History of Crypto Valley

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From the Middle Ages to the Holding Privilege in the Swiss Town of Zug

The term Crypto Valley has gained currency in recent years to describe the region in Switzerland that attracts international cryptocurrency and blockchain companies. Zug, both a city and a canton, is in the center of this region and is home to over 600 blockchain companies, according to the CV Maps. The origins of Switzerland's blockchain boom are in Zug, but the borders of Crypto Valley go beyond the canton and across Switzerland and Liechtenstein.

An overnight success that took a thousand years

The rise of Crypto Valley is a classic story of an ‘overnight success’ many years in the making. The transformation required innovation, courage, and tenacity.

Until the early 1960s, Zug was seen as the poorhouse of Switzerland with the lowest income and the highest debt per capita in the federal nation. The rise of cryptocurrencies began in 2009, but the real history of Crypto Valley started much earlier. How did this humble Swiss region become the epicenter of blockchain technology and cryptocurrencies of the world? Several factors were involved.

The first settlements in Zug date all the way back to the Neolithic period (around 4,000 BC), but the foundation of the city dates to 1200 AD. For hundreds of years the region was under the iron fist of the Habsburg kings until the brave men and women of Zug won their independence in 1415 after a series of bloody battles. The foundation of Switzerland had taken place earlier, in 1291. It took a while until the federation won full independence from the Austrians, the Germans, and the French. But when it did, it became the world’s first direct democracy with a decentralized government. These values inspired trust in Swiss governance which would later work hand in hand with the ethos of blockchain technology.

 

From poorhouse to Switzerland’s wealthiest region

Even after winning independence from the Habsburg kings, the citizens of Zug’s struggle with poverty continued. It was only after the First World War (1914-1918) that prosperity came to the region — this time, with the stroke of a pen.

In fact, it was one single action that laid the foundation for Crypto Valley: The passing of a favorable tax law. One of very few Swiss cantonal authorities to do so, the local government of Zug instated the so-called “holding privilege” in 1921, allowing holding companies in the canton to pay no income tax and only capital gains tax.

Another masterpiece of tax innovation in Zug was the so-called ‘combined company’: If a company generated more than eighty percent of its income abroad, it paid much lower taxes. The combination of these two accounting laws marked the beginning of the region’s upward trajectory.

It took a few years for international companies to find their way to the Swiss mountains, but when they did, Zug’s coffers overflowed. Among those that moved their headquarters to the city are multinational corporations like Siemens, Nestle, Glencore XStrata, Shell, BP, and many more. Zug is also one of the most important trading hubs for commodities such as oil and coffee in the world today.

The favorable regulatory framework would soon attract international financial companies that were looking for a tax-friendly jurisdiction in which to found themselves. In 2014, Switzerland’s financial regulator (FINMA) declared that it would forgo formal regulation of Bitcoin. This created legal certainty for cryptocurrency companies with a domicile in Switzerland.

 

Zug’s history with cryptography

In 1952, long before Bitcoin was invented, Zug had established its first link with cryptography. The inventor Boris Hagelin (1892-1923), a mechanical engineer who spoke five languages, had been producing mechanical cipher machines in his native Sweden. He moved to Zug after the Second World War to found Crypto AG, also known as Hagelin Cryptos, still a pioneer in hardware today. The firm was to bring a touch of secretive, intelligence-related mystique to the tranquil mountain village. It supplied the US Army with cipher machines and was a contract manufacturer for the US National Security Agency (NSA).

Zug’s favorable tax structure, its legal stability, its openness to experiment, and its growing network of financial and legal service providers proved a perfect match for the emerging crypto and blockchain movement. When Bitcoin started the cryptocurrency movement in 2009, global blockchain entrepreneurs identified Switzerland, and within Switzerland, Zug, as the ideal base for operations.

 

Crypto Valley: A breeding ground for crypto and blockchain startups

The origin of the name Crypto Valley is disputed and unclear. Most likely it dates back to a meeting in February 2014 between Zug city officials and a group of visiting entrepreneurs, where one of them expressed the idea, to build an ecosystem similar to California’s Silicon Valley and call it Crypto Valley.

The crypto brokerage Bitcoin Suisse set up shop as one of the first projects in Zug in 2013, and Ethereum located its foundation and headquarters there in 2014. These two beacon projects have been an enormous draw for the region. Ethereum’s founder, Vitalik Buterin now lives in Singapore, but the fact that Crypto Valley with its legal infrastructure made Ethereum possible is a big part of the founding myth that still attracts many startups to the region.

In July 2016, the city of Zug set another record: As the first municipality in the world, it started accepting bitcoin as payment for local taxes (Handelszeitung 2018). By then, hundreds of crypto projects had already set up shop in Crypto Valley, and several regional stakeholders founded the Crypto Valley Association (CVA) in January 2017, among them Lakeside Partners, Bitcoin Suisse, Lucerne University of Applied Sciences and Arts, Luxoft, and Thomson Reuters.

The future of Crypto Valley

Crypto Valley is today home to a thriving ecosystem with roughly 600 crypto startups and foundations including some of the brightest names in the space, including ConsenSys, Shapeshift, Dfinity, Aragon, Bancor, and many more (visit CV Maps to see more).

With its crypto-friendly regulation, its style of direct democracy and decentralization, and a rich offering of services focused directly on the need of crypto and crypto firms, blockchain entrepreneurs worldwide identify with Crypto Valley on many levels. The region now is a multicultural ecosystem of incubators, conferences, blockchain competitions, venture capital investors, legal services firms, and co-working spaces. With its long track record of success in the blockchain space, Crypto Valley and its inhabitants have a bright future ahead.