Will the real Crypto Valley please stand up?

A skeptical take on ‘Crypto Hubs’

One of the biggest themes in crypto in 2018 has been increasing focus from regulators. As cryptocurrency valuations have skyrocketed and large financial institutions have entered the space, high-profile frauds have continued to make headlines and governments have rapidly tried to catch up to reign in the ‘wild west’ of initial coin offering. In many cases, regulators have taken a forceful approach — they’ve warned investors of the dangers of ICO’s and made clear that they believe that token sales are within their regulatory purview.

In parallel, a number of countries have seen an opportunity in attracting token issuers. These countries are attempting to become ‘crypto hubs’ by creating favorable regulatory frameworks, attracting high profile projects, and implementing low taxes for token issuers.

The race to build or find the global ‘crypto hub’ has become an elusive dream that has captured the imagination of legislators and founders alike. Governments see an opportunity to attract a burgeoning industry to their country (and subsequently an ability to claim credit for the economic growth that it may generate). For founders in the space, these jurisdictions seem ideal—forward looking regulatory environments where the ‘onerous’ securities laws of the US (and other countries) don’t seem to matter.

I believe that regulators are likely to be disappointed at the outcome of their efforts here. Switzerland may seem like an early success story of the ‘crypto hub approach’ — in 2017, almost 1000 companies ran their ICO’s from the country. However, it’s unclear that much is actually happening in Switzerland besides the price of PO boxes in Zug going up (a la Delaware). The focus on ‘crypto hubs’ ignores the much more consequential question of where people are actually building companies in the space.

Founders that spend their time chasing the white whale of a regulatory ‘heaven’ are also unlikely to be happy with the end result. Nations like Switzerland (and respective service providers like law firms) have created a narrative that these jurisdictions are a utopia where you set up an entity, run a token sale, and are able to abstract away the entire global patchwork of securities laws. Given that ICO’s by nature involve cross-border capital flows, the truth is that favorable local regulations have limited impact. Indeed, cautionary tales like Tezos, which raised over $200M an in ICO last year and is currently embroiled in a number of class action lawsuits, illustrate that reality is much more complicated. For a more in depth exploration of the consequences of this strategy, I highly recommend Gideon Lewis-Kraus’s Wired story about the Tezos scandal.

Regulators at the Gate

One of the biggest discussion points of the crypto-verse so far in 2018 has been increasing focus from regulators on initial coin offerings. Long gone are the days when Tezos raised nine-figures without requiring KYC/AML checks from participants (side note: 🤦)¹. Today almost all U.S. based token sales require these and most only sell to accredited investors. While there are still plenty of countries where token sales remain unregulated, it seems likely that by the end of 2018 most major jurisdictions will have at least some rules in place around the sale of digital assets.

Many governments have aggressively attempted to regulate token sales or ban them outright:

  • China has taken efforts to block access to crypto exchanges and initial coin offerings, in order to “…to prevent financial risks”
  • Japan has required cryptocurrency exchanges to register with the government
  • South Korea has banned initial coin offerings (although may be reversing that position soon)
  • The US Securities & Exchange Commission has made clear that it views initial coin offerings as under their regulatory purview

Other governments have seen opportunity in courting these companies:

  • Switzerland has proclaimed itself ‘crypto valley’ and adopted favorable regulations for token issuers
  • Malta has publicly welcomed cryptocurrency exchanges
  • Gibraltar has proposed a favorable regulatory framework for token sales
  • Bermuda is attempting to create an attractive regulatory environment for crypto businesses

Countries positioning themselves as “crypto hubs” has become an emerging theme against the backdrop of increasing regulation globally. Countries are doing this by courting high profile projects, developing friendly regulatory frameworks for token sales, and offering favorable tax treatment. While I am skeptical of the trend overall, I am optimistic that it will bring some more competition into the ecosystem.

Your Regulations are my Opportunity

Whale Hunting

Malta has pursued a strategy of publicly courting high profile crypto businesses. The country has proposed a new government agency specifically to work with blockchain companies and the country’s Prime Minister is keynoting at the Malta Blockchain Summit later this year. In late March, Binance — the world’s largest cryptocurrency exchange (by volume) — announced that it was moving to the Mediterranean island state because of the favorable regulatory environment. Malta’s regulatory framework allowed Binance to secure a local banking partner and offer fiat-to-crypto deposits and withdrawals, something most exchanges still aren’t able to do.²

On the whole, I believe that this is a net positive step for the ecosystem. The lack of crypto ‘on-ramps’ in the eco-system has allowed the small number of exchanges that do have banking licenses to charge high fees. Binance’s banking license will result in more options for consumers that want to convert fiat currency into crypto and likely push down transaction fees.

