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tax-free crypto valley: is Dubai the next blockchain island? is that even desirable?

The news that Dubai is rolling out the red carpet to cryptocurrency and blockchain companies caps an interesting period for the sector as companies continue to seek friendly jurisdictions in which to operate.

The announcement of a ‘Crypto Valley’ in Dubai’s tax-free trade zone sets the perfect stage for the Middle Eastern emirate. 

The news release was timed to coincide with January’s 2020 World Economic Forum in the Alpine village of Davos. The annual meeting of the world’s most powerful financial NGO saw perhaps the most important regulatory news in the history of cryptocurrency.  

This is the creation of a new supra-national group of world bankers and financial leaders who will set global cryptocurrency standards. More on that here.

desert to valley

Dubai’s Crypto Valley will offer a startup incubator, co-working offices, training, education, and exposure to venture capital funding. The latter, implied but not explicit, is perhaps the most important of these in the sense that firms will be rubbing shoulders with ultra high-net-worth investors and all the status upgrades that confers. 

Dubai’s free-trade zone is based around the Jumeirah Lakes Towers district and lead by the Dubai Multi Commodities Centre (DMCC), a government body formed in 2002 to improve commodities flow through the city. Its CEO is Ahmed Bin Sulayem.

The zone offers 0% personal and corporate income tax, and members can move profits back to their home countries without restriction, the Asia Times says.

City leaders hope the move will grow the ecosystem akin to the Zug Crypto Valley in Switzerland, home to arguably the world’s most important cryptoasset companies including the Ethereum Foundation and Facebook’s Libra Association. 

swiss peaks

The Zug canton has attracted companies with its low 12% corporate tax rate. Along with close access to Swiss banking facilities these are privileges which have inspired thousands of firms to move to the region since the late 1950s.

Light-touch regulatory trade zones do have a dark side. Along with favourable tax rates, a culture of confidentiality and the attractive status of having some of the richest neighbouring businesses on earth, a region’s ongoing reputation as a tax haven does attract less well-meaning actors. 

SwissInfo.ch reports on alleged abuses by controversial cryptoexchange Bitfinex and the court case that has consumed the Zug-registered business.  A New York court will consider the latest market manipulation lawsuit against Bitfinex, its sister company Tether and its parent iFinex.

Occasionally opaque business structures do lend themselves to insider dealing, too. 

A head-turning recent report in the Manila Times, quoting national intelligence sources, claimed that the head of the Philippines Cagayan Economic Zone was ‘outrageously corrupt’. This is not the kind of analysis investors want to see. 

More broadly the UAE, of which Dubai is a part, has shown it will act to protect capital while still attempting to unlocking the promise of tokenisation and cryptocurrencies. 

In October 2019 the state issued a 28-article draft of cryptoasset regulations in consultation with local businesses, with a focus on protecting investors, anti money-laundering compliance, standards for safe custody, information security controls and technology governance. 

binance vs malta

The last attempt to build a business-friendly Blockchain Island fell well short of expectations. Passing three linked blockchain-supportive bills in 2018 set the stage for Malta to make good on this intention. 

But something was rotten in EU’s smallest member state. In 2018 the OECD put Malta on a blacklist of 21 countries for its role in potential tax evasion through its ‘golden passport’ scheme — selling residency for cash.

Prime Minister Joseph Muscat was linked to the murder of corruption expose journalist Daphne Caruana Galizia. Muscat and his cabinet later resigned. 

On 21 February 2020 Malta Financial Services Authority regulator confirmed what many in the space had suspected: that Binance “was not authorised to operate” in the country. 

Binance CEO Changpeng Zao — known as CZ — dismissed the story as old news, tweeting that the information was already in the public domain. However the exchange has been content to let news organisations erroneously report on the Malta-Binance connection when it suited them. 

Binance’s Malta move was greeted with a slew of headlines connecting the world’s largest cryptoexchange by volume with the tiny Mediterranean island and Muscat’s social media messaging announcing the arrival of the former China-headquartered exchange. 

CZ is reportedly the space’s highest net worth individual according to a recent world rich list. 

appetite

The appetite for blockchain and cryptoasset investment is clear to see. As the months and years pass, the sector grows stronger and ever more institutional investors want access to cryptocurrencies and derivative products through the likes of Fidelity and Intercontinental Exchange’s Bakkt.

Associating cryptocurrency businesses with tax havens does nothing to improve their wider reputation. 

Along with maturity comes responsibility. Regulation. Structure. Tax-free zones come with their own problems and are not necessarily the way to achieve greater market adoption. That comes by companies building trust with growing audiences through well-regulated and transparent operations. 

Investors both large and small, both retail and institutional, benefit most when there is transparency, a level playing field, strong governance and fair treatment from the companies they invest in.