Hot Spotlight: Encrypted currency has to seek safe havens everywhere

Reuters, New York, November 28-When American entrepreneur Bharath Rao was looking for the best place to raise funds for his cryptocurrency derivatives trading business, the United States was not on his list. Instead, he chose the East African island nation of Seychelles to sell the tokens of the trading platform.


Profile picture: On November 6, 2017, the virtual currency placed on the US dollar banknote next to the computer keyboard. REUTERS/Dado Ruvic
This situation like Rao is not alone. He is a senior technologist in San Diego, California, and has worked in many major banks on Wall Street.

As regulatory agencies in some countries tighten the regulation of digital currency financing, that is, initial coin offerings (ICOs), many entrepreneurs have moved companies to places that welcome cryptocurrencies and are known for their low tax rates.

According to interviews with entrepreneurs and business registration information obtained by Reuters, dozens of start-ups have flocked to Singapore, Switzerland, Eastern Europe and the Caribbean this year.

Like Bitcoin, these tokens use encryption technology and a blockchain transaction database for fast and anonymous fund transfers, rather than through a centralized payment system. Bitcoin, founded in 2009, is the most well-known virtual currency.

Data compiled by the cryptocurrency research company Smith + Crown shows that national regulators' attempts to curb token sales may have caused the token business to move elsewhere.

Since the beginning of this year, the United States has registered 34 digital currency start-ups and is in a leading position in the world. This reflects the status of Silicon Valley as a technology hub and the depth of the US financial market, rather than a friendly regulatory environment.

According to Smith + Crown, there were 21 entity registrations in Singapore this year and only one in 2016. Switzerland has increased from three last year to 19 this year. There were 14 companies registered in Central Europe this year and only one in 2016, while the number of companies in the Caribbean increased from two last year to 10.

"This data confirms our view that Switzerland and Singapore are still the target registration locations, but the United States is still where companies raise large sums of money," said Matt Chwierut, research director of Smith + Crown.

**Swiss advantage**

The Swiss Financial Market Supervisory Authority (FINMA) said in September that although Switzerland does not have specific regulations for digital currency issuance, some issuance activities may fall within the scope of current supervision.

At present, four of the five largest ICO financings are conducted in Zug in the southern region of Switzerland, known as the "crypto valley", with a total of more than $600 million in financing.

In contrast, China and South Korea banned the sale of digital currencies this year. Regulatory authorities in the United States, Malaysia, Dubai, the United Kingdom, and Germany also warned investors that the current lack of supervision exposes investors to fraud, hacking, and theft. under.

The rapid increase in registrations in areas where judicial supervision is rather "friendly" shows how difficult it is to supervise the sale of digital currencies. This is a challenge that regulatory authorities are beginning to realize.

"We are communicating with other regulators and we know that there are a lot of bilateral discussions going on," the Dubai Financial Services Regulatory Authority said in an email to Reuters.

The U.S. Securities and Exchange Commission (SEC) declined to comment on the migration of digital currency issuers to remote jurisdictions.

The British Financial Conduct Authority (FCA) and the Malaysian Securities Commission have reiterated their position that digital currency sales are high-risk speculative investments, and retail investors should be aware of it.

A spokesperson for the German Financial Supervisory Authority (BaFin) told Reuters that “jumping” within the EU would be “basically futile” because the EU supervisory authority takes the same position as the German Financial Supervisory Authority.

The Dubai Financial Services Regulatory Authority pointed out that it is not uncommon to seek friendly jurisdictions, but regulators still need to warn about the inherent risks of digital currency sales.

Financial regulators in South Korea and China could not be reached for comment.

In the United States, the United States Securities and Exchange Commission (SEC) ruled on July 25 that digital currencies should be regulated in the form of securities, but this only caused a short-term cooling effect on the virtual currency market. The short-lived reason is that many American start-ups believe that they can avoid regulation by selling "utility tokens," which allow buyers to obtain products or services, rather than company rights.

However, people from all walks of life are worried that the views of regulators may evolve with the times, which has led potential US virtual currency issuers to consider selling overseas.

"Our lawyers have confirmed that the supervision of functional tokens may change. Therefore, for safety reasons, the initial token issuance should be done outside the United States." said Arran Stewart, co-founder of Job.com, based in the United States. Job.com is an online employment service platform. The company plans to issue tokens in the Cayman Islands in February.

In fact, among the 15 startups interviewed by Reuters, only one company, Airfox, sold digital tokens in the United States and raised $15 million last month. Others either have completed the token sale overseas or plan to do it overseas.

Rao, who has established a cryptocurrency futures trading platform, said that he chose Seychelles to raise funds because the place is open to cryptocurrencies. Rao said, "There is no order to detriment cryptocurrency."

**Quick financing**

According to Autonomous NEXT, which tracks technology in the financial services industry, digital currency sales increased to approximately US$3.6 billion in mid-November, compared to just over US$100 million in 2016.

Usually, cryptocurrency issuers publish "white papers" to describe their business plans, and news of new currency sales are spread through online forums and websites that track new currency issuance. Investors use bitcoin and ether, the two most accepted virtual currencies, to pay on a company's website.

Emerging companies raised millions of dollars in a matter of minutes with almost no scrutiny, which aroused the vigilance of regulators, but they lack a unified management method and they can't do anything about the new financing market.

Lewis Cohen, a partner at the New York law firm Hogan Lovells, said, “It is difficult for governments to act together in an organized manner.” Hogan Lovells has a team of lawyers focused on blockchain.

"Different jurisdictions will use different standards to treat token sales, and it will be difficult to completely integrate them."

Agile virtual currency companies with few regulatory restrictions can easily cross national borders.

For example, BANKEX CEO Igor Khmel stated that the company is registered in Delaware and plans to issue tokens in the Cayman Islands this month. BANKEX's goal is to tokenize assets with poor liquidity and then trade on its virtual currency platform.

Hogan Lovell's Cohen said that it is unwise to block token sales and should be regulated or self-regulated.

He said, "We may need some protective measures."