax implications and the anonymity aspect are concerned. Therefore we at FFT, probably like the rest of the world are keeping our eyes peeled in anticipation as to what will transpire.

Origin of cryptocurrencies

Despite the recent success and last year's explosion of the Cryptos globally, which might suggest that this is a recent phenomenon, nothing more delusive. In fact, in order to fully grasp and appreciate this phenomenon, we must look back as far as 1983 when an American cryptographer David Chaum conceived the anonymous cryptographic electronic money called ecash. Later in 1995, he implemented it through Digicash, an early form of cryptographic electronic payments which required user software in order to withdraw notes from a bank and designate specific encrypted keys before it can be sent to a recipient. This allowed the digital currency to be untraceable by the issuing bank, the government, or a third party. It wasn't however until later, year 1998, when the first real attempts of creating a "Virtual Currency" was made. Many may not know this, but in fact, between year 1998 and 2009 2 attempts at creating a Crypto Currency were made, called B-Money and Bit Gold respectively, none of which succeeded past the drawing board as they were formulated but never fully developed. With the beginning of 2009 a new era dawned on the world financial markets and a first decentralized "cryptocurrency (as we know them today) was created. It used SHA-256, a cryptographic hash function, as its proof-of-work scheme. It was the first successful cryptocurrency to us this hash function scrypt, instead of the standard SHA-256. Bitcoin was created by a pseudonymous developer Satoshi Nakamoto, whose real identity remains a mystery until this day. Soon, some 2 years after the initial launch on Bitcoin, so in the year 2011, Litecoin was released. Thereafter many more were created attempting to replicate the original success of their predecessor, likes of which are still to be seen.

The rise of Bitcoin

Cryptocurrencies predominantly spearheaded by their most dazzling star, Bitcoin, have taken the financial world by storm. Since their effective inception, dating back to the beginnings of Bitcoin, as referenced above, these unsupervised means of payment and exchange have enjoyed a spell of almost a magical appreciation. It was not, however, until the end of 2016 and the beginning of 2017 when the markets and the tentative investors truly started to appreciate the power of the Cryptos putting them right to the top of the "investment chain".

Just to put things into perspective, the initial price of Bitcoin, set in 2010 was less than 1 cent. Whereas during the last quarter of 2017 it grazed and nearly reached the USD 20,000,- threshold. Once seen as the province of nerds, libertarians and drug dealers, bitcoin today is drawing millions of dollars from hedge funds. The recent price surge, as referenced above, may be just a simple bubble, however it could also be the belated recognition of the broader financial community that the so-called cryptocurrencies - digital forms of money are going mainstream.

Enthusiasts see it as a new way of doing all sorts of business; as a result of lower costs, without the central middleman responsible for keeping track of transactions, and charging its fees. The reality is that banks and stock exchanges have invested heavily in developing blockchain technology, while retailers are experimenting with using blockchain for ensuring food safety. Driven by the success of the cryptos to date, Central Banks are even speculating about issuing blockchain-based official currencies.

As a result, many have tried to replicate the success story behind Bitcoin, as the number of cryptocurrencies and tokens multiplied and continues to do so. Bitcoin however is standing its ground as the best known, time-tested and valuable Crypto.

So what actually explains the surge of Bitcoin and its followers? In fact, nothing simpler, new investors and expectations of many more to follow, has increased the price of majority of the cryptos over 12-fold, 2017 alone. In fact, certain exchanges are already offering future contracts on Bitcoin and other mainstream Cryptos, which further expand their appeal. The fact that Bitcoin software guarantees a finite supply has further added to the fear of missing out for some investors. Their relevance and global enthusiasm from virtually all fronts have led to creation of Cryptocurrency exchanges and the so-called ICO's which are being discussed in more detail separately.

Economic significance of cryptocurrencies

Apart from their obvious application as means of payment, money, cryptocurrencies can play a significant role in increasing global economic participation and offer protection against government overreach.

Putting in things in a global perspective shows that there are some two billion people without bank accounts, many of who simply do not have the necessary means of funds for opening and maintaining a bank acct. Cryptocurrencies seem to be offering an immediate remedy. Their low adoption costs and the possibility of division into small fractions with virtually no minimum account requirement strongly demonstrates their appeal. What it means in real terms, is that anyone with a smartphone and an internet connection can easily access the equivalent of a bank acct. and actively participate in the global economy. Furthermore, this application is not limited to the developing world alone. The US alone have a sizeable unbanked cohort of funds. Therefore Cryptocurrencies could help integrate the unbanked into the financial system, creating synergies across the economy and generating additional revenues.

What is equally import, is the decentralized nature of cryptocurrencies. It provides an alternative avenue to traditional financial systems; preserving, transferring and managing wealth. Cryptocurrencies further offer protection against unlawful government seizures and can mitigate the political risk that could lead to systemic financial calamities.

By seeking to provide secure, fast and frictionless means to store, spend and move assets/value, cryptocurrencies are challenging the traditional pillars of the financial system. Despite their seemingly ethereal nature, cryptocurrencies have attracted talent and enough monetary momentum to change the way we transact, raise capital, and organize ourselves to create economic value. Cryptocurrencies mark the ascent of independent decentralized, "government-free" global money into the world economic order.

Birth of a virtual market and the ICO

The drive to discover alternate ways for a new or a startup company to raise money has given birth to many experiments, but none more prominent than the 2017 rise of so-called Initial Coin Offerings, or ICOs.

