In a world of VPNs accessing websites and platforms disguised as ISPs from other countries, it would be obtuse to think that Americans will not always find ways to trade cryptocurrency. The murky waters of the policy and regulatory stance of the US Securities and Exchange Commission (SEC) notwithstanding, crypto will still find a market amidst curious US citizens. The glaring consequence of this opacity in regulations is that crypto firms – including those started by young, brilliant Americans – are considering leaving the United States in droves. The migration to countries with a clearer regulatory framework or providing greater accommodations to crypto is like a siren call they cannot ignore. Leaving the United States is a good business decision for crypto entrepreneurs because it might save them millions of dollars when the regulators come knocking at their doors with fines, despite not providing clear policy that businesses could follow.
The SEC’s failure to provide sufficient guidance will inevitably benefit other economies and countries. A clear example came when New York regulators ordered Paxos to discontinue issuing the Binance US Dollar (BUSD) stablecoin. Contrary to its intent, however, that hasn’t stopped trading in the pegged dollar stablecoin. It has only taken the business away from American jurisdictions. Thus, USDT, a stablecoin issued by a Hong Kong-based company, still has a thriving market that includes US
citizens.
One of the SEC’s missions is to protect investors who invest their hard-earned money in projects they believe will yield a profit. That mission will ultimately backfire if it does nothing because when crypto companies move operations offshore, regular American citizens cannot be stopped from investing. And without the SEC, there is no regulatory scheme in place to protect their interests. It is vital to the SEC’s mission that it adopts clear regulations. In countries where regulators have done so, we have seen progress in the crypto assets’ economy and active protection of citizens’ interests in their investments.
Interested persons and elected officials have made these points (and more) repeatedly at hearings of the SEC. But, at the time of this writing, the agency has not adopted any clear regulations to govern the crypto industry. The United States has been seen as a forerunner with everyone agreeing that if it provides clear policies, other countries will follow suit. In this regard though, the United States has fallen behind, as others have taken the lead in providing clear guidelines for crypto businesses to operate. While some of these countries have adopted particularly stringent regulations, at least they have adopted guidelines, and every party is aware when they cross the lines. The following countries, for example, are open and welcoming to businesses fleeing the opaque waters of the United States.
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Germany
One of the first countries to provide guidance on taxation and regulation of crypto assets was Germany. Although Germany is not as ideal an environment for tax optimization as the Netherlands, the country is a pioneer in supporting the Web3 ecosystem. The government, together with academia (e.g. the Frankfurt School of Finance & Management), had established a thriving Web3 community. Therefore, it is no surprise that some of the greatest blockchain developers, NFT projects and others have relocated to Frankfurt and Berlin. Germany, however, is not the best location for tax optimization and businesses wanting to set up shop there must use the German language.
Netherlands
The Netherlands is the best country in the world for tax optimization purposes. It has the most bilateral tax treaties in the world. It also has asset protection treaties and is an easy place to do business. With one notable exception – Dutch is required for filing tax returns and communicating with the Dutch tax authorities – all key institutions necessary to incorporate and manage a business communicate digitally and in English. That said, almost all important tax information is also available in English (online).
The Netherlands has also a strong blockchain community. But most importantly, the institutions are fair and practical. Crypto businesses can feel safe establishing their business there because Dutch regulators won’t completely reverse their policies overnight and will provide sufficient support and time for crypto companies to comply with Dutch requirements. The Dutch Central Bank has fined two of the largest crypto centralized exchanges (CEX) EUR 3 million for serving Dutch customers without a license. It is worth noting that despite the fine, those two CEXs are now licensed in the Netherlands and are operating without issues.
That is not the case with the United States. The CEXs that were fined (USD 45 million) were kicked out of the country and now operate in Switzerland and Hong Kong. It’s also worth mentioning that Dutch authorities are ahead of the curve when it comes to knowledge of blockchain technology. The Dutch police force handles ransomware attacks on the blockchain very effectively. The Dutch Prosecution Office (Openbare Ministerie) and the Dutch Tax Authority Criminal Unit (Belastingdienst FIOD) handle money laundering and crime with crypto assets quite impressively.
France
France pioneered regulatory certainty in Europe. Their licensing requirements are the closest to the EU’s forthcoming Markets in Crypto Assets (MiCA) Regulation (as are Malta’s). France is also a vibrant Web3 community centre, with many NFT and CEX projects headquartered in Paris. Unfortunately, a lot of regulatory tasks and information are described only in French. But the biggest drawback is that crypto businesses don’t realize that when they have become large enough (with revenue from supply in digital services on French territory exceeding EUR 7 million), the 3% digital services tax applies. However, some crypto companies do not care because the luxury image of having a headquarters in Paris is worth the 3% extra tax.
UAE
The United Arab Emirates has done its best to attract blockchain businesses. The country has lured them in with luxury, good weather, friendliness and 0% tax. Unfortunately, as of June 2023, the UAE has applied a 9% corporate income tax. It is worth noting that the tax is still 0% when a company’s profit is below AED 375,000 (approximately USD 100,000). Another drawback is that the UAE is on the grey and blacklists of the Financial Action Task Force, and the European Union.
