Although the issuance of initial coin offerings (ICO) have under regulatory scrutiny in the U.S, investors are expertly straddling borders with ease and are flocking to offshore destinations to raise millions in a matter of minutes.
Interestingly, investors who are looking for the best place to raise money for their crypto-currency derivatives trading business, the United States is not on their shortlist, instead surprisingly Seychelles, the East African island nation, is becoming a popular destination.
Case in point, tech veteran Bharat Rao, San Diego-based investor who has worked for major banks on Wall Street banks, prefers moving his business to a place where initial coin offerings (ICO), don’t attract harsh scrutiny and have lower taxes as well.
Dozens of startups have flocked to Switzerland, Singapore, the Caribbeans and Eastern Europe as a result of attempts by national regulators to clamp down on coin sales.
Although the U.S. leads the pack with thirty four digital currency start-up registrations, so far this year, but that is more reflective of Silicon Valley’s role as a technology hub than anything else.
As per Smith + Crown, Singapore has registered twenty one entities, up from one in 2016, followed by nineteen in Switzerland, up from three last year.
Central Europe saw fourteen registrations this year, compared with just one in 2016 and the Caribbean hosted 10, up from two in 2016.
“The data affirms our sense that Switzerland and Singapore remain go-to locations, but the U.S. could remain for companies raising large amounts of money,” said Matt Chwierut, Smith + Crown’s research director.
Earlier in September, the Swiss Financial Market Supervisory Authority (FINMA) clarified that although the country does not have any specific rules on ICOs, some parts of the sale are however covered by existing regulations.
So far this year, 4 of the 5 largest token sales, which total to more than $600 million, were carried out by firms registered in Zug, a low-tax region south of Zurich known as the “crypto-valley” of the world.
In Contrast, countries including South Korea and China banned the sale of digital coins while regulators in Dubai, Malaysia, U.S., U.K and Germany have warned investors that current scant oversight exposed them to risks of fraud, hacking or theft.
For regulators, soaring registrations in “friendly” jurisdictions are an indication as to how hard it is for national watchdogs to regulate ICOs. Regulators are only begining to recognise this challenge.
“We are talking to other regulators, and we know that there are a lot of bilateral discussions taking place,” said the Dubai Financial Services Authority.
Incidentally, in the U.S., on July 25, the SEC ruled that ICOs should be regulated as securities had a bone chilling effect, albeit short-lived, on the crypto-currency market.
U.S. startups had assumed that by selling “utility tokens,” which gave buyers access to products or services rather than a stake in the company they could circumvent regulations. With evolving regulatory approvals, U.S. coin issuers are considering sales overseas.
“Our lawyers certainly think regulations on utility tokens could change. So for safety, the ICO should be done outside the U.S.,” said Arran Stewart, co-founder of U.S.-based Job.com, an online employment platform which plans a token offering in the Cayman Islands in February 2018.
As per Autonomous NEXT, which tracks technology in the financial services industry, ICOs touched nearly $3.6 billion by mid-November, compared with just over $100 million in 2016.
Typically, issuers publish a “white paper” describing their business plan and the news of new coin sales spread via online forums and websites tracking new offers. Investors pay for them with bitcoins or ether – two most widely accepted crypto-currencies – via a company’s website.
What has taken regulators completely by surprise is the ease with which start-ups can raise millions of dollars in a few minutes, with base minimum scrutiny. However without an unified approved they hold little sway over this new funding market.
“It’s very difficult for governments to work together in any organized fashion,” said Lewis Cohen, a partner at Hogan Lovells in New York, which has a team of lawyers specializing in blockchain. “Different jurisdictions will look at token sales through different lenses and it would be very difficult to get on a completely harmonized place.”
Lightly regulated crypto-currency companies can straddle borders with ease.
Case in point: as per BANKEX’s CEO, Igor Khmel, the firm aims to convert illiquid assets into tokens which will be traded on its crypto-currency platform. Although it is registered in Delaware its ICO is slated to take place in the Cayman Islands sometime this month.
According to Hogan Lovell’s Cohen, the sale of digital currencies should either be self-regulated or be completely regulated.
“We may need to have some guard rails,” said Cohen.
He went on to add, “I don’t think it’s really fair for legitimate platforms that are trying to create new and innovative business models to be thrown in with other less scrupulous parties who may see token sales as a way of making a fast buck.”