‘Blockchain Paradise’ or Pirates of the Mediterranean?

The world’s biggest cryptocurrency exchange – Binance –  is to open a base in Malta and three more crypto companies have expressed interest in following suit.

The news of Binance’s move to Malta, where it plans to employ some 200 people, came after it was ordered to suspend its operations in Japan by the Asian country’s financial services agency.

Prime Minister Joseph Muscat has long been talking of turning Malta into a “blockchain island” and Binance CEO Zhao Changpeng tweeted that the Maltese “party” has started.

Muscat also took to Twitter and said “We aim to be the global trailblazers in the regulation of blockchain-based businesses and the jurisdiction of quality and choice for world class fintech companies.”

Funnily enough, a few days later Twitter announced a ban on cryptocurrency advertising, joining other social media giants Facebook and Google in a clampdown that seeks to avoid giving publicity to potential fraud or large investor losses.

The sector remains unregulated and despite its promise to become an alternative to ‘real’ money regulators around the world have stepped up warnings that bitcoin and other virtual currencies are highly speculative and that some could be fraudulent.

Europol estimated that about 3-4% of the €113 billion in illicit proceeds in Europe were laundered through cryptocurrencies.

In recent years, not only has Malta been accused of being a tax haven but it has also gained an undesirable reputation as a corrupt country and an international hub of money laundering and organised crime.

A buccaneering tax regime, accusations of corruption levelled at the Prime Minister and his closest allies and the presence of dodgy banks has put Malta under the international spotlight.

In this context, Malta’s flirtation with cryptocurrencies raises many questions and the Delphic nature of the technology only adds to the suspicions that once again Malta is flirting with danger.

What are cryptocurrencies? 

Cryptocurrencies, such as Bitcoin, are a digital version of money where all transactions are done online.

In a nutshell, cryptocurrencies like Bitcoin rely on blockchain to conduct transactions. Blockchain is a shared public record of transactions, and creates and tracks a new type of digital token – one that can only be made and shared according to the rules created by the networks.

These networks are powered by its users without having any central authority such as central banks and governments controlling them.

Why Malta and why now?

Similar to what it did 20 years ago in the financial services sector, Malta is aspiring to become a pioneer in blockchain and become the first country in the world to fully regulate companies which use the technology.

Lao Mao, the CEO of crypto exchange BigONE which is also looking at investing in Malta, said the country is planning to become a “blockchain paradise.”

In January, government announced that it was in the process of establishing a “Virtual Currency Act” and a “Digital Innovation Authority.” These will provide a regulatory framework to allow crypto companies to operate in Malta.

Alexey Kirienko, whose name appeared on the list of new Maltese citizens published last year, heads the Malta-based broker Exante which signed a deal in Kazakhstan to develop the ex-Soviet nation’s untapped cryptocurrency market.

The company’s top men have been treated like royalty in Malta in recent years despite an investigation by US Securities and Exchange Commission on “one of the largest financial cybercrime networks of all times”.

Soon after the 2017 general election, Alexey Kirienko, and Exante’s co-founder, Anatoli Knyazev, met Muscat, “to discuss the rise in cryptocurrencies and to discuss the launch of Exante’s cryptocurrency trading.”

However, there might be more to it. Muscat has often said that Malta’s tax system is “under attack” and cryptocurrencies could be his Plan B if the financial services and iGaming sectors start looking elsewhere.

Moreover, the lucrative digital gambling sector has been infiltrated by the Italian mafia with the Malta Gaming Authority revoking the licences of a number of gaming companies linked to organised crime. An on-going Italian police anti-mafia operation dubbed “Game Over” claimed criminal organisations use Malta as a laundromat for tax avoidance and money laundering.

In the last two decades Malta become a global hub for online betting and this sector is worth something like €1.2 billion a year, which is roughly one day’s worth of trading on Binance.

What are the dangers?

The main attraction of cryptocurrencies is the lack of control which governments, central banks, regulators and traditional markets have on them.

Blockchain has many critics but a difference must be made between the technology and cryptocurrencies such as Bitcoin, which has become the currency of choice for online drug dealers and cybercriminals demanding ransoms to restore hacked data.

There is an increasing number of cryptocurrencies which offer anonymous transactions and some of these are widely used for tax evasion, money laundering, contraband transactions, and extortion.

Another major issue is hacking. In 2014, Mt. Gox, then the world’s largest exchange, declared bankruptcy after it lost approximately $450 million in a hack and it’s CEO Mark Karpelès was charged by Tokyo police with fraud and embezzlement.

But there are various cryptocurrencies and not all operate in the same way and some are safer than others. In the meantime, global banks such as JPMorgan, Citi, ING and BNP Paribas are working on ways blockchain technology can be used in financial markets.

But earlier this month, the US Securities and Exchange Commission warned that “many platforms refer to themselves as ‘exchanges,’ which can give the misimpression to investors that they are regulated or meet the regulatory standards of a national securities exchange.”

The greatest difficulty cryptocurrencies face is integration with the existing financial infrastructure and banks and other financial institutions are not willing to let go of the control they exert on financial transections and money.

Blockchain, goes beyond money and is a technology which records any kind of data and can be a useful tool in many spheres of life, from commerce to politics.

However, like with any other tool it can be used and manipulated in various ways and not always to the benefit and interests of all.


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