The economic and travel uncertainties originating from the Covid-19 crisis have led many to reconsider both their personal priorities and their investment portfolios. Two beneficiaries of this re-evaluation process have been citizenship by investment (CBI) and cryptocurrency — owing to their shared capability to provide greater financial freedom and independence from a particular government’s decision-making.
Perhaps not surprisingly, along with this surge has been increased discussion as to whether CBI programmes should accept cryptocurrency as a form of payment.
It is not the first time that questions have been raised about the potential ties between CBI and cryptocurrency. In 2017, Vanuatu was rumoured to have become the first country with an active CBI programme to accept bitcoin as a form of payment for its citizenship; however, these reports were subsequently refuted by the nation’s government. Similarly, in summer 2018, Antigua and Barbuda took steps to integrate cryptocurrency in the nation’s CBI Programme, only to later clarify that payment must still be made in US dollars. Indeed, to date, no CBI government accepts bitcoin or other cryptocurrencies as payment for citizenship.
However, this is not to say that there is no recognition of the growing appeal of cryptocurrency and of its underlying blockchain technology, as well as of some of the arguments in favour of allowing cryptocurrency payments from prospective CBI investors.
Cryptocurrency payments can lower transactions costs for international payments through the elimination of banking fees while also allowing for greater transaction mobility. Moreover, the change would be easier to implement following the digitisation of CBI units and the Covid-19 cyber acceleration witnessed in the last 18 months.
High-end due diligence is costly. An industry-wide, federated, permissioned blockchain could streamline some of the vetting processes by allowing access to immutable know-your-client (KYC) data records on investors stored on the blockchain by financial actors. Ultimately, this could improve due diligence in a manner that is cost effective and does not significantly increase administrative burdens.
Some reports suggest that the reality of cryptocurrency being a magnet for financial crime is likely overstated, with only 0.5% of total transactions estimated to be used for illicit activity. In the case of bitcoin, transactions are public, traceable and permanently stored in the network, and users must typically perform KYC and anti-money laundering requirements on reputable crypto exchanges. Rather than hinder a country’s source of funds analysis for the investor, blockchain’s immutable ledgers could therefore help track the source of funds and limit financial crime exposure.
While cryptocurrency is likely to remain on investor radars for some time, it is unclear whether the benefits of cryptocurrency use will be deemed enough by CBI governments to outweigh some of the challenges posed by it — the most obvious ones being the reputational risk associated with digital currencies and their connection to illicit activity, as well as cryptocurrencies’ volatility and the dangers of being overexposed to them. What is certainly clear is that the industry, and investors, will continue to watch this development closely.