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Last week, the International Monetary Fund published a working paper on cross-border Bitcoin flows. Its main conclusion is interesting, but not surprising: when there is volatility in the dollar or a change in risk appetite, the flows recorded on the official blockchain (mostly used by whale traders/crypto exchanges) move inversely with regular assets. Off-chain transactions, which are Bitcoin's equivalent of over-the-counter trading, continue as usual. For a full discussion of the how and why, there is a PDF here.
But what caught our attention were the heat maps. Here is one:
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This is a map comparing countries' on-chain Bitcoin flows to GDP, and a good place to start is with distribution buckets. The bottom three quartiles are in the range of 0.0 to 0.1 percent of GDP; The top quartile has a frankly ridiculous range of 0.1 to 2.5 percent of GDP.
This is the Seychelles effect.
Africa's smallest and least populated country is a global hub for cryptocurrency trading. Exchanges, including Bybit and OKX, have benefited from low taxes and light regulation in the archipelagic nation in the Indian Ocean.
As a result, cross-chain bitcoin inflows in Seychelles between 2019 and 2022 are equivalent to approximately 2.5 percent of GDP, the International Monetary Fund found. Relative to anywhere else, this is huge. Second and third on the list are Venezuela (0.8 percent of GDP) and Moldova (0.7 percent).
The use of a tax haven is common in both cryptocurrencies and trading, of course. FTX's global business was based in Antigua and Barbuda, with its corporate headquarters in Bermuda. Binance, the largest cryptocurrency exchange, holds a registration in the Cayman Islands but has no local accreditation and, as it claims, has no fixed headquarters.
However, the Seychelles cryptocurrency pool is noteworthy, as is the international scrutiny that many of its operators attract. The local regulator says there are about 50 unlicensed virtual asset service providers in its jurisdiction. It's an estimate that seems very conservative.
Among them was HTX, the Chinese-founded exchange formerly known as Huobi Global. Justin Sun, a cryptocurrency promoter and HTX “adviser,” claimed to have $1.6 billion worth of tokens deposited on the exchange, and said in 2022 he was considering a transfer. HTX has since been delisted from the Seychelles corporate registry and, like Binance, claims to be nomadic. Last year, the Securities and Exchange Commission charged Sun and three of his companies with fraud and violating securities law.
The second largest cryptocurrency exchange in the world in terms of web traffic, according to CoinMarketCap data, is Seychelles-registered Bybit. It has been involved in a dispute with Canadian authorities, was recently regulated by the Securities and Futures Commission in Hong Kong, and was disavowed by the British Virgin Islands, where it was founded.
Among its neighbors on the island of Mahe is KuCoin, whose founders are under investigation by US authorities over alleged anti-money laundering failures. The founders of Seychelles-listed BitMex pleaded guilty in 2020 to the same charge. Atom Asset Exchange, a Seychelles-listed company, collapsed in 2022, with its anonymous founder allegedly still on the run.
Seychelles-listed vehicles have also played supporting roles in the OneCoin pyramid scheme, the Sam Bankman-Fried hunt, the Craig “Fauxtoshi” Wright saga, and the £1.4bn Hampstead coin mystery. Even Binance maintains an office in Seychelles (although apparently nothing crypto-related happens there).
Among the top 12 cryptocurrency exchanges incorporated in Seychelles, we can find physical addresses for six of them.
Seychelles has no legislative or regulatory framework for virtual assets and virtual asset service providers, which means it fails to comply with the Financial Action Task Force's Anti-Money Laundering Act. Last year, the European Union blacklisted it for non-cooperation in taxation.
A risk assessment ordered by the national financial watchdog in 2022 was scathing, finding there was a “very high” risk that its unlicensed companies were using cryptocurrencies for money laundering, terrorist financing, tax evasion and extortion via ransomware. In response, the regulator said it aimed to bring in legislation in 2023.
In December, the Seychelles National Anti-Money Laundering and Countering the Financing of Terrorism Committee announced that it had opened a consultation on the potential licensing of operators. The plan was to finish the text by February, but since the regulatory body was still holding briefs for members of the National Assembly in late March, this is another goal that appears to have been pushed back.
While we wait, IMF data suggests that roughly $340 worth of on-chain Bitcoin flows into Seychelles annually for each of its roughly 120,000 residents (along with all the difficulty of tracking off-chain volume, and altcoin trading). coins, memes, non-fungible tokens (NFTs), and native exchange tokens). It is difficult to estimate how many citizens benefit from these huge flows.
