Cryptocurrencies have excited many people for many different reasons. Techno-libertarians aim to free people from fallible politicians and central bankers who distort the economy.
Techno-geeks see a means of doing finance ‘their way’ – with exciting new technologies that transcended the old world of banking, stuck on mainframes and paper in the internet era.
T-shirt clad millennials like the idea of getting rich without having to put on a tie and join the stuffy world of banking. Ride that Lambo to the moon!
Financial professionals, however, think they can “normalize” cryptocurrency and make real money. Originalists push back, fearing this new frontier will lose what made it special if it is tamed. National regulators are caught in the middle and struggle to determine if they should to let crypto alone, ban it, or regulate it.
A handful of small countries and jurisdictions are trying to capitalize on crypto-prosperity by creating a legal framework that will not jeopardize their standing vis-a-vis the global financial order but attract high income workers in technology and banking.
So new, so old
With the skepticism of Jamie Dimon-types being overcome (“I regret calling Bitcoin a fraud”), many fintech entrepreneurs have piled into the blockchain and cryptocurrency world. Many are former bankers and they see opportunities to apply what they have done in their former banking life in the new exciting world of crypto. Financiers like Arthur Hayes (ex-Citi and Deutsche), Bob Bonomo (ex-Oppenheimer and AllianceBernstein), and Galia Benartzi (ex-Founders Fund) have founded firms that provide crypto derivatives (BitMex), crypto-Bloomberg (BCT, aka BlockChain Terminal) and crypto-currency creation support (Bancor), respectively.
The former bankers want to play nice with the traditional global authorities and replicate not only financial instruments and services (e.g., short-selling, margin trading, options and derivatives and more) but also traditional banking safeguards – know your customer (KYC) and anti-money laundering. They file taxes and report their gains on crypto-assets for audit.
They know that real money will come when crypto can interact more easily with, well, “real” normal money. Senior global financial leaders believe that normalization is coming. IMF Monetary and Capital Markets Department deputy director, Dong He, warns of central banks’ possible loss of relevance and stresses that eventuality may arise from people switching from traditional monies to use cryptocurrencies.
The dream: The Wild, Wild West
Many founders of Bitcoin, Ethereum and early cryptocurrencies see government, allied with traditional big finance, as a problem to be solved through disintermediation.
To them, cryptocurrencies’ main assets are the things governments like least about it: anonymity and transportability across borders without scrutiny. For those who fear government succumbing to the temptation to print and devalue money, one of Bitcoin’s big attractions is resistance to uncontrolled devaluation through money-printing.
Big finance, with its onerous KYC and high fees for small amount account holders, is anathema to young millennials. Technologically savvy young people, excluded from the world of pre-IPO underwriting and venture capital deals, are excited to participate in ICOs, becoming ground level investors in new technologies.
There was a time when many smaller countries found financial success in providing some of the same virtues now claimed by cryptocurrency, including banking secrecy. While they may have once and for all been forced by the U.S. and OECD countries to give up their advantages in this area, crypto may give them a chance to regain some of their shine through intelligent regulatory arbitrage.
Little guys come first
Smaller jurisdictions can often be more nimble in seizing new opportunities. Less bureaucracy and knowing every relevant politician, regulator and business person (and probably where they live, work and socialize) makes decision making fast and easy. A quick walk around the town of Vaduz or the Gibraltar Main Street can produce consensus quickly.
Most OFCs are now fully compliant with global norms. But the unsettled state of affairs in big OECD nations regarding cryptocurrencies has given the swift a chance to get ahead.
By creating a clear regulatory framework to provide certainty to, for example, crypto exchange operators, places like Gibraltar and Malta can attract highly paid, highly skilled workers. When China shut down cryptocurrency exchanges, Binance moved to Hong Kong.
Uncertainty about regulations in Japan and Hong Kong has seen them plan to move to Malta, bringing perhaps 200 jobs to the tiny island nation where the prime minister has publicly welcomed their presence. This company of 800 recently made headlines for being more profitable than Germany’s biggest bank, Deutsche Bank.
Gibraltar likewise has been aggressively promoting its token sale platform and digital asset exchange, the GBX. Again, a willing government has worked hard to create a favorable environment. It already has safeguards in place to ensure compliance with global standards. Now it has moved quickly to secure listing from ICOs by providing regulatory certainty.
In the Swiss county of Zug and the nearby country of Liechtenstein, friendly banks like Frick Bank are providing the bank accounts and access to global banking that big global banks, nervous about future shifts in policy in big markets like the U.S. or Europe, are afraid to deal with. The official website of Liechtenstein touts its banking friendly attitude. Several members of the ruling royal family are notable for their commitment to the Austrian brand of free market economics, making them kindred spirits to the founders of the cryptocurrency movement.
Blockchain events have been held in Cayman Islands and it is estimated up to 25 percent of companies at Cayman Enterprise City are blockchain related. That could be up to 50 companies in Cayman Tech City alone.
Get it while you can
However, the state of uncertainty about the regulatory status of cryptocurrencies (not to be confused with applications of blockchain technology) may end. Christine Lagarde, head of the IMF, warns central bankers that cryptocurrencies could overcome technical challenges that prevent their supremacy over central banks today. Not tomorrow, but eventually.
If major economies and the OECD establishment decide that their money monopolies cannot be challenged, they may try to outlaw cryptocurrencies. Fearing Lagarde’s predictions, they may squelch cryptocurrencies as much as possible. Like drugs, however, prohibition may only make them popular and profitable for all the wrong people, flowing around borders in exchange for illicit goods and dirty deals.
In the meantime, there is a huge gain to be made for small jurisdictions through the exercise of one of their core competencies – creating regulatory arbitrage opportunities while avoiding the ire of economic giants and exclusion from the traditional world of finance. The window to profit for small nations is open now and many are jumping through it. They would be wise to make the most of it while they can.