By Jin Gonzalez, Chief Architect of Oz Finance
It would be an understatement to say that traditional financial institutions didn’t exactly welcome the crypto industry with open arms. Despite global investment banks' recent interest in the crypto game, traditional financial institutions desperately tried to halt Bitcoin and crypto’s disruptive impact. Unsurprisingly, when El Salvadorian President Nayib Bukele decided to make Bitcoin a legal tender last year, the IMF went up in arms, while crypto enthusiasts celebrated.
Just last month, the 40-year old Bukele announced a new initiative: offering El Salvadoran citizenship to foreign investors. While unorthodox, the young president’s move represents part of a larger ambitious strategy to steer his nation’s economy in the right direction after it was ravaged by COVID-19. Bukele’s bold initiative plans to court foreign crypto investors, including through a fund to build a “Bitcoin City.” But is this all he needs to encourage an investor influx?
The UAE model
Upon closer inspection, Bukele’s crypto plans seem to be overlooking a crucial opportunity. To see it, the president should look at how the United Arab Emirates approached crypto regulation. The UAE placed its bet on its special economic zones (including free-trade zones)—geographically-bound zones where economic regulations promote business-friendly policies, such as low corporate tax. These zones see dozens of international companies sitting side by side, which naturally leaves ample room for mingling and creating new opportunities.
The UAE has long leveraged special economic zones to attract foreign businesses and investors from across an endless list of industries. In 2018, with the hope of becoming a crypto hub, the UAE began laying the groundwork for a crypto-friendly regulatory environment, and their economic zones were at the center of these plans—including because of the favorable rules they were offering to foreign-owned companies.
This led to the Abu Dhabi Global Market’s (ADGM) Financial Services Regulatory Authority (FSRA) establishing a framework to regulate the virtual asset activities of multilateral trading facilities, brokers, custodians, asset managers, and other intermediaries. These crucial steps toward regulating digital assets would start a domino effect, leading to other initiatives within the Emirates.
In March 2021 the Dubai Multi Commodities Centre, a free zone, signed a memorandum of understanding with the UAE’s Securities and Commodities Authority to establish a regulatory framework for businesses offering, issuing, listing, and trading crypto assets in the free zone. The MoU essentially facilitates the development of an integrated ecosystem for crypto and blockchain businesses.
Over-regulation is never a good thing in the business world, but when it comes to crypto, smart regulations can protect investors and help the young industry gain legitimacy and access to global markets. As the UAE example shows, smart regulations within economic zones create a win-win scenario for both businesses and the local economy.
While the UAE and El Salvador are very different, El Salvador can enjoy the same success that the UAE has had by utilizing its two free-trade zones—Zona Franca San Marcos and Zona Franca Internacional—in a similar manner. After all, the economic benefits that crypto provides—fast and cheap transfers of value—come in handy in all parts of the globe.
Leveraging economic zones
Bukele deserves a lot of credit for taking bold steps to normalize Bitcoin and cryptocurrencies in general as part of a strategy meant to improve his country’s economy. To build on these positive steps, Bukele’s government would be wise to bolster the Zona Franca San Marcos and Zona Franca Internacional by enacting crypto-friendly regulatory policies that could attract a wide range of businesses across the industry.
El Salvador should leverage its free-trade zones by integrating them into its wider plans and policies regarding crypto. Through enacting regulatory frameworks and laws that recognize and protect digital asset businesses and services, El Salvador would transform its free-trade zones into prosperous and innovative high-tech hubs. This would perfectly position the nation to be a global leader in the Web3.0 revolution.
Instead of using citizenship as a selling point, El Salvador’s focus should be on building up and expanding these two free-trade zones, enabling and encouraging crypto investors and blockchain companies to operate in them. Crypto investors and businesses likely prioritize regulatory cover over a new passport.
These benefits will spill over outside the free-trade zones, boosting El Salvador’s overall economy and standard of living while simultaneously helping pave the way for Bukele’s other ambitious plans, like Bitcoin City.
A country like El Salvador serves as a perfect case study for other developing countries in regards to normalizing crypto activity. By leveraging their existing free-trade zones, the government can further its goals of attracting foreign investments and building a crypto-friendly ecosystem. Of course, it is important to keep white-collar criminals and other bad actors engaging in fraud and money laundering out of this space. To combat this type of activity, authorities operating the free trade zones must invest in creating some type of security body capable of vetting all businesses and investors while also monitoring and investigating suspicious transactions.
The writing is on the wall, and it’s saying “the future of finance is decentralized.” While pundits doubted Bukele’s grand vision to build an entire city centered around Bitcoin, a more manageable and quicker move would be to turn the free-trade zones already in place into crypto-havens. This would provide quick benefits serving the El Salvadorian people as well as the state.
About the author:
Jin Gonzalez has established six startups over the years, including two successful exits. Prior to founding Oz, a digital assets project with the aim of connecting a network of special economic zones across the globe, he was responsible for pioneering the adoption and embracing of blockchain technology at the Union Bank of the Philippines, as their Director of BD, Fintech, and Blockchain. Gonzalez is also the Executive Director of the Distributed Ledger Association of the Philippines.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.