Bermuda is one of three island states proposed to be a safe base once legislation is bought in. Photo: AFP/Don Emert
Bermuda is one of three island states proposed to be a safe base once legislation is bought in. Photo: AFP/Don Emert

The sudden rise of crypto-currencies from geeky obscurity to left-field niche investments has presented regulators around the world with a spectrum of thorny, difficult-to-grasp issues.

On the one hand, the emerging sector shot to its current high profile on the back of frenzied speculation and has been beset by fraud, perforated by hackers and has even been linked to laundering drug money and North Korean espionage.

On the other hand, cryptos, and the blockchain technology that underwrites them, clearly represent a significant future value proposition.

This dichotomy raises the question of whether regulators should crack down hard or work to incubate a promising new sector. Meanwhile, regulators’ brows are being wrinkled by the number of silos the new technologies straddle – tax, currency, foreign exchange, securities and technology laws may all require tweaks.

Speakers at the Beyond Blocks conference in Seoul this week debated these issues – and one proposed a novel solution: Leveraging gateway island jurisdictions as Trojan horses to “passport” companies from one market to another and to harmonize regulations across much broader geographies.

Asia’s regulatory minescape

Korea – more than any other global market – was roiled by last year’s frenzy of crypto speculation, driving alarmed regulators to float a ban on initial coin offerings (ICOs) and the shutdown of exchanges. But now Samuel Yim, an attorney at Seoul’s biggest law firm, Kim & Chang, calls the regulatory environment “very fluctuating.”

Indeed. Amid last year’s market shutdown rumors, citizens raised their voices and Seoul did a swift U-turn. “I like it in Korea, when everybody started protesting and there was a petition to the Blue House,” said Michael Novogratz, the founder and CEO of Galaxy Digital Capital Management. “Regulators listen, politicians listen. There is optimism.”

Yim agreed. “There is a more positive stance from government,” he said. He anticipates “a lot of trial and error” as regulations are tweaked, but was cautious about making predictions. “This is uncharted territory for legal analysis,” Yim admitted. Finalized regulation “… will be a sub set of securities laws, foreign exchange laws and banking laws,” he suggested.

Securities laws generate risks for token issuers. For example, Korean securities laws encompass strict investor-protection clauses. That suggests that token holders could file suits against ICO organizers in the future, Yim said.

Still, he anticipates a full raft of legislation to be finalized by the end of the year, with its toughness falling somewhere in the middle of the spectrum between the laissez faire Singapore model and the more heavily regulated Japanese and US markets.

Tokyo has also rushed to the wave the regulatory stick. “Japan felt foolish when they had the big hack, so put the brakes on,” said Novogratz, whose US-based enterprise is now opening offices in Hong Kong and Tokyo. “They did not shut it down, but they did put the brakes on.” But regulators “have worked stunningly hard,” he said, adding: “I think in Japan, they are going to turn the taps back on.”

Conference speakers seemed broadly united in the belief that Singapore now offers the best environment for the sector in the region.

“It remains unregulated in Singapore,” said Joshua Ho, co-founder of QCP Capital in the island state. He expects the Singaporean government to await sound and stable regulations to appear in a major market, and benchmark that. “They are waiting for a big jurisdiction to come in and they will slip in behind,” he said. But for now, Singapore is “ … a hub – an ideal location for talent,” he said.

The “elephant in the room” is China, Ho said. “We look at China, it is full of promise – you can’t avoid it!” he said. He added, perhaps a little diplomatically: “A country that wants to digitize the renminbi would not want to tamper with the most revolutionary technology that can make it real.”

The irony of a technology which aims specifically at decentralization gaining mass traction in a nation led by a highly centralized party was not lost on some.

“The killer app is identity, a self-sovereign identity – then all of a sudden you are in more control of your data,” said Novogratz. “Now, Uber has your data, and uses that data illegally, and in China, almost all transactions are Alipay, and the government gets that data.”

This indicates that blockchain may replicate the situation of the internet in China: Originally seen as a tool of liberation, Beijing transitioned the web into a tool of oversight.

“One central reason for blockchain is privacy … China is the exact opposite of that,” Novogratz said. “Some of the biggest players are Chinese, but philosophically, it cuts against what blockchain is there for. It will be very interesting to watch.”

Gulf between players, regulators

Participants were clearly concerned about the chasm separating those who are creating, issuing and investing in a new and disruptive series of technologies and the prudence-focused figures regulating the space.

“With crypto-currencies, to have sensible laws, you need legislators themselves to understand the technology,” Yim said, but he worried that the technology is changing on almost a daily basis.

Maja Vujinovic, the CEO of O Group and a former CIO of emerging technologies at GE, suggested a firewall exists between regulators and the industry.

“No regulators I have seen have invited tech guys, as they are guys in suits and they think they are smart, and the tech guys think they are the smartest bunch in the world,” she said. “They are stuck in their own egos – there is a breakdown in communications.”

Amid regulatory uncertainty, Ho suggested a hedging strategy.

“We have a team in-house that only opens bank accounts and opens entities,” he said. “They are running round bank accounts, setting up fail safes, so if one is shut down …”

Gateways and passport jurisdictions

But one conference speaker was more upbeat.

Loretta Joseph, an industry chair of the Australian Digital Commerce Association with a background in banking and financial consulting and who has been advising governments around the world on blockchain-related regulations, suggested a novel – and speedy – method of slashing through the  global regulatory knot.

Asked to consult on regulation on the island of Bermuda, she gathered all the necessary players. “We sat down with policymakers and government and all stakeholders and legislated in three months,” she said.

Bermuda presents a good benchmark, not only because of the speed with which it moved, but also because of the overall prudence of its financial regulations and its resultant clean reputation.

“If you can’t trace a source of funds in Bermuda, you go to jail,” she said. “Bermuda has a really good reputation because of the reinsurance market. We wrote regulations that won’t upset Bermuda … I think they are some of the best regulations in the world.”

Her wider strategy is revolutionary: to harmonize laws among island territories like Bermuda, then use them as gateways to larger markets.

“Malta, Bermuda and Mauritius are in good positions, as they are small but similar,” Joseph said. All three are governed by the same legal system: English common law. And with legislative processes on such island territories and states being easier to manage than in larger economies, the timeframe for legislative and regulatory action is compressed. “Malta is close to it,” she said, referencing the Bermuda regulations. “And Mauritius is working on it.”

The trio of islands holds significant possibilities. “If we could harmonize laws and standards in legal systems in smaller jurisdictions, we would have treaties on tech [the way we now have treaties on tax], then we could ‘passport” companies between jurisdictions without fear of legal changes,” she suggested.

The three islands are finance-centric jurisdictions – but with none of the dubious associations such a status often implies. “They have blue-ribbon status, they are not just tax havens; if you could federate them all together …” she said. Then, the three islands could act as gateways, providing companies bridgeheads into much larger markets: the US for Bermuda, the EU for Malta and Africa and India for Mauritius.

It is not just a pipe dream. Joseph engaged in closed-door discussions with related OECD bodies this month and a second OECD meeting on the issue is scheduled for September, she revealed.

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