If one considers the cryptocurrency sector, no other topic than Initial Coin Offerings (ICOs) has got governments and countries more divided. While major jurisdictions have completely shut out the controversial fundraising method, tax havens have seemingly fully embraced the concept, and are reaping the rewards.
The Isle of Man’s Newfound Appeal
To understand why, take the example of Zac Cheah, the founder of blockchain-based payments company PundiX.
In 2017, Cheah was looking to launch an ICO for his firm, while remaining close to his homeland of Indonesia. As a result, the entrepreneur made several trips to cryptocurrency-friendly nations such as Singapore and Hong Kong, which are regarded as cities with high “ease of doing business.”
However, Cheah was the recipient of ambiguous responses, alongside the general confusion amongst lawyers when asked about ICOs.
“They say they will not rule against you now but they can’t guarantee they won’t rule against you in the futu, re. That’s quite scary.”
Determined to find a way around the regulatory befuddlement, Cheah decided to launch the company’s ICO 7,300 miles away in the Isle of Man, an offshore tax haven in the Irish sea, and ended up raising $40 million in a few hours. The process was surprisingly simple, allowing Cheah to set up a subsidiary for PundiX, which is headquartered in Singapore, for the sole purpose of issuing tokens.
Bird’s Eye View of Pint-sized Isle of Man. Source: Wikimedia
Similarly, a plethora of companies are resorting to this exact method, raising up to an estimated $12 billion in the form of ICOs issued in offshore tax havens, away from the world’s financial centers.
Paper Finds Lesser-known Countries Becoming ICO Favorites
According to a working paper from the University of Luxembourg, lesser-known hubs like the British Virgin Islands, Gibraltar, and the Cayman Islands now count among the world’s top ten ICO destinations, owing to their ease-of-ICO administration, laws, and tax benefits. For research purposes, the study sampled over 300 different ICOs.
Data collated from the 80 largest ICOs, regarding funds collected, indicated that a quarter of the companies were concentrated around a few jurisdictions known for beneficial tax breaks, and included Curaçao, Mauritius, and St. Kitts and Nevis.
Furthermore, the firms are not necessarily domiciled in the country of token issuance, often choosing financial hubs like Singapore or Switzerland for former purpose.
While highlighting the risks linked with the emerging market, the paper maintained:
“ICOs provide a new, innovative and potentially important vehicle for raising funds to support innovative ideas and ventures, with the potential for aspects of their underlying structure to have an important impact on fundraising systems and structures in future.”
Regulatory Breaks Support the Move
Understandably, ICOs move to lesser-known countries in a bid to escape the regulatory uncertainties. The situation is usually a win-win for both parties, as the company can issue their tokens, while the country enjoys monetary benefits, such as registry costs, company running and maintenance fees, and an annual fee.
Amongst the many tax havens, Gibraltar is also in a process to set up a regulatory framework to control token issuances, as it looks to attract similar players to their country. To this effect, Cheah added:
“Financial markets are starting from Ground Zero. The race for this market is just starting.”
In April 2017, Bermuda lured Binance, one of the world’s top cryptocurrency exchange by volume, to partner with the country for supporting the growth of talent. In addition, Bermuda published a paper which sought to regulate virtual currency businesses – for making the land attractive for cryptocurrency businesses and ICOs.
Binance CEO Changpeng Zhao with Bermuda Premier David Burt. Source: Bernews
Jonathan Garcia, a partner at a Gibraltar-based law firm, explained why such countries seem to be pulling ahead in the cryptocurrency race:
“If this kind of framework was proposed in the UK or another large jurisdiction there would have to be so much consultation and inbuilt self interest in certain existing participants that it would take years to achieve the same result.”