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Two years ago, Prime Minister Joseph Muscat became a star in the crypto space when he announced that he was going to make Malta the most crypto-friendly jurisdiction in the world. Or as he called it ‘Blockchain Island.’
While most countries were either trying to ban crypto or figure out what in the world it was, Malta stunned everyone by passing a series of laws to establish regulatory certainty for crypto businesses and attract blockchain projects to its shores.
Excited by these moves, hundreds of crypto projects flocked to the country to apply for licenses under the new legislation.
I wish I could say that all of these projects went on to do business happily ever after, but unfortunately, that was not the case.
Nearly two years later, most of these projects are still stuck in uncertain regulatory limbo. Unable to do business and uncertain of their legal status.
Now Muscat, the crypto-friendly Prime Minister, has resigned amidst corruption charges, shattering the idea of ‘Blockchain Island’ entirely.
So, why did ‘Blockchain Island’ fail? What can we expect from other jurisdictions that similarly claim to be crypto-friendly? Read on in today’s article to find out.
Also, stick to the end to find out the easiest way to test a government’s crypto-friendly promises before you move there.
The Need for a Crypto-Friendly Jurisdiction
When Malta announced its campaign to become a crypto haven, it quickly gained endorsements from some of the biggest projects in the space.
Most notably, Binance, the world’s largest crypto exchange by trading volume, was one of the first to jump on board.
Founded in China, Binance had struggled for years against restrictive government regulations.
In 2017, under threats of Chinese regulatory crackdowns against crypto businesses, Binance moved its servers and headquarters to Japan and Hong Kong. Unfortunately, the exchange quickly discovered that it was not welcome in either of these countries either.
Binance was at a loss for options, until Malta came onto the scene.
Once the government of Malta announced that it was open to crypto business, Binance lept at the opportunity to have a secure base.
Binance Becomes Malta’s Biggest Advocate
Binance CEO, Zhao Changpeng quickly became a vocal advocate of Malta. Publicly sharing the warm relationship that he was building with the local government.
Government of Malta works on Saturday for blockchain initiatives. How about yours? https://t.co/IIWNFh8xRf— CZ Binance 🔶🔶🔶 (@cz_binance) June 2, 2018
Until an anonymous blogger, named BugM, called Binance out.
BugM accused Binance of not genuinely being based in Malta, and released financial statements from the company’s Malta subsidiaries that showed that it had no transactions in the country.
In recent weeks, Malta’s regulatory authority, the MFSA, has publicly confirmed this. In their words, it was inaccurate to refer to Binance as a “Malta-based cryptocurrency firm,” as the company was never licensed by them.
If Malta offers everything a crypto project could ask for: regulatory clarity, low taxes, low KYC AML requirements and more, why wouldn’t Binance do business there?
It doesn’t seem logical to loudly and publicly announce that you’re going to be based in a tax haven and then not take advantage of it? So, what happened?
Here’s what’s been going on behind the scenes…
The Business License Bait and Switch
In order to take advantage of Malta’s new crypto regulatory environment, companies had to apply for a license under the country’s new Virtual Financial Assets (VFA) framework.
At 10,000 euros, the cost of applying for a license was steep. But when it came to the compliance costs, a VFA license was an absolute steal. The KYC AML compliance requirements were so low, they were almost non-existent. Ultimately, it was a pay to play deal.
Sounds too good to be true? It was.
Fast forward to today, well over a year since applications opened, and not a single license has been issued.
Over 300 companies applied and have neither been accepted or rejected. Instead they’re just stuck in regulatory purgatory.
Whether this is an issue of just bureaucratic disorganization or whether it’s part of a larger scheme, it’s hard to say.
But to me, it smells like a bait and switch. A way to make a quick buck off of desperate companies.
Unfortunately, this is something you see a lot in developing countries and havens. It’s easy for politicians to promise something and then not follow through.
After all, what can a foreign company do about it? Complain to its home government that some tax haven didn’t give it all the benefits it promised? Good luck with that.
Some have even postulated that the prime minister’s promises to the crypto community in Malta were not just a money making scheme, but were actually a distraction technique to get people to look away from the corruption and murder scandals that the government was (and is) facing.
Regardless of the interpretation, the conclusion is still the same — ‘Blockchain Island’ was a sham.
What does this mean for Crypto Law Insiders?
The moral of the story is not a new one: beware of politicians’ promises.
In the best-case scenario, even if a politician is well-intentioned (which they’re usually not) governments change and bureaucrats push back– which prevents their plans from ever coming to fruition.
In the worst-case scenario, a politician may not have had any intentions to follow through. We’ve seen this time and again. Politicians will promise whatever it takes to get what they want.
As intelligent Insiders, it’s easy to be on guard against the usual populist campaign promises. But sometimes even we can drop our guard when politicians promise things that we want to hear. Low taxes, an easy business environment, reasonable KYC AML…
Remember, if it sounds too good to be true, it probably is.
So, what does this mean for other supposedly crypto-friendly jurisdictions out there?
While we’re still optimistic about Bermuda, Switzerland and the Cayman Islands, the key takeaway here is to look at politicians’ actions, not just their words.
And whenever possible, try before you buy.
Don’t just move around the world because you read an article about the new hottest jurisdiction. (Even if it’s from Crypto Law Insider!)
Test it out by trying to open up a bank account there. If the bank says that they will give you an account upon incorporation, then that’s a good start. But if they give you a list of 32-diligence items before they can consider you, it’s probably not going to work out.
This is something that a lot of people from North America don’t understand when trying to incorporate abroad.
If a bank in the US gives you a list of documents and you provide them with the requested documents you get to open an account.
But in many of these smaller, haven countries, the list is not real. Once you provide them with the diligence items, they’ll give you 72 more. In the end, you’re never able to open a bank account.
At the end of the day, there are undoubtedly jurisdictions that offer incredible advantages for those who are based there. But always be sure to do your own homework.