ZUG, Switzerland—When 24-year-old Ian Worrall launched his crypto-investment startup MyBit last year, he chose this Swiss lakeside city.
It was an odd fit: the no-holds-barred corner of the financial markets meeting button-down Switzerland.
Yet this nation, as closely tied to its ultrasafe Swiss franc as it is to the Alps, is entranced by volatile digital currencies. Buildings in Zug and in Zurich, Switzerland’s financial center, are blossoming into crypto-finance hubs.
Four of the 10 biggest initial coin offerings last year were in Switzerland, according to PwC, more than any other country.
The hope is the country’s banking prowess, low taxes, elite universities and the Swiss brand itself will do for Switzerland what Silicon Valley did for the U.S.
Efforts to expand the so-called Crypto Valley into what Switzerland’s economics minister has called Crypto Nation have seen some success and may offset the country’s shrinking banking sector. The number of banks here has fallen 20% in the past decade, according to the Swiss Bankers Association.
Switzerland “is the best from a tax, legal and operational standpoint,” Mr. Worrall said from the MyBit headquarters in a startup hub called Crypto Valley Labs, where the “California Republic” state flag hangs in his office.
MyBit is an investment platform to fund Internet of Things devices like self-driving automobiles. It raised the equivalent of some $3 million in an initial coin offering last summer.
The space once housed an energy-technology company. There’s a circus school next door.
The number of companies at Crypto Valley Labs and another location jumped from 15 early last year to over 100, said Mathias Ruch, managing partner at Lakeside Partners, which developed the site. “I’m signing contracts on a daily basis,” he said.
The canton of Zug, population around 120,000, has emerged as the heart of Switzerland’s Crypto Valley. Its population grew at the fastest rate of all Swiss cantons in 2017, and its jobless rate is 2.3%, below Switzerland’s 2.9% average and down 0.2 percentage points from a year ago. Its corporate tax rate is 14.6%.
Matthias Michel, Zug’s economics minister, said Crypto Valley wasn’t a grand plan. Rather, it began five years ago when pioneers of blockchain platforms like Monetas put down roots in Zug, attracted by the business-friendly environment. Others followed, and an ecosystem developed.
In the process, Zug became a pilgrimage destination for global crypto devotees, complete with guided tours. There’s a “Bitcoin accepted here” sign at city hall.
“You cannot copy and paste [what Zug has done], it’s a systematic approach which makes it strong,” said Mr. Michel.
Recently, officials from Finma, the Swiss financial regulator, met industry representatives at a packed conference here. The meeting showcased another Swiss advantage—nimble regulators, or as Mr. Worrall described the approach: “Do your best, and if you mess up, we’ll work with you.”
While Finma is receptive to cryptocurrencies, the Swiss National Bank is skeptical and has warned of the risks associated with them. Executives from large banks echo those worries.
“From our standpoint, until you are able to trace all of these transactions and subject them to strict rules on anti-money laundering, this is a huge risk,” said UBS Chief Executive Sergio Ermotti.
There are other drawbacks for Switzerland. Despite a skilled workforce, the country lacks a startup culture: There is a greater stigma attached to failing at a new business in Switzerland than there is in the U.S. High living costs will make it hard to scale up. If Mr. Worrall expands, it will probably be in Berlin.
The biggest fear, though, isn’t the central bank or living costs, industry participants say, but rather the potential to run afoul of U.S. regulators.
Switzerland has spent years distancing itself from a reputation as a shady-money haven. Banks have spent billions of dollars settling damaging charges from U.S. authorities related to tax evasion and mortgage-backed securities. Crypto startups say it’s hard to open a business bank account.
This reputational risk was highlighted in January by U.S. Treasury Secretary Steven Mnuchin, who warned that cryptoocurrencies can’t be allowed to become the equivalent of “the Swiss-numbered bank account.”
And even the Swiss are starting to add some nuance to their crypto ambitions. Economics minister Johann Schneider-Ammann, who caused a stir when he called Switzerland “Crypto Nation” a few months ago, has recently backtracked, telling a conference in Zug Thursday that he should have called Switzerland “Blockchain Nation,” a nod to the technology underpinning digital money.
Still, cryptocurrencies are taking hold. One sign: A building housing blockchain and crypto-finance companies called Trust Square opened on Zurich’s ritzy Bahnhofstrasse across from the central bank—just a few blocks from banking giants Credit Suisse and UBS and kitty corner from Tiffany & Co.
Daniel Gasteiger, who developed Trust Square, launched his first blockchain startup from his apartment two years ago, after having spent two decades at UBS and Credit Suisse. Now he has 16 employees, and Trust Square’s 200 workspaces rented in one week. As for his neighbors at the Swiss National Bank, “they need to have an open spirit toward innovation,” he said.
Mr. Gasteiger has positioned Trust Square as a research hub for “Swiss made” blockchain. The offices—which once housed a bank—include space for universities. He thinks even if the digital-currency craze fizzles, Switzerland’s diversified economy will thrive. The banking system is another matter, he says.
“Switzerland will be fine. There will still be watches, chocolate and tourism. It is a question of a new financial center based on trust,” Mr. Gasteiger said.
Write to Brian Blackstone at email@example.com