Crypto Valley

Switzerland has also been particularly vocal about wanting to be a hub for initial coin offerings. Earlier this year, Johann Schneider-Ammann, the Swiss economics minister, proudly proclaimed that his country is becoming the ‘crypto nation.’ The country has embraced the ‘crypto valley’ nickname for the town of Zug and while not historically known for being a fashion hub, Switzerland has embraced bitcoin cuff links ahead of traditional fashion capitals like Milan and Paris.

Switzerland has focused on developing a favorable regulatory and tax framework for blockchain companies. In February, FINMA (the Swiss financial regulator) established a token classification framework to clarify when tokens are securities (and hence when companies need to run relevant compliance processes).

FINMA established three categories of tokens:

  • ‘Payment tokens’ that are primarily used as a means of payment (ie BTC, ZEC)
  • ‘Utility tokens’ that provide digital access to application, network, or service (ie REP, FIL)
  • ‘Asset tokens’ that represent ownership in traditional assets such as companies, income streams, or real estate (ie BCAP)

These categories also clarify when companies need to comply with securities laws, which is a consistent headache for companies in other jurisdictions.

The Swiss government has been incredibly forward-thinking in crypto regulations and I hope that other countries follow suit. Switzerland has created a clear regulatory framework (with reasonable oversight) for companies to run their token sales, which almost no other jurisdiction has. Indeed, while the US regulatory approach to crypto-currencies continues to evolve in the right direction, it is still not clear when a cryptocurrency can shift from being a security to something else, which is a huge pain-point for token issuers.

Chasing the (Crypto) Crown

It should not be surprising that nations are fighting to attract token issuers given how much attention the space has gotten. It is very early days, but blockchain technology has at least some chance of upending large swaths of the finance and technology sectors (and it has certainly captured the popular imagination). There is also real money at stake — regardless of whether you believe ICO’s are democratizing investing or a scam (or somewhere in between), they will likely raise over $10B this year alone (for context, all VC funding in Europe totaled $17B in 2017).

While distributed ledger technology may be new, countries competing aggressively with the tools at their disposal (regulations, tax rates, etc) to attract emerging industries is not. Malta and Switzerland have both successfully played on the ‘edges’ of European law and benefitted before. The timing may be a coincidence, but both of those countries also currently face headwinds in some of their largest sectors.

Switzerland has been considered a tax haven for decades because of its bank secrecy laws. The Swiss banking sector, at least partially driven by this strategy, has grown tremendously and and today accounts for almost 12% of the country’s GDP (Hacked). However, Switzerland recently adopted legislation that would bring it in line with international standards on taxation, which will eliminate some of the Switzerland’s competitive advantage here.

Malta bet its hand on online gaming and this has paid off — the country has become a center for the European online gambling industry, which now accounts for more than 10% of its economy (Politico). While this strategy has brought tremendous wealth to the island, it’s come along with accusations of lax enforcement, money laundering, tax evasion, and other organized crime, and has brought the country into conflict with the EU.

What’s Actually at Stake?

At first glance, it looks like the efforts of regulators in Malta and Switzerland to attract token issuers are paying off. Malta is earlier in its pursuit of crypto businesses, but other exchanges will likely follow Binance to the island. Switzerland has even more to brag about — during 2017, more than 800 Swiss-based ICO’s raised over $800M, the most of any country besides the US (Atomico). This includes some high profile projects like Tezos, which raised over $225M.

But what exactly is success bringing here? These companies don’t seem to be establishing thriving Swiss offices and boosting employment in the region. Despite its Harvard-sized endowment, Tezos has less than half a dozen employees in the country. Sirin Labs, another supposed ‘blockbuster’ Swiss ICO, raised $157M in a token sale. The company has three employees in Switzerland (see LinkedIn searches here and here).³

It’s tough to decipher how much tax revenue ICO’s are bringing these countries but I’m skeptical that it’s significant. In Switzerland, it seems likely that projects that qualify as utility or payment tokens will face a fairly low tax burden. Moreover, token sales are generally one-off events and so it seems unlikely to me that there will be any recurring revenue here for governments.

Don’t be Delaware

In general, I am skeptical that this game of regulatory limbo will matter much. Yes, there will be some benefits to countries that adopt a regulatory regime that encourages token issuers to run their sales from that jurisdiction — incorporation fees, some tax revenue, a few legal and compliance jobs. Indeed, Silicon Valley hasn’t been the only one to benefit from the U.S. tech boom — most tech companies incorporate in Delaware (which then collects a nominal fee on their registration). But it should be obvious who is capturing the vast majority of the upside there.

