The Most ICO-friendly Jurisdictions — the Switzerland, Malta and Gibraltar edition (Part 3)

I apologize for my tardiness in writing Part 3, the final installment (for now) of the most ICO-friendly jurisdictions, but summer is upon us and stocking up on sunshine and fresh air was in order. In case you missed them, you can find Part 1 (the Caribbean) and Part 2 (the Baltics and Belarus) of my series here.

The three countries I cover here: Switzerland, Malta and Gibraltar, are all in the running to become the defacto ‘Crypto-Capitals’ of the European landmass — each pushing the regulatory envelope on Distributed Ledger Technology (DLT) and Initial Coin Offerings (ICOs) in their own way. Initially, I was not going to write about Switzerland, given the country’s longstanding crypto-reign and the considerable attention it already receives from the crypto-media. However, Switzerland offers an interesting story with regards to forging a regulatory framework around this emerging fintech, as well as serving as a strong backdrop for comparative purposes of Malta and Gibraltar.

Switzerland

One of the most important facets of Switzerland’s crypto-history (wherein the setting has largely been in and around the canton of Zug — or “Crypto Valley”) is that it was the country chosen by the Ethereum Foundation in 2014 for their Ether token launch (currently the 2nd largest cryptocurrency by market cap). This highly successful launch was really the “starting point” of it all, according to Oliver Bussmann, president of the Crypto Valley Association in Zug. After a global search for a jurisdiction offering legal clarity, the Ethereum Foundation decided on Switzerland — chosen thanks to its location at the heart of Europe, financial prowess, technological underpinnings and pro-business attitude — as well as being a global center for human rights and freedom of speech.

While many continue to regard Switzerland as a “tax-haven”, this label no longer applies as the country’s infamous bank secrecy laws that once protected these financial practices are no longer in place — after relentless international pressure persuaded the country to do away with them.

As banks and bankers in Switzerland continue to lose business through this new era of greater financial transparency, it might be the case that some of it can be regained through advancements in DLT and ICOs. An ever increasing number of Swiss ICOs certainly points to this; and the growing interest in this new technology has already motivated the Financial Market Supervisory Authority (FINMA) into publishing its ICO “Guidelines”.

FINMA’s primary concern? Anti-money laundering (AML)! That and securities regulation. If you have followed me since Part 1 of this series, you will recall that AML initiatives are one of the primary concerns of the company I work for. It is through sound AML policies that enterprises launching ICOs are better aligned with the global financial world — adding legitimacy to their project and the crypto-sector as a whole.

However, despite the relative legal certainty and the international clout of Switzerland’s financial regulatory environment, an enterprise aspiring to launch an ICO might still be better suited somewhere else. A growing consensus among prominent players (Tim Draper for one — although to be fair he was embroiled in a legal battle over his involvement in Tezos at the time) and other industry insiders in the crypto scene points to Switzerland’s stifling regulations as the reason for its eroding role as a top ICO-friendly jurisdiction. A recent article calls out the Swiss National Bank as the proverbial ‘spoke in the wheel’, as they are hesitant to do business with certain enterprises launching ICOs — due to their non-existent KYC/AML procedures, no less. Data published by PwC/Crypto Valley points to the greater role that ICO-friendly jurisdictions (such as the Cayman Islands and the British Virgin Islands) are playing and how this is challenging Switzerland’s ICO business.

Finally, the cost of setting up operations in Switzerland is certainly not on the cheap side. A quick search at immoscout24.ch for downtown Zug, Switzerland & immobilienscout24.de for downtown Berlin, Germany (where our offices are located) shows prices to be about the same per square meter of office space. Consider, however, that Berlin is a world-class city of approximately 4 million inhabitants and all the formidable services that go along with that, while Zug is a sleepy mountain town of less than 30000 — the high cost of doing business in Switzerland is apparent!

Gibraltar

Hassan’s, a leading law firm in Gibraltar, lays claims to the limestone outcrop which they call home, as the best place to launch an ICO. In a sometimes silly and all too-biased article posted on their website, the law firm pits Switzerland’s “Crypto Valley” against Gibraltar’s “Crypto Harbour”, with the assumption that an enterprise about to launch an ICO has already narrowed their decision down to these two jurisdictions. On categories ranging from blockchain friendliness and overall crypto-culture to regulations, banking, taxes, currency, stability and security — Switzerland wins only in the category of security and Gibraltar either draws or wins in everything else. It is worth noting here that “security” is not meant in the sense of the securitization of this newfound digitization of assets but rather in the sense of having, at their disposal, impenetrable vaults for offline data storage. Between Switzerland’s Cold War-era military bunkers in the Swiss Alps and Gibraltar’s 55 kilometres of World War 2-tested tunnels inside the Rock of Gibraltar, Switzerland is given the win.

