Safe Space: A Guide to Special Economic Zones for Crypto, From China to Switzerland

Last week, Russian officials revealed plans to build a major financial center on an island in the Far East, which would cater to cryptocurrencies, among other things.

Notably, the creation of special economic zones for crypto has been an enduring idea both in Russia — similar proposals have been previously made in regard to Crimea, a territory that is claimed by Russia — and the rest of the world. Here’s the list of countries that have been establishing special hubs for cryptocurrencies and blockchain on their soil.

Bolshoi Ussuriyskiy offshore crypto zone and similar concepts in Russia

The news that an offshore destination for cryptocurrencies might appear on a Bolshoi Ussuriysky island was revealed at the St. Petersburg International Economic Forum, an annual Russian business event for the economic sector.

The concept was mentioned by Leonid Petukhov, the head of the Far East Investment and Export Agency, during an interview. According to Petukhov, the island could become an offshore destination for cryptocurrencies, crypto exchanges and forex markets. He told TASS, a Russian news media:

“We want to make a large financial center there. Metaphorically speaking, that would involve cryptocurrencies, cryptocurrency exchanges, timber trading platforms — so like domestic offshore, in a good sense. What we did in Kaliningrad.”

Petukhov was most likely referring to Oktyabrsky Island in the Kaliningrad region, which, along with Russky Island in Vladivostok, reportedly became offshore economic zones in July 2018. Foreign companies registering in those clusters become exempt from certain levies — for instance, they don’t have to pay taxes on profits received by way of dividends. However, neither of those zones currently involve any cryptocurrency-related benefits.

Bolshoy Ussuriysky is a sedimentary island at the confluence of the Ussuri and Amur rivers, and lies exactly on the border between Russia and China. It had been a long-disputed territory for more than a century, but in 2004, the island was officially divided between Russian and China, and half of Bolshoi Ussuriysky (170 square kilometres) was moved to China’s jurisdiction.

According to Meduza, a Latvia-based online newspaper, the Russia-owned part of Bolshoy Ussuriysky has been mostly abandoned in the past years, especially after a 2013 flood, and lacks many elements of essential infrastructure like paved roads. Further, the report mentions that there have been “at least a dozen different proposals to develop Russia’s side of Bolshoy Ussuriysky Island” presented since the mid-2000s, none of which have been implemented.

Meanwhile, the acceptance of crypto and blockchain in Russia has been significantly mixed.

Officials have been struggling to outline a specific framework for cryptocurrencies for the past few years, although President Vladimir Putin had previously announced a deadline for July 2018. At the start of June 2019, the country’s parliament said it was considering imposing fines on crypto mining by the end of the month, while Sberbank, Russia’s largest bank, officially announced it was dropping its plan to develop crypto-related services.

The idea presented for the island of Bolshoi Ussuriysky is not new for Russia, however. Last year, authorities in the Crimean peninsula, a territory claimed by the country, considered creating a blockchain cluster in the form of a crypto investment fund in order to attract more tech businesses to the area.

The cluster would be located within the special economic zones (SEZ) in Crimea and its largest city Sevastopol, according to a local official, who outlined the concept in November 2018. There has been no public update regarding the cluster since.

Switzerland

Zug, a small Swiss town with a population of 30,000, is home to one of the oldest and well-known hubs for cryptocurrency and blockchain companies, and is commonly referred to as the “Crypto Valley.” Although there is no official confirmation for this, the term was supposedly coined by Ethereum (ETH) co-founder Mihai Alisie, who worked on the project with the rest of the Ethereum team.

The path for Zug to become the Crypto Valley started back in 2016, when the municipality allowed residents to pay their fees in bitcoin. “With Bitcoin, we're sending a message: We in Zug want to get out in front of future technologies," local mayor Dolfi Müller told German news outlet DW at the time.

Unlike with the other places mentioned on this list, the move was merely symbolic — the payments were even limited to the equivalent of 200 Swiss francs ($201) — and did not suggest the creation of a special economic zone, per se. Nevertheless, it drew the attention of various fintech companies, who chose to settle in Zug and neighboring Baar around the time it was introduced. An effective tax policy is also believed to be a major factor.

In December 2018, Zug was ranked the fastest-growing tech community in Europe based on a comparison of year-on-year growth of attendees to tech-related meetup events per European city. According to the IFZ Fintech Study 2018, more than half of the new fintech ventures based in Switzerland in 2017 operated in the blockchain and crypto space. The majority of these companies were reportedly founded in Zug.

The general attitude toward blockchain from local officials seems positive. In March 2019, the Swiss Federal Council had initiated a consultation period on the adaptation of federal law for blockchain development, which was supposed to finish in June. The goal of the consultation was to improve legal certainty over blockchain applications in order to build a basis for a regulatory framework for the industry in Switzerland, particularly in the financial sector.

Days after the consultation period commenced, the president of the Swiss Confederation, Ueli Maurer, stressed that establishing regulation for the blockchain sector should be fast and clear. Symbolically, Maurer made his remarks at the Crypto Valley Summit in Zug.

The Philippines

The Philippines seems to be at the front of the race for a crypto hub in Asia, having unveiled arguably the most detailed plan in the region so far.

In 2018, the Cagayan Special Economic Zone — a state-owned corporation responsible for the development of the 54,000-hectare Cagayan Special Economic Zone and Freeport (CSEZFP) located in the northern Philippines — announced it was going to establish a fintech hub with the goal of creating an Asian “Silicon Valley.”

The hub, also known as the Crypto Valley of Asia (CVA) will be developed by the Cagayan Economic Zone Authority (CEZA) in collaboration with private property developer Northern Star Gaming & Resorts Inc. The ultimate goal for the CVA is to stimulate the local economy and allow more Filipinos to pursue careers in technology.