South Africa & South Korea
Both countries are very friendly to Web3 businesses. One is favoured by African-born startups and scaleups, the other by Asian ones. Both countries also have the potential for tax optimization to become leaders in their regions, should their governments embrace flexibility and cater to the Web3 community. It is worth noting that Africa is a region with very large crypto adoptions, which increases financial inclusion and logistical ease for citizens there. Nigeria and Kenya also have the same potential as South Africa, should those governments become more flexible and create a comfortable environment for Web3 businesses.
Hong Kong
Hong Kong is historically a favorite jurisdiction for tax planning purposes. The territoriality principle and 9% corporate income tax are very attractive for all businesses (including crypto). Some of the largest crypto projects (like stablecoin issuers) are already located in Hong Kong. However, many blockchain entrepreneurs are a little worried about the fact that Hong Kong is under the control of China. As crypto fans know, China “hates” crypto assets, unless it is its own central bank’s digital currency that is being discussed.
Singapore
Singapore is another "classical" jurisdiction for company formation and is a great location for tax optimization. The only drawback is that traditional banks are not fans of crypto companies. The author’s feeling is that this is going to change very quickly, and Singapore will become a great location for cryptocurrencies. Just to highlight how quickly the US crypto landscape is shifting, Binance, the world’s largest centralized exchange, moved its operations to Singapore in early June 2023. This occurred after the SEC filed a suit against Binance, accusing the company of fraudulent activity and engaging in the sale of unregistered securities.
Bulgaria
Bulgaria is a hidden tax optimization gem that is regularly overlooked because of its archaic public administration. It is well known, however, that Bulgaria is a pioneer in Europe with regard to cryptocurrency ownership and usage. One logical explanation is that Bulgaria has the best Web2 and Web3 programmers in the world. They understood blockchain technology early on and, as a result, own lots of cryptocurrencies. Because of this, the Bulgarian tax authority is one of the first to tax crypto-to-crypto transactions, as well as crypto-to-fiat transactions. Bulgaria has the heavenly 10% flat tax, applies the EU’s MiCA Regulation and has a large Web3 community. Although public administration is still archaic, tax and legal professionals are very skilled in navigating it and are not very expensive.
Lithuania & Estonia
Other pioneers in blockchain technology are Lithuania and Estonia. The Estonian tax authorities are among the most technologically advanced in the world. A lot of crypto businesses incorporated themselves in these jurisdictions early on because they are not expensive, many excellent blockchain coders live there and the government supports Web3. Unfortunately, recent uncertainty with Lithuanian licences has shaken up the industry and thousands of companies have lost their licences. About 80% of Estonia’s crypto firms have either left or been banned from that country, in the wake of a 2022 law that requires crypto firms to maintain significant capital reserves and “genuine links” to Estonia.
Switzerland
One of the most expensive and also safest places to live, Switzerland offers amazing brand image and security for Web3 businesses. In one of the cantons, you can even pay your taxes in cryptocurrency (only Bitcoin and Ethereum for now). The Swiss government provides very strong support to blockchain companies. It is traditionally great for tax optimization. The only drawbacks are the lack of applicability of the MiCA Regulation, the high cost of living and the language barrier.
Malta & Portugal
Malta and Portugal are tax and vacation havens. Most digital nomads love these two countries because of their tax treatment of expats and the strong Web3 community. Websummit, with more than 70,000 international visitors, is held in Portugal and that means a lot for crypto businesses. Most digital nomads, small and medium business that are into blockchain technology reside in Malta and Portugal
Conclusion
For years, the European Union was seen as lagging behind the United States when it comes to technological advancements, as people mocked the EU’s bureaucracy. However, that turned out to be a blessing, rather than a curse, when it comes to regulation. The European Commission’s experience in creating complex legislation that covers 27 different legal systems has paid off with the creation of the MiCA Regulation. MiCA has turned the European Union into an absolute winner, as crypto businesses have begun relocating their headquarters from the United States to EU Member States such as France, the Netherlands and Ireland. While it is true that most companies offering online payment methods are American companies, being able to pay quickly, cheaply and easily with stablecoins from the European Union to any wallet in the world makes credit card usage less and less attractive.
It should be noted that American companies literally begged the SEC for help, guidance and regulatory clarity, as they wanted to stay in the United States. Unfortunately, they only received punishment and scrutiny in return. It’s no wonder then that American companies “ran away” from their strict “mother” to stay with their friendly European Union “grandmother”.
Company formation involves many considerations. It is not one size fits all. In deciding where to locate, company founders should consider, at the least, political and economic factors, the proximity to key talent, access to new markets, tax optimization, asset protection, reliability of legal system and risk management. In this respect, each of the countries discussed above presents a viable alternative to the United States. Founders of crypto businesses should carefully consider, together with their tax and legal team, which is the best jurisdiction for them.
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