How and why did Switzerland turn into the blockchain capital of the world?

Attitudes to "crypto winter" are largely positive, at least among those who are in it for more than just the money.

Switzerland's history and unique direct democracy are promoting cryptocurrency uptake in the region.

Music rights management is the goliath of copyright challenges, and blockchain presents a viable solution.

Winter brings crisp and clean air, and crypto winter is no exception. The crash of 2018 was quite a positive development for the projects that want to actually build something, says Utopia Music CEO Mattias Hjelmstedt to Finder.

This sentiment is widely shared in Switzerland's Crypto Valley, the blockchain tech hub in the canton of Zug, he notes.

Show me the money functional product

"When you look at the crypto space you see an enormous amount of projects that didn't really have a real business case or companies that really could do something," Hjelmstedt says.

And as the belt tightens, as investors look to fundamentals and as the industry gets more realistic and discerning, the most practical, down-to-earth and viable projects are in a better position than ever.

"We get more attention and more help now, than we did during the big hype when people didn't know where to look," Hjelmstedt says. "I think what it's led to now is that people and companies that are really working to make change, they get more attention, not less attention."

"I don't know if it's politically correct in the blockchain space, but coming into it from being a successful entrepreneur, you see a lot of naivety. It's seldom only tech that solves something. The tech needs to be created to solve a problem that is bigger than the tech itself."

The downturn is excising the projects that got involved for the wrong reason, he says, with the wrong reason in this case being defined as purely to make bank on cryptocurrency as a novel asset class.

It's still a slightly painful dichotomy though, given that you can't entirely separate cryptocurrency from money. Indeed, Hjelmstedt attributes this ever-present financial element of cryptocurrency as one of the reasons Switzerland took off as a crypto hub before his equally forward-looking original home of Sweden.

Like it or not, blockchain as we know it today was first invented specifically to be all about the money. And as a country, Switzerland can relate.

Tech and culture

"It [blockchain] is in some ways about transactions, which has never been high on the radar in Sweden," Hjelmstedt says. "Earning money has never been perceived as a good thing. I think Sweden will have a little bit of a hard time about it."

"In Switzerland it's the opposite. Money and the possibilities it gives you are a central part of the society."

This attitude is especially pronounced in Zug, which went from one of the country's poorest cantons to one of the wealthiest thanks to the passage of some laid back tax laws. These shifts, passed down following the first world war, would have ripple effects over the decades and eventually directly contribute to Zug's growth as a cryptocurrency hub in several ways.

Firstly, it helped cement that laissez faire over time. This rippled onwards to 2014 when Switzerland's financial regulator (FINMA) explicitly declared that it would not pass formal regulation of bitcoin. This relative regulatory certainty has been attracting crypto companies to Switzerland for years now.

But more subtly, and perhaps more importantly, Switzerland's culture and politics lends it to blockchain in a way completely different to any other country.

Switzerland is an analog blockchain

"If you look at Switzerland as a system, it is literally the only direct democracy in the world," Hjelmstedt points out. "It's literally a massive DAO system, because people vote about everything right down to your town. Switzerland by itself is the centre of money in the world, and it's literally blockchain in an analog way."

This level of direct representation operates on several levels.

Firstly, changes to federal laws or constitutional amendments have to go to a national referendum, and have to be supported by both the majority of cantons and the majority of individual residents. This means every federal law change goes to every citizen for a vote.

Secondly, any citizen can challenge a law or seek a constitutional amendment. If someone can get 50,000 signatures from people against a law within 100 days, a national vote is scheduled where every individual collectively decides whether to accept or reject the law. Along the way, there will be public debates and anyone will be able to present their views and make arguments for and against.

It's a level of autonomy and representation that's difficult to imagine in any other country, but which probably sounds quite familiar to anyone who's spent some time exploring blockchain governance systems.

When proposed in Switzerland, dececentralised autonomous organisations which automatically respond to the votes of participants weren't just a hypothetical. Rather, they were a sensible equivalent to Switzerland's current governance model built on top of practical digital infrastructure, as well as a practical solution in their own right. Bitcoin probably would have been quite different if Satoshi Nakamoto was Swiss.

At the same time, Swiss residents are also much more used to active participation in governance which makes active involvement in cryptocurrencies feel more natural.

"You need to change views a bit," Hjelmstedt says. "When you come to people in the old hacking community, it was about freedom, and access, and how you could get something done. For that blockchain, DAOs and distributed voting... really feels like giving power to the people. It's scary for a lot of people I think."

"When you look at that, [blockchain] just makes sense because it's almost like a digital version of Switzerland's system," he added. "It just makes sense for Swiss people. It just makes it easy for regulators, for banks, for legal parts and getting frameworks in place. It goes with how people think instead of against. Once you've gotten over that hump, you can actually work and get it to happen. It helps."

Switzerland's Crypto Valley startups per canton (Ft. Liechtenstein)

Getting things done

Switzerland and its regulators never had that fear of the unknown that lawmakers in other countries had to contend with, and are still contending with, when faced by cryptocurrency. Even beyond providing a more relaxed sandbox for startups to play in, this helps things get done faster in the event of unexpected obstacles.

"You see a country that's embraced it. It's very uncommon," Hjelmstedt says. "If you meet bank people, and people who are execs of the biggest banks, and regulators and legal people... All you talk to are in favour [of blockchain and cryptocurrency]. You have very, very few people who are against this change."

