The Canton of Zug: The Mecca of Cryptocurrency

With its internationally recognised banking system, Switzerland is now actively embracing financial technology (fintech). The country is the birthplace of Ether – Bitcoin’s closest competitor – and was the location where the public service payments are to be made using cryptocurrency. In 2017, it hosted four of the six largest Initial Coin Offerings (ICOs) or fundraisers. This summer, it was the canton of Zug which took the blockchain spotlight, as the region hosted the Crypto Valley Conference on Blockchain Technology – the first large conference on Swiss soil.

Nicknamed “Crypto Valley”, the canton of Zug has drawn the brightest young entrepreneurs in cryptocurrency and blockchain. These economic players are drawn to the region’s relatively low tax rates and its suitability for new technologies, and they are certainly making the most of the canton’s infrastructure. The blockchain scene in Zug is currently home to over 250 firms, according to statistics from Crypto Valley Labs.

How does blockchain work?

Blockchain was the technology which led to the creation of Bitcoin, the first cryptocurrency. Today it is used by other digital currencies, as well as by other applications in a variety of fields outside the financial sector.

All new operations using a cryptocurrency form part of its history, and must be verified first. In the absence of a central system, control lies with the other network users, also called “nodes”. This allows transactions to be analysed and assembled in “blocks”, which are then reattached to the existing blockchain.

Given that blockchain is a decentralised system without a supervisory or arbitrary body, any blockchain user can potentially validate an erroneous or malicious transaction. As the number of users of a system is determined by whether the blockchain is public or private, it is potentially limitless. This is, for instance, the case for the blockchain of Bitcoin, which is open to everyone, allowing widespread use of the cryptocurrency.

To solve this problem, certain well-known rules are shared among nodes to validate transactions. These different principles form the consensus mechanism, which varies from one blockchain to another. For example, Bitcoin works via a “Proof of Work” system. To validate a “mining” block, users (also called “miners”) must solve a mathematical problem by testing random numbers. The term “miners” is a call-back to 19th Century prospectors, who could earn instant fortunes by discovering a few grams of gold. Just like in the old days, only the miner who finds the gold (or validates the block) receives payment for their work. Luck, speed, and PC performance are therefore paramount to success. In theory, anyone could become a miner in a public blockchain, but in practice, current technical restraints and the large demands on electricity are limits to this possibility. Through the “Proof of Work” mechanism, users only accept the new block only if they have proof of the miner’s energy expenditure, which is brought about by them solving the mathematical problem. This system also allows the creation of new Bitcoins to compensate the miner.

Using a very similar method to mining known as “forging”, the developers of the cryptocurrency Ethereum are currently turning towards the “Proof of Stake” method. This consensual system validates transactions by prioritising users with more shares – these users are more invested in the efficient running of the system, as they don’t want to see their shares decline in value.

The first blockchain conference in Switzerland

The Crypto Valley Conference on Blockchain Technology was held in Zug from 20th to 22nd June 2018. Attracting more than 800 participants, the event had over forty speakers, with backgrounds in education, start-up businesses, and the corporate world. As for the political sphere, representatives included federal advisor Johann Schneider-Ammann, Matthias Michel (director of the Public Economy of the canton of Zug), and the mayor of Zug Dolfi Müller, as well as Thomas Moser, a director at the Swiss National Bank. With the assembled experts and high quality debates, the conference was comparable to similar events in big cities. There were three main themes, including how blockchain applications might evolve, data protection issues with this technology, and legalisation of trade using cryptocurrencies and tokens (digital shares generated from ICOs).

Blockchain applications

Currently, there are still limits to any real potential breakthrough by cryptocurrencies and blockchains. The technology is not yet ready for the creation of a “cryptofranc”, according to Thomas Moser, whose position echoes statements already made by representatives of the International Monetary Fund. However, concrete applications from blockchain are already possible in various steps of production, such as supply chains, or logistics. In the communication sector, blockchains may have a role to play in data registration, management, and invoicing, although significant obstacles remain.

Data protection

Issues such as digital IDs, the security of Smart Contracts, and Data Protection guarantees were on the agenda, and solutions are expected in 2019. The other theme was the scale of the energy and technology costs needed to find a consensus. The financial incentive for mining will lead to further growth in the existing networks, causing a slowdown in the cycles of consensus.

Legislation for trade and ICOs

Trading of the first crypto bourses was set to begin this summer, but the biggest concern remains obtaining a licence to offer digital shares which are equivalent to securities. ICOs were also on the agenda, and the discussion focused both on potential initiatives to normalise their transmission, and on the necessary regulations.

The Crypto Valley Conference allowed participants to raise important issues concerning the digital ecosystem, while also opening up numerous lines of research. Traders will have to wait between 2 and 15 years before they see any concrete implication of these applications, with various delays depending on the sector. Other blockchain conferences are planned in Switzerland later in the year ; notable examples include the Blockchain & Bitcoin Conference Switzerland in Geneva on 9th October, and the ICO Summit on the 28-29th October in Zurich.

Source: Rapport “Conférence Crypto Valley: du phénomène au dur labour” [Report: The Crypto Valley Conference: from the phenomenon to hard work] by e-foresight, 28/06/2018.

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