Smaller Countries Will Win the Cryptocurrency Regulation Race

  • August 3, 2018

Malta’s new legislation on ICOs, exchanges, and DLT technology is ground-breaking indeed. In fact, the EU’s smallest member, Malta, is the first country to issue brand-new regulation and to create a Digital Innovation Authority. Finally the blockchain technology is getting the recognition it deserves which furthermore demonstrates that it is here to stay.

It’s a myth that Cryptocurrency companies and blockchain start-ups are shrinking from regulation. After seeing so many investors lose their funds in 2017 and then numerous subpoenas being issued, many ICO teams feel as if they’re fumbling in the dark.

Regulation is necessary and, for the most part, welcomed — in the right shape and form.

The worst thing for business is uncertainty

The very enemy of business is uncertainty. Hence it does not come as a surprise that the majority of key institutional investors are still waiting at the gates of the cryptocurrency industry. How can they invest (or been seen to be investing) in such a high-risk area that can, at any time, be deemed illegal and shut-down? How can these firms provide certainty and security for their stakeholders?

I believe that the situation in the US has shown us exactly that, a lack of clarity. Whilst many people have been quick to label Bitcoin as a bubble and Cryptocurrencies as the Wild West. However it’s a very different picture when you’re on the inside. If we were all criminals and money launderers, surely the voices rejecting regulation would grow to a deafening chorus.

But I think any legitimate blockchain company and ICO team that want to seriously provide value for their customers, welcomes clear guidance. Even my colleagues in the industry who are strong believers in anonymity and privacy, and who believe that regulation could stifle innovation, agree that the industry needs clarity.

The Co-founder of Swiss-based exchange ShapeShift and my co-speaker at MoneyConf, Jon, stated in relation to America, “What are the rules? Because nobody knows,” and that “what’s needed for everyone is clarity.” Such an uncertain operating environment is extremely dangerous and is sending a lot of money offshore.

Malta Will Regulate ICOs

Malta announced three new laws this month, but of course, the main law that everyone is so interested in is the Virtual Financial Assets Act (VFAA). This will regulate Cryptocurrencies, ICOs, and exchanges, as well as wallet providers, Crypto asset managers, advisors, and the like.

I believe that this is a great step forward to legitimizing ICOs and Cryptocurrency in general. Similar to the FINMA ICO guidelines in Switzerland that were put into place in February of this year, the Maltese government is providing clarity on how to operate in a compliant way.

Blockchain companies will be subject to a financial instrument test to determine whether their cryptocurrency is a security, a utility, or a hybrid of both. This clearing out of the gray space is critical. It’s vital for a company to know what they have to comply with and whether they will fall under the rules of EU Markets in Financial Instruments Directives or not.

Regardless, the requirements to hold a compliant ICO are steep and that is the way it should be, we want to weed out all untrustworthy projects. White paper requirements in Malta are among the strictest so far and ICO teams must undergo a due diligence process to ensure that they are legitimate.

Malta’s lead is certainly encouraging, however, I fear that excessive law making at this stage may prove its limitations further down the line. Creating hundreds of rules for a completely new area could potentially stop it in its tracks.

I still believe that the Swiss Principle-based approach to regulation is more pragmatic and prudent. It’s also important to remember that Malta is a member of the European Union, which means that they are unable to offer the same type of flexibility that we can in Switzerland. They are unable to proceed on a case-by-case basis, which can cut out room for innovation.

Regulation that brings clarity without killing innovation

Malta has made some bold legal moves and has thus already attracted large cryptocurrency exchanges to its shores, including Binance and BitBay. These laws, in the most part, are designed to protect investors, to prevent scams from happening, and ultimately to give companies a legal framework in which to operate and hold an ICO. This can only be a positive thing.

I am personally extremely optimistic that while certain jurisdictions are taking such a restrictive approach to this permissionless technology, smaller countries are embracing the it with open arms. They will be the winners in the Cryptocurrency regulation race. Lichtenstein, Singapore, Switzerland, and Malta all see this as an incredible opportunity to boost their economies and embrace financial innovation.

This will give them the competitive edge over larger countries like Japan and the US — as long as they are not too quick to categorize this category breaking technology.

Olga Feldmeier with Joerg Gasser (State Secretary for International Finance) and Ruedi Noser (Parliament member FDP), on the right, during Crypto Summit in Zurich, March 2018

Olga Feldmeier with Joerg Gasser (State Secretary for International Finance) and Ruedi Noser (Parliament member FDP), on the right, during Crypto Summit in Zurich, March 2018

Why is Switzerland still the world leader in Cryptocurrency

Switzerland is still the world leader in Cryptocurrency because we are allowing this new technology the breathing space it needs, while providing companies with guidance. We were the first country to issue clear ICO guidelines that explain what is needed to be compliant and how to tell what category the specific Cryptocurrency pertains to.

This has propelled Switzerland into the limelight and shown us such a trailblazing technology that is blockchain. In fact, our ex-President and current finance minister Johann Schneider-Ammann even proclaimed Switzerland as the ‘Crypto Nation.’ The Swiss government has shown its willingness to give guidance and clarity.

One of our very first milestones in the Crypto space was achieving licensing approval for Xapo, one of the largest Bitcoin custodians. Personally being instrumental in this case, I feel extremely proud and positive of the way that Switzerland is acting in regards to blockchain technology.

Some have criticized Switzerland for its “regulatory arbitrage” and even “offshore” reputation. However, I would argue that before Bitcoin, the very best example of borderless capital was offshore banking. Except that offshore banking was only for the ultra-rich and cryptocurrency is for everyone.

I also believe that businesses in this space needs to act in a compliant and regulated way. FINMA is opening the doorway to global cryptocurrency businesses by providing them with prudent, principle-based, and technology-neutral regulation.

Switzerland’s Expertise

Moreover, the obvious advantages of Switzerland as a crypto nation cannot be ignored. To start with, Switzerland is a worldwide leader in offshore wealth management and holds one-quarter of all global offshore assets (to the tune of some $4 trillion).

We are the fifth largest banking centre and have a long legacy of financial management and innovation. Being independent of the European Union allows us to be more flexible and poised to meet innovations of the future. Instead of killing innovation with extensive regulation, we continue to apply principle-based law on a case by case basis.

It’s not surprising then that Switzerland is the still one of the largest hub for ICOs. We are enabling legitimate innovators to raise funds in a compliant way. Our Crypto Valley in Zug is home to more than 200 blockchain companies, with the Crypto Valley Association comprising businesses and NGOs from over 20 countries.

Closing Thoughts

I am pleased to see countries embracing Cryptocurrency and beginning to understand its importance as a source of innovation and growth. Regulation is important and can represent a material competitive advantage. Yet the other factors needs to be considered when selecting your company’s jurisdiction. We at Smart Valor has chosen Switzerland as next to Crypto-friendly regulation, it is also one of the most established banking centres worldwide, with impeccable legal wrap around privacy and security, impeccable reputation and stability of its legal system. Gibraltar, Malta and the Bermuda’s might be a bit faster and a bit more bold. But we’d rather go for sustainability, quality and global brand.