"It's also the only place I know of where [when] it comes to being able to talk to lawmakers; You go to the regulators, you go to any part of the government and you tell them your problem and their answer is 'let's see if we can fix it'. In the rest of the world you usually try to find ways to bypass the system. I think we [in Switzerland] continue to really be in the frontline of this, because it really suits."

"We've been in Switzerland for 11 years, we created several of our previous companies in this space," Hjelmstedt says. "We were in here before crypto. We've seen the change that happens here with crypto."

A good vantage point

Zug is attractive to crypto startups, and its status as a tax haven (or its "culture of innovation" if you will) has attracted many other companies from a wide range of industries.

Blockchain applications cross a wide set of industries, so bringing such a diverse range of business needs to one place does a lot to encourage development of practical real world solutions. It's also made Zug a tempting destination for established businesses with blockchain ambitions. According to Hjelmstedt, the quieter times of 2018 saw more giants arrive in Crypto Valley than the previous years.

"You feel it," he says.

Utopia Music might be in an especially good vantage point for observing the crossover between established companies and blockchain startups, because that's kind of what it is.

On the one hand it's yet another startup that wants to put music on the blockchain. On the other hand, it's one of Switzerland's more successful blockchain startups, and the only media and entertainment-related resident of crypto valley to achieve a spot in the top 50 by valuation.

Top 50 by valuation: Familiar faces of Crypto Valley

Good tech gone bad

Hjelmstedt attributes the relative success of Utopia Music to date to his team's industry credentials. He's been extraordinarily active in digital media and rights management for well over a decade now, and Utopia Music enjoys a degree of trust from the wider industry that lesser-known names probably wouldn't.

"It helps when you’re looking at another industry because it gives you credibility," he points out. "People know we're not there to destroy anything, but to help it grow."

It's especially important in this case because technology has not been kind to the music industry.

"Music industries don't just see new technologies as helpful. It might be the exact opposite," Hjelmstedt notes. "So to be able to change them you actually have to be able to incentivise them and understand them."

"20 years ago about 70% [of people in the music industry] was working with creative," he explains. "Today seventy, seventy-five percent are working with legal and accounting.... What's happened is costs go up, more money disappears, lots gets stuck in the system and it can take 5 years [for creators] to get paid."

This is because royalties, intellectual property and licensing in music is obscenely complex. Hjelmstedt, who's tackled rights management issues across more types of media than almost anyone else on earth, says music is on an entirely different level from anything else.

"One aspect of the industry is that there is no centralised or decentralised copyright system where you can set access to your copyright," he points out. "In TV you have a very clear path of creation, distribution, and reaching the consumer. You have literally one copyright, which is production. In music you have several."

"Composition, what is written down, songwriters... when you record it you get a different copyright so you get a lot of players fighting over the same song... Your books, computer games, TV, movies, have a much clearer path."

The digital revolution cranked these slow-burning complexities into overdrive, and quite abruptly locked billions of dollars from the music industry into accounting and legal scuffling. At the same time, entrants like Napster, and then Spotify and YouTube, started strangling revenue at the source.

"You [could] see for a long time how modern technologies and modern data has been pouring into an analog industry," Hjelmstedt says. "The industry was never ready for millions of data points pouring into it... It's literally like 'we have to fix this'. We've had this on the radar for the better part of 10 years."

The right place at the right time

The world has seen several massive waves of Internet-related disruption in the last odd decade, and as a techie serial entrepreneur based in Switzerland, Hjelmstedt has had front row seats to all of them.

If he's blasé about the bare bones of blockchain, it's perhaps a consequence of seeing so much change so quickly. But cryptocurrency has definitely put some energy into the mountain air, and the ability to get so many people meaningfully working on and investing in the same area at the same time bodes well for blockchain applications.

"Blockchain for me is a natural progression," he shrugs. "It's technologies we've seen for a long time."

"In 2005 and 2010, when you had the big second wave with the Spotify of the worlds coming up, what happened there is you get a formation of tech people coming in and working together and helping out. And a lot of gatherings, and the world was looking at it. So you've got capital coming in and people coming in. It's literally the same feeling as that."

Now, after 10 years of eyeing the growing problem, the combination of blockchain and Crypto Valley presents an opportunity to tackle the goliath of music industry rights management.

"The burst of blockchain is really helpful for this," he explains. "It gives the trust. It's an industry built on personal trust. Having the blockchain component you can actually feel that the copyright is your copyright even if it's in the system. When a transaction actually happens you have an audit trail, which is one of the biggest problems in the music industry today."

Essentially, a blockchain-based system allows for the automating-away of many of the industry's accounting and lawyer jobs. By creating a trustless and immutable record of rights that can run on a (de)centralised system you solve a lot of problems all at once, including a way of actually tracking who owns what, and the lack of a source of reliable source of truth for the system.

Then cryptocurrency, as a digital currency to carry monetary value, expands the functionality of that system by giving the ability to make direct, instant and programmatic payments anywhere in the world as needed.

"Direct data transfer and money transfer can remove 70% of the cost of the industry," Hjelmstedt says. "Everyone I meet globally, not just Switzerland, agrees that blockchain is here to drive a change. It's not something that will go away."

Disclosure: At the time of writing the author holds ETH.

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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