I have not seen any compelling arguments as to why blockchain company headquarters (and employees) will follow their lawyers to Switzerland (or any other jurisdiction for that matter). It is fairly trivial to run your token sale from a jurisdiction outside of where you are headquartered and many companies have been doing this for the past few years.

The barriers to entry for other jurisdictions to compete are also pretty low and so I would predict that this game of regulatory arbitrage becomes a race to the bottom. It seems unlikely to me that countries like Switzerland are going to be able to compete with nations like Bermuda on attracting companies chasing the lowest tax rate. Their income tax rate is 0% and you can wear shorts and high socks to work.

Wrong Focus for Founders

The press coverage of this game of regulatory arbitrage — and the subsequent attention that it’s gotten from founders — is a massive distraction. While Tezos made many mistakes in its token sale, it is their belief that domiciling in Switzerland would protect the enterprise from non-Swiss securities laws that may bring down the whole company. Tezos is facing multiple class action lawsuits in the US that charge that the company’s ICO was an unregistered securities offering.

In my view, most token issuers overestimate the importance of where they run their token sale from. The choice of jurisdiction is obviously important and issuers should work to find a jurisdiction that has a clear framework on ICO’s. However, given that token sales by nature involve cross-border capital flows, companies are going to have to deal with a patchwork of local securities laws regardless of where they incorporate. As the Tezos example illustrates, if you are selling securities to to US investors, you fall under US securities laws, regardless of whether you’re domiciled in Switzerland or Swaziland. There is also zero reason to believe that other countries won’t follow the SEC in prosecuting securities laws’ violations.

Conclusion: Follow the Talent and Money

Perhaps the most frustrating thing about the hubbub of the emergence of crypto hubs is that it ignores the actually important and interesting question of where people are building companies. Unsurprisingly, the next generation of technology companies aren’t being built in the Swiss Alps or a small island in the Mediterranean with a population of 400,000.

It turns out that they’re largely being built in existing tech hubs. In Western Europe, that has meant Berlin and London. In the US, that means San Francisco and New York. Why? Because people want to live there. Capital is there. And ironically, these are often the places with some of the strictest (or least clear) regulations.

Indeed, neither Britain nor Germany has been at the forefront of regulatory policy towards token sales, and yet they’re undeniably the epicenters of this in Western Europe. Neither the FCA in the UK, nor BaFin in Germany have particularly clear positions on token sales. However, many high-profile projects (Polkadot, Lisk, Gnosis) and just about all of the top VC funds (BlueYard Capital, Libertus Capital, Fabric Ventures) are based in either London or Berlin.

The evolution of the market in the US should give European legislators pause before putting all of their eggs in the ‘ICO Hub’ basket. New York State has some of the most restrictive laws around token sales in the country and yet it is arguably the most innovative hub for blockchain activity in the U.S. It hosts by far the biggest U.S. conferences in the space, is home to a large number of top investors (ConsenSys, CoinFund, Digital Currency Group) and has some of the best teams in the space headquartered there (Blockstack Inc, Kadena). Why? Because people want to live there and it’s not that hard to incorporate your company in neighboring states like New Jersey or Delaware.

If legislators really want their country to benefit from the growth that the blockchain space will likely see over the next decade, then they should focus on attracting companies’ headquarters. This is a far harder exercise than lowering taxes and it takes a long time. It requires investment in education, attracting capital, and creating a stable business environment. But it is almost definitely the jurisdictions where the next generation of technology companies decide to headquarter that will see by far the largest upside here.

In a similar vein, I would urge founders to avoid creating an Apple-like legal scheme for running their token sale. That energy is almost definitely better spent recruiting a great team or building product. These things are going to matter more in the long run than where you ran your ICO from.

Huge thanks to Samit Kalra and Andy Bromberg for their input on this article.

Disclosures: I am not a lawyer and nothing here should be construed as legal advice. These are my personal views and not those of CoinList. I may invest personally in any of the projects mentioned. CoinList may engage with any of the projects mentioned.


  1. Tezos is now retroactively forcing investors to undergo KYC/AML checks almost a year later
  2. This article is written with token issuers in mind, not exchanges. National regulation for other companies in the crypto space like exchanges is much more important (just look at Binance and Kraken leaving New York).
  3. Linkedin searches are an imperfect way to gauge employee headcount in a specific country but I believe that they’re at least directionally correct.

Business Ops @CoinList. Past lives @AngelList @Handy.📍San Francisco. 🏠 New York.

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