Jurisdiction Shopping: How regulatory uncertainty is affecting the geography of crypto innovation
Increasingly, blockchain projects, mining farms and exchange platforms are sprouting up across the globe in response to the rapid growth in use cases the industry is experiencing. The way governments, supranational organisations and infrastructure companies decide to behave towards this new technological wave will have a huge impact on where this new generation of ‘wealth creators’ choose to base themselves.
The race is on for some…the drawbridge is up for others
We are now at the stage of development and understanding in blockchain technology where governments, bureaucrats and even central banks are pushing for proper legislation and regulation around cryptocurrency and ICOs. Whilst some, such as Agustin Carstens- the General Manager for the Bank of International Settlements- just want the community to “stop trying to create money!”, most of the old-legacy executives (whilst still fearing the decentralised potential of crypto) accept it is a question of jurisdiction.
One thing is certain: those who work in the blockchain and cryptocurrency industry want regulatory clarity, and they’re voting with the feet.
Where is the talent headed?
Speaking to Max Keiser at Money Conference 2018 in Dublin, Thomas van der Spuy, a native South African and the founder of Bitfair.com, explained his decision to relocate to Anguilla, a British Overseas territory in the Caribbean. “It’s not regulated in South Africa, it’s not un-regulated in South Africa, we don’t know where it is going to go” van der Spuy exclaimed, “Anguilla already has regulation designed for utility tokens so it makes obvious sense to set up in that jurisdiction”.
In Europe, Zug Valley in Switizerland has become one of the main crypto-hubs on the continent, while Malta is attempting to position itself as the most crypto-friendly jurisdiction in the world, attracting talent from all over the world, such as Asian crypto giants like Binance, Tron and OKEx to make the long journey to set up shop there. Just last week, Binance announced it is funding the world’s first decentralized bank based on the island- a bold experiment which could have profound implications for the future.
Across the world, another big example of cryptocurrency projects (and therefore capital) seeking domicile on friendlier shores can be witnessed in Japan. Neighboring China has not been shy in its opposition to cryptocurrency, and has taken a particularly hostile approach towards exchange platforms and mining farms. Understandably, the mining farms can be a sustainability issue for such a large nation, and when you spend Yuan to acquire the mining hardware, that money leaves the country… only for the produce of your labour (cryptocurrency) to slip out of the exchequers reach. Much of this activity has relocated to Japan and other nearby nations where it can operate with peace of mind, despite the strict regulation.
Japan has been associated with accessible crypto regulation since the early days of Bitcoin, back when Tokyo housed the now infamous Mt Gox exchange, which at one point handled 70% of bitcoin transactions on the planet. Mt Gox was dealt a mortal blow after suffering the largest bitcoin hack ever in 2014, shutting up shop shortly after. This served as a red light for Japanese legislators who acted swiftly to build a clear framework for virtual currency exchanges and increasingly ICOs, simultaneously building a regulatory template for the rest of Asia to follow.
Another, somewhat surprising example of crypto’s capacity to go ‘jurisdiction shopping’ can be seen in America’s (and more specifically the FCC) surprisingly accommodating attitude towards blockchain project. The Federal Reserve, notoriously protective of USD and its influence across the globe, has not yet pushed for the sort of draconian legislation which many expected to come from Washington.
While certain restrictions like those pertaining to ICOs remain in effect, many prominent exchanges are based in the US. The Securities Exchange Commission (SEC) has determined that Bitcoin and Ethereum are not securities, and thus not subject to SEC regulation. Some projects however can be classified as securities, meaning that long established and widely understood rules would apply to these new “security tokens”. There’s also the much-anticipated Bitcoin ETF approval which could occur in early August- a move that has the potential to send the cryptocurrency market to new heights.
The US appears to be greener pasture for some Asian investors well, with a group of Indian investors recently setting up a multi-million cryptocurrency incubator on US soil. (To give credit where it’s due- the Indian government appears to have realized its error, and is now leaning towards classifying cryptocurrencies as commodities rather than banning them altogether.)
Perhaps these decisions reflect a desire on the part of the US government to avoid alienating the crypto market, as it could theoretically cause a negative shift in the importance of the dollar to the global economy.
What we can gather from this is that crypto-capital doesn’t necessarily run from strict regulation, rather it is a well-designed regulatory framework which encourages blockchain based enterprise to set up shop there. Countries that offer clear, reasonable crypto regulation stand to gain in this era, while those that offer ambiguity or arbitrary and unfair rules risk missing out.
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