The Tiny Nations Plotting to Become Tax Havens for Cryptocurrencies
WHY YOU SHOULD CARE
Success could transform these territories into cryptocurrency tax havens and safe spaces, and models for smaller economies of the future.
By Eric Czuleger
Payday won’t be the same next year for the soccer players of Gibraltar United, a team in the premier division of the sport’s league in the British overseas territory. Only a part of their salary will hit their bank accounts, and the rest will come to them in the form of cryptocurrencies. But the soccer team is no outlier there. Nor is Gibraltar unique — it’s among a growing set of tiny territories betting on cryptocurrencies as economic weapons of the future.
Larger economies have approached cryptocurrencies with waves of regulation. South Korea, the largest market for cryptocurrency trading, has since last September banned initial coin offerings (ICOs) — crowdfunding initiatives to raise money for new cryptocurrencies. Japan, home to the most cryptocurrency exchanges, is now planning to apply laws for traditional stock exchanges on them. Regulators in the U.S. and India are discouraging trading in cryptocurrencies while they explore legislative frameworks. This is opening up economic space that smaller nations are looking to fill, by welcoming investments in cryptocurrencies, launching their own sovereign ones and steering clear of heavy-handed regulations. Success could transform them into cryptocurrency tax havens and safe spaces, and models for smaller economies of the future.
Bermuda, through a new law that came into effect in July, is facilitating the fast approval of ICOs. The Marshall Islands in May became the first country to launch a sovereign cryptocurrency, called the SOV. The self-proclaimed nation of Liberland, an island on the Danube river squeezed between Croatia and Serbia, plans to offer its own cryptocurrency publicly this coming spring. In the Pacific, PayPal founder Peter Thiel is among a set of investors propping up a plan for an independent floating island that will run on its own virtual currency. Cryptocurrencies have come out of the shadows, and onto the map.
The Maltese government [has] created a strong framework which can … give [cryptocurrency firms] peace of mind.
Ivan Borg, organizer, Malta Blockchain Summit
Liechtenstein’s Crown Prince Alois is personally encouraging cryptocurrency investors to come to his country. He has stated that he plans to invest some of his family’s wealth in digital currencies. This summer, Gibraltar launched a blockchain exchange that allows anyone to enter the crypto-marketplace by trading traditional or “fiat” currency for cryptocurrencies. And in July, Malta became the world’s first nation to establish a full-fledged legal framework to facilitate investments in blockchain technology and cryptocurrencies.
“The Maltese government [has] created a strong framework which can accommodate blockchain and cryptocurrency companies looking to operate somewhere which will give them peace of mind,” says Ivan Borg, an organizer of the government-sponsored Malta Blockchain Summit scheduled for November, which is expected to be attended by more than 5,000 delegates.
It’s a strategy that appears to be working. Binance, the world’s second-largest cryptocurrency exchange, has moved from China, where it was founded in 2017, to Malta, where it is creating a blockchain-based bank called the Founders Bank. Yanislav Malahov, one of the creators of Ethereum — the second-most popular cryptocurrency after bitcoin — has chosen Liechtenstein as his base to build a new blockchain called Aeternity. And companies like remittance firm eXlama decided to set up shop in Gibraltar, because it was “one of the first” territories to “answer to the demand” for a legal framework for blockchain, cryptocurrencies and ICOs, says the organization’s founder and CEO Pavel Kaprisek.
For sure, these countries and territories are also exposing themselves to the vulnerabilities of virtual currencies and their trading. Cryptocurrencies are notorious for pump-and-dump schemes, hacking thefts — a South Korean exchange lost $40 million in coins after a hack in June — pyramid schemes and fraud. Low regulatory standards could allow the use of cryptocurrencies to fund crimes. Virtual currencies also suffer from instability. Bitcoin’s price has crashed to around $6,000 from over $20,000 in 2017.
But for some nations and territories, these risks are worth it. Liberland is competing for crypto and blockchain businesses with other European nations hoping to become the gold standard in creating a decentralized business environment. Because it’s currently an unrecognized country, Liberland can build its laws and regulations from scratch around cryptocurrencies. “Malta and Gibraltar are our closest European competitors in terms of attracting ICOs,” says Liberland President Vit Jedlicka. Across the Atlantic too, the lure of crypto-based economies is beginning to take hold.
The Marshall Islands, despite its independence from the U.S. in 1986, remains economically tied to America. The U.S. dollar is still its principal currency. The SOV, which will supplement the dollar, offers it a chance to slowly reduce its dependence on America. People on the islands can now pay for everything — from taxes to groceries — in the SOV. For new entities like the Floating Island Project, a cryptocurrency promises an entry into the global economy from birth.
To Liechtenstein and Bermuda, tax havens for traditional businesses, the move to cryptocurrencies represents an investment in the future. If virtual currencies increasingly replace traditional ones, they’ll be ready as the tax havens for these new coins. And for Gibraltar and Malta, the move marks a bet aimed at leapfrogging from small economies to major financial hubs by connecting crypto companies with a global customer base.
Gibraltar has a friendly tax system similar to Switzerland’s but is cheaper. Kaprisek says it’s also easier to understand Gibraltar’s British legal system as an entrepreneur without a background in international law. Malta is showcasing its own advantages as a cryptocurrency investment destination. As a member of the European Union, it offers access to a giant market, while its domestic framework shields firms based there from the EU’s tougher regulations. “The English-speaking population, attractive weather and leisure opportunities make Malta a tempting place to settle,” says Borg.
The November summit is an unabashed attempt by Malta to draw more blockchain and cryptocurrency investments from abroad. On the event’s website, the country’s prime minister, Joseph Muscat, invites attendees by saying that he wants Malta to be at the “front line in embracing” these technologies. “We must be the ones that others copy,” he says. At the moment, that’s a bold statement for the leader of a country with a population smaller than Wyoming’s. Malta and its fellow tiny crypto nations are counting on it sounding prophetic, two decades from now.
- Eric Czuleger, OZY AuthorContact Eric Czuleger