Offshore financial centers are in trouble. Many countries are looking at blockchain technology and cryptocurrency to fix their ailing offshore banking industries. In this article we’ll consider how blockchain and crypto can save these offshore financial centers.
There are many reasons offshore financial centers are in trouble… and most of them can be tied back to the US government’s relentless attacks on the industry.
For example, it’s become nearly impossible to get or keep a correspondent banking relationship. If a foreign bank wants to do business in USD, they must have a US correspondent partner. And this US correspondent bank makes them jump through all kinds of compliance hoops.
Today, it’s nearly impossible to get a correspondent banking account for a small or startup offshore bank. There are very few correspondent banks with KYC and KYCC systems willing to take on smaller offshore banks.
- We do have a few correspondent banks that accept offshore clients. If you own or manage an international bank, you can reach me at email@example.com.
Because it’s become so difficult to operate an offshore bank, many have closed. This has caused all kinds of trouble for offshore financial centers that were being supported by license and tax revenues from these businesses.
And the same goes for any financial services or FinTech company that accepts client deposits. If clients will deposit money into your bank account, you now have all kinds of know your client and anti-money laundering rules to follow.
If you fail to keep proper track of your clients, they hide untaxed money, or do something illegal using your correspondent account, your correspondent bank may have to pay a fine to their regulator. Because of this liability, which can be in the millions of dollars, banks are pushing out businesses that hold client funds.
Adding to the trouble, many of the best financial services companies and banks are leaving Hong Kong and Cayman for the US territory of Puerto Rico. By setting up in Puerto Rico, they can join the US system, eliminate most of their compliance and correspondent partner issues, and operate as an offshore bank in a major jurisdiction.
International banks and financial service companies can set up in the Puerto Rico under Act 273 with only $550,000 in capital. This compares to about $5 million in Belize. So long as they have at least 5 employees in Puerto Rico, they pay only 4% in corporate tax rate.
The employee requirement has not been a problem. The largest 273 bank has about 400 employees. Because of Act 273 and other financial incentives offered by the territory, Puerto Rico is taking a great deal of business away from traditional offshore financial centers.
In fact, Puerto Rico is the second largest financial center after Cayman. With over 50 IFEs and IBEs in operation and but 20 pending, I believe Puerto Rico will surpass Cayman in two years time. For more on this topic, see: Tax Planning for an International Bank License
For these and other reasons, the offshore financial centers are in trouble and looking for new business paradigms and new income sources. Financial centers need ways to opt out of the traditional banking system to reduce the risks and costs of correspondent banking.
Into an offshore industry in dire need comes blockchain. This technology has the potential to revolutionize the offshore financial industry and save these jurisdictions.
Note that I’m focused on blockchain technology. Not just cryptocurrency, but rather all of the many banking and FinTech uses of this protocol.
For example, offshore banks in smaller jurisdictions can’t currently offer business banking services. Offshore banks have high transaction costs and $100+ wire fees, so cross border remittances and small to medium sized business transfers are inefficient. It would be cost prohibitive to operate a small business offshore that sends and receives a high volume of low dollar transfers.
As a result, offshore banks are limited to providing cash management (holding retained earnings) and personal asset management. The fees generated from these businesses are lower than transactional accounts and client acquisition is more difficult. Not to mention that the number of potential customers is a small fraction of traditional business customers.
Blockchain technology may allow offshore banks to provide cost effective business banking services. Transmitting funds over blockchain, and outside of high cost legacy systems like SWIFT, can be done at near zero cost to the bank. Such an offshore bank could offer $10 international wire transfers to business clients.
For another example, blockchain and FIAT backed tokens could eliminate the need for correspondent banking partners. Clients could hold their accounts in a USD denominated token and transfer that token, rather than USD, thereby eliminating the need for a USD correspondent bank.
Without a correspondent partner, an offshore bank would be free to take on clients and do business as it sees fit. Of course, it must operate within the law. The point here is that the cost of compliance would be greatly reduced.
The last offshore banking use of blockchain technology I’ll cover is raising capital. As major countries like the United States push out Initial Coin Offerings (ICOs), offshore jurisdictions are welcoming them. For example, Hong Kong and Singapore are working hard to attract ICO businesses.
Smaller countries, such as Belize, Nevis, Cook Islands, Dominica and St. Lucia have not issued any rules limiting ICOs. In fact, a country like Dominica, which was devastated by a hurricane in October of 2017, could open up to ICO and crypto exchanges. A quality FinTech company could set up in one of these countries and help them craft legislation that benefits all interested parties.
And offshore banks could use these same platforms to raise money themselves. For a detailed article on this topic, see: How to Raise Money for an International Bank.
I hope you’ve found this article on why countries are looking to blockchain to fix their ailing offshore banking industries to be helpful. I’ve barely scratched the surface of the possible uses of blockchain and crypto to save the industry. There are probably hundreds of other potential uses for this solution in banking in general and offshore banking in particular.
For more information on setting up an offshore bank or opening a correