By Brenna Hughes Neghaiwi

ZUG, Switzerland (Reuters) - The small Swiss canton of Zug, famed for the low taxes that have drawn multinational companies and hedge funds to its lakeside shores, is trying to turn itself into a hub for virtual currency firms.

Over the past half century Zug has transformed itself from "the poorhouse of Switzerland", sustained by fishing and manufacturing, into a headquarters for commodity giant Glencore and a home to the outposts of hundreds of global companies, becoming one of the country's wealthiest provinces.

But with tax reforms and the end of banking secrecy posing a threat to its business model, the canton wants to reinvent itself as a "Crypto Valley" - a base for start-up companies using virtual currencies like bitcoin and related technology.

In July, the town of Zug, the cantonal capital, launched a pilot program allowing residents to make bitcoin payments for government services - a world first, according to Swiss media

Together with a group of start-ups behind the "Crypto Valley" movement, Zug's economic promotion board has so far persuaded more than a dozen virtual currency firms to set up shop there and in nearby towns.

These include Ethereum, the foundation that provides the technology behind ether, the main rival to bitcoin, and digital currency exchange ShapeShift.

Mayor Dolfi Mueller says attracting more companies like this is central to the 2035 development plan the town has drawn up to ensure its economy can thrive as global tax laws get tougher.

"This is one of the most globalised small towns in the world," Mueller said. "We don't want to let that dynamic fall asleep."

South African Johann Gevers was one of the first entrepreneurs to set up a virtual payment firm in Zug, establishing his transaction platform Monetas there three years ago.

Gevers' business enables people without bank accounts to make digital payments and operates in more than a dozen African countries. He says Switzerland's decentralized government and lack of interference in business made it the best base for him.

He set up in Zug with ambitions of shaping it into the world's next major technology cluster.

"I believe crypto finance is the next big wave after the internet," he told Reuters. "The country that succeeds in being the friendliest jurisdiction to attract crypto finance companies— that's gonna be the financial center of the future."


However not everyone backs the initiative. Local Swiss People's Party councilman Gregor Bruhin said the project is "speculative", citing high volatility, system hacks and the potential for criminal activity in crypto currencies.

Located just south of Zurich with a population of 120,000, Zug is one of the smallest of Switzerland's 26 cantons and it has one of the country's lowest tax rates, introduced in the 1940s as a way to lift itself out of poverty.

Zug was put on the map by Marc Rich, the oil trader and one-time fugitive who cemented the canton's reputation as a discreet business hub. His firm later became Glencore.

For now Swiss authorities and industry are behind Zug's push into crypto finance, believing it will allow the financial sector to diversify as the demise of banking secrecy looms. "If we don't take part at the front of 'fintech', we don't deserve our title as a global financial center," said Martin Hess of the Swiss Banking Association.

Switzerland currently lags the likes of Britain and Singapore when it comes to fintech. Firms specialising in crypto currencies say Zug could carve out a significant niche in this field, but financial regulations much be changed if it is to make a major breakthrough.

Many crypto currency companies are currently subject to regulations aimed at banks as they are classed as deposit-taking firms, meaning they need 10 million Swiss francs ($10 million) in paid-up capital once their business grows above a certain level. Olga Feldmeier, a managing partner of bitcoin wallet provider Xapo, says her company has spent a lot of time in discussion with Switzerland's Financial Market Supervisory Authority (FINMA), contending that its service storing private key codes to users' digital funds does not constitute deposit-taking. Xapo is still based in California's Silicon Valley despite last year announcing plans to move to Switzerland, and says it would abandon those plans without a regulatory solution. "We are hopeful there will be an adequate solution for crypto currency wallet providers like Xapo," Feldmeier said. In March, FINMA announced its support for allowing start-ups in the field of financial innovation to operate without a special license, with small established companies that do not carry out the risky lending activities of traditional banks subject only to light licensing requirements. "We suggest creating a new category that is sufficiently broad and open to encompass any innovative financial service, letting markets decide which types of services will prove successful," a FINMA spokesman told Reuters.

The Swiss government has asked the finance ministry for proposals this year. "We are working on solutions and expect concrete results in the near future," a spokesman for the Secretariat for International Financial Matters said, adding a final sign-off could take a year after reaching parliament.

($1 = 0.9685 Swiss francs)

(Reporting by Brenna Hughes Neghaiwi; Editing by Rachel Armstrong and Giles Elgood)