More specifically, local firms are expected to generate employment in exchange for the tax breaks they will receive. CEZA will also require companies to invest at least $1 million over two years and pay up to $100,000 in licence fees.

As CEZA’s CEO, Raul L. Lambino, put it in the official press release:

“CEZA welcomes the launch of the Crypto Valley of Asia as a critical infrastructure that will serve to attract more foreign investors and global fintech players to CEZA and the Philippines. The Philippines can become one of the major off-shoring destinations for Fintech and blockchain related work,”

Asia-focused English-language publication Nikkei Review describes CVA as “a $100 million blockchain hub that aims to mimic Zug in Switzerland.” According to the media outlet, the Cagayan Economic Zone Authority has already secured participation from at least 25 tech companies, while the hub will include an internet data center, self-sustaining power production infrastructure and a "blockchain academy" training facility.

CEZA has already began issuing provisional licenses to cryptocurrency exchanges and other crypto-related businesses in the economic zone.

Related story: From the UK to Malaysia: How Countries Have Been Classifying Crypto Across the World

As for the rest of the country, the government seems to be keeping a close eye on cryptocurrencies. In February of this year, the Philippines introduced a new set of rules governing the issuance and acquisition of utility and security tokens.

The Bangko Sentral ng Pilipinas (BSP) — the country’s central bank — has required domestic crypto exchanges to register as remittance and transfer companies and implement specific safeguards — covering Anti-Money Laundering (AML), Combating the Financing of Terrism (CFT), risk management and consumer protection — since February 2017.

In June 2019, BSP warned against the potential use of cryptocurrencies in terrorism financing and stressed that they will continue to closely monitor their use in the country.

Georgia

In 2014, the government of Georgia, a post-soviet republic located in the Caucasus region, offered preferential treatment to Bitfury, a major cryptocurrency mining outlet currently headquartered in the Netherlands. Specifically, as per The New York Times report, the Georgian government sold 45 acres for just $1 to Bitfury so that the company could establish its operation. In addition, an investment fund that belongs to a former prime minister also granted the startup a $10 million loan.

Once Bitfury set up shop, Georgia created “free economic zones” in which mining activities and electricity aren’t taxed. As a result, the country has had the fastest-growing electricity consumption per capita in all of Eastern Europe and Central Asia since 2009, with 10-15% of electricity devoted specifically to crypto mining, as per the World Bank report.

Bitfury has built two facilities within the free economic zone in Georgia: a 20 megawatt data center in Gori and a 40 megawatt mining facility in Tbilisi. The latter reportedly had a daily revenue of $250,000–$400,000 as of May 2018. At some point, the farm was reportedly sold to Bitfury’s Chinese stakeholder, but within a few months, the mining outlet repurchased it back.

Regulation-wise, there is no specific framework for cryptocurrencies in Georgia at the moment.

However, the government has been leaning toward a general blockchain-friendly, low-regulation stance, as Cointelegraph previously reported. In 2017, Georgia became the first nation to implement distributed ledger technology for securing and validating government records.

China

In April 2017, Chinese President Xi Jinping announced plans to build Xiongan as a special economic zone. Notably, blockchain was presented as one of the cornerstones of the plan — it would be used in the areas of community services, government affairs and business, as the officials declared.

However, bitcoin and other cryptocurrencies are missing from the plan. That is explained by the general trend of the Chinese government, which has been cracking down on digital assets for the past few years, but facilitating and encouraging the growth of their underlying technology.

The South China Morning Post reports that the urban development project will “redirect” around 6.7 million people and could bring in 2.4 trillion yuan ($348 billion) over the next decade.

At this point, Xiongan’s local government has already partnered with numerous Chinese tech firms — including Tencent, Ant Financial and Qihoo 360 — to incentivize blockchain companies to come to the city. Notably, foreign companies have also been approached. In July 2018, China’s Xiongan New Area government signed a memorandum of understanding with the New York-based blockchain company ConsenSys to bring blockchain technology to the “smart city.” Joseph Lubin, the founder of ConsenSys, said at the time:

“As one of our first major projects in the People’s Republic of China, we are excited to help define the many ‘use cases’ that could benefit from the trust infrastructure enabled by ethereum technology,”

Belarus

Belarus has gone further than any other post-Soviet republic and set up its own fully fledged version of Silicon Valley in a bid to become “a tech country.”

Thus, as a result of signing the Decree on the Development of Digital Economy, the Belarussian government effectively legalized businesses that deal with blockchain or any other activity related to cryptocurrencies and moved them to a special economic hub called the High-Tech Park (HTP).

More specifically, as per the decree, mining and exchange operations are not treated as "business activities" in Belarus and are not subject to being taxed. According to Clause 2.2 of the decree, Dec. 21, 2017, No 8:

“Natural persons are entitled to possess tokens and, having regard to specific features established by this Decree, to perform the following operations: mining, storing of tokens in virtual wallets, exchange of tokens for other tokens, their acquisition, alienation for Belarusian rubles, foreign currency, electronic money, and also to donate and bequeath tokens.”

In addition, the declaration of income from cryptocurrency operations was declared optional until Jan. 1, 2023.

However, as Cointelegraph reported last year, the Belarussian experiment turned out to be quite feeble, at least in its infancy. As of March 2018, a few months into the new decree, “virtually no one in the territory of the Republic of Belarus has yet been engaged in the exchange of cryptocurrency or the conduct of so-called ICO,” according to what a member of the Advisory Council of the Belarusian Blockchain Association told Cointelegraph at the time, suggesting that the HTP was not in high demand.

Moreover, it is still unclear how Belarus would deal with ICO authorization and audit of cryptocurrency balances, among other things.