As facetious as the above might sound, there might be some truth to Gibraltar ‘beating’ Switzerland in most of these categories. Gibraltar’s small population is exceedingly nimble and given that much of the nation already works in online casino-type gaming (i.e. are Internet savvy) it would appear that a transition into DLT and the ICO ecosystem that has sprung up around it would not require much additional effort. Furthermore, Gibraltar has a highly evolved AML Code of Practice as published by the Gibraltar Gambling Commissioner. With some small effort this code of practice could be ported over to this new fintech.

Like Switzerland, Gibraltar has also published ICO guidelines, which it calls “Token Regulation”. Unlike Switzerland, however, the country seems to be much more lenient with regards to issues of securitization. Take for instance an excerpt from Gibraltar’s token regulation guide that says: “most often, tokens do not qualify as securities under Gibraltar or EU legislation”. However, this is only true because there is very little EU legislation on the issue in the first place. Compare this to the equivalent guidelines from Switzerland which classifies security tokens in a much more regimented manner as: “standardised certificated or uncertificated securities, derivatives and intermediated securities… which are suitable for mass standardised trading”, etc.

Adding to this, Gibraltar has already launched its own blockchain exchange (GBX), where a native token designed to be used on the exchange sold out in 9 seconds! — raising $27 million USD from 3474 contributors. It sounds to me like the ICO ships have already set sail for Gibraltar’s “Crypto Harbour”.

Malta

With the recent passage (July 2018) of not one but three separate blockchain regulatory bills into law, Malta is rapidly defining itself as the “Blockchain Island”. Perhaps one would have appended this title to one of the three islands already covered in the Caribbean edition of this series — but the name was somewhat already claimed by Malta at the ‘2017 Malta Innovation Summit’ in October. To be clear, the summit was not about Malta as the Blockchain Island but rather about the crypto-sphere as an island that Malta would set-out to conquer. However, the misconstrued Blockchain Island moniker stuck for Malta — no doubt propelled by the ravenous crypto-media seeking ‘the next big story’.

The Prime Minister of Malta, Joseph Muscat, had already announced in May 2017 that Malta would become one of the first countries in the world to fully embrace blockchain technology. In that same announcement Muscat clarified that: while he was aware of the wariness of regulators with regards to the technology, the tech was here to stay and Malta could either copy the future regulations put in place by other countries or create its own regulations as the standard to be copied.

The three aforementioned bills are: the ‘Malta Digital Innovation Authority Act’, the ‘Innovative Technological Arrangement and Services Act’, and the ‘Virtual Financial Asset Act’. A Coin Insider report outlines the significance of the bills and how they provide cryptocurrency exchanges, lawmakers and the world with a clear and navigable regulatory framework on DLT and ICOs. On the topic of cryptocurrency exchanges, two of the largest, Binance and OKEx have just set up shop there (though I am hesitant to label any exchange as the largest given some fairly damning evidence of fake volume reporting). Upon Binance announcing their intent to move, the PM of Malta tweeted “Welcome to #Malta @binance”. Also of note is how the CEO of Binance, Zhao Changpeng, was invited to Malta to discuss the blockchain bills; a clear case of the crypto-industry informing government.

What is even more special, at least to this crypto analyst, is the Founders Bank initiative based in Malta (currently seeking regulatory approval and a banking license) which hopes to “become the first decentralized, community-owned and blockchain friendly banking solution”. In partnership with Binance and Neufund (a blockchain-based equity fundraising platform) the realization of Founders Bank and its wider global acceptance will thrust Malta into the crypto-spotlight and certainly earn it the title of Blockchain Island.

Lastly, no briefing on Malta would be complete without mentioning the ongoing issues of high-level corruption and the possible “takeover” of Malta by organized crime syndicates. Furthermore, the unsolved murder of a journalist reporting on issues stemming from these hostilities should be a cautionary red flag for enterprises considering Malta for an ICO launch.

Conclusion

With names like “Crypto Valley”, “Crypto Harbour” and “Blockchain Island”, the ecosystem around this newfound fintech is certainly bringing out the novelist in all of us. However, as the industry matures, some surprising changes are underway especially as the contest for the most ICO-friendly jurisdiction heats up. Switzerland once the crème de la crème of the crypto-industry now struggles with maintaining its edge.

Countries with smaller populations and governments and, therefore, more compact regulatory environments are proving themselves much more nimble in charting the burgeoning crypto-sphere. Malta is seen as an especially fast moving player in the industry, attracting some major talent from the likes of Binance and OKEx as a result. Gibraltar, which is expressing itself as much more flexible than Switzerland, also has a lot to offer especially after launching its own blockchain exchange.

A final note: It is important to keep in mind that while all of the countries covered in this series are great places for launching an ICO, a regulatory onus is also in place for the target countries in which potential ICO investors reside.