For decades the most prominent and only successful way to raise cash for a technology company was for the founder to sell some of his or her ownership stake in exchange for money from venture capitalists, who essentially believe that their new ownership will be worth more in the future than is the cash they spent now.

But in 2017 - and especially during the first and second quarter of 2018 - a new craze has overtaken some influential subsets of the technology industry's powerbrokers: What if companies had a more democratic, transparent and faster way to fundraise by using digital currency? The answer is an ICO. But what does actually this magical acronym ICO mean in real terms?

An ICO typically involves selling a new digital currency at a discount - or a "token" - as part of a way for a company to raise money. If that cryptocurrency succeeds and appreciates in value - often based on speculation, just as stocks do in the public market - the investor has made a profit.

Unlike in the stock market, though, the token does not confer any ownership rights in the tech company, or entitle the owner to any sort of cash flows like dividends. Buyers can range from established venture capitalists and family offices to less wealthy cryptocurrency zealots. Investing in a digital currency is extremely high-risk - more so than traditional startup investing - but is motivated largely by the explosive growth in the value of bitcoins, which as mentioned afore have skyrocketed to stardom in the space of 10 months of 2017 alone. That spike helped introduce both fanatics and professional investors to ICOs.

Furthermore, what is interesting to realize now, that despite initial reluctance from the Governments to participate or even to monitor these offerings, the landscape seems to be drastically changing with more governments getting involved every day creating rules of engagement for this still fairly pristine market. These actions have significantly divided the economic landscape of the ICOs between the financial powerhouses; Switzerland and the US, who have quickly emerged on top of the 'investment chain' and everyone else who wishes to play the game. In Switzerland, Zug, a small, yet very dynamic city on the shores of the Zug see, in the German speaking part of Switzerland has quickly established itself as the hub of Cryptos and ICOs not only in Switzerland but Europe as a whole. FINMA, which is the Swiss Financial Market Supervisory Authority had to quickly step up their game and formulate the necessary rules to govern this new and extremely dynamic regime of virtual currencies. They published their rules and guidelines of February 16, 2018, which can be found on their website.

The Swiss factor

Switzerland is worldwide known as a historic financial hub housing around $2 trillion, or 27 percent, of global offshore wealth in management. Its financial system is strong and solid.

In the field of blockchain Switzerland has attracted Ethereum and Bitcoin foundation which are the main cryptocurrencies worldwide. The long-term policy regarding crypto-currencies on the part of FINMA and its clarification of many aspects related to their business makes Switzerland and more particularly the canton of Zug as the best place to launch an ICO.

The arguments for which Switzerland is the best jurisdiction to conduct an ICO over Malta, Gibraltar, Estonia or Cayman are the following:

• The Crypto Valley Association recently drafted a code of conduct as a means to encourage the community to foster best practices and weed out scammers. This is entirely in keeping with the spirit of the global blockchain community - peer-to-peer review and balance where no one central player needs to enforce or control things.

• The country's legal and political system has been and will continue to be stable and predictable - and decentralized. The Swiss cantonal system with 26 semi-autonomous regions and rotating federal presidency provides a balanced framework, and a real-world example of the principles that power blockchain.

• The political environment is in favor in the spirit of "consensus-building." Politicians are understanding the potential - and complexities - of blockchain and cryptocurrencies. There will not be an abrupt change.

• During 2017, Swiss-based ICOs raised about $550 million in funding, which was about 14 percent of the global ICO market, worth around $4 billion. The Zug-based Tezos ICO alone raised $232 million in July 2017. "Many Swiss ICO's are structured as foundations that applied for non-profit tax status and the money raised in these ICOs are treated as a donation that may not be returned to ICO investors" explained Dr. Luka Muller, legal partner of Swiss law firm MME, which helped set up the Tezos foundation as well as some other big ICOs.

• FINMA outlines a regulatory approach to ICOsIn response to the sharp increase in the number of Swiss ICOs, on February 16 2018 FINMA published guidelines on ICOs under the Swiss anti-money-laundering and securities laws. Under regulatory guidelines issued, many ICOs will be treated as securities in Switzerland.

• There are some exceptions, for example tokens used to access a platform that is already up and running, or for cryptocurrencies that function only as a means of payment. Neither will be considered securities, FINMA said, while the latter would be subject to anti-money laundering regulation.

• "Our balanced approach to handling ICO projects and enquiries allows legitimate innovators to navigate the regulatory landscape and so launch their projects in a way consistent with our laws protecting investors and the integrity of the financial system," FINMA CEO Mark Branson commented. Switzerland is "unofficially" a cryptocurrency tax haven. Undoubtedly Switzerland is a very attractive place for ICOs both for investors and issuers given the Swiss tax system both in terms of rate and clarity. Cryptocurrencies are neither money nor a foreign currency, nor a financial supply for goods and services tax (GST) purposes.

Transacting in tokens that qualify as securities may give rise to securities transfer tax duties for domestic instruments at a rate of 0.15 percent (or 0.30 percent for non-domestic instruments) in cases where a Swiss securities dealer was involved in the transaction.

Cryptocurrencies are an asset for capital gains tax (CGT) purposes, which only applies to someone who qualifies as a professional trader. Holders or investors of cryptocurrencies are subject to a wealth tax at the rate determined by the tax authorities on December 31 of the fiscal year.

An equity token, issued by an ICO, may be subject to a one-time capital duty of 1 percent, unlike a debt token. Any distribution of profits on equity tokens or payments on debt tokens is subject to Swiss withholding tax at a rate of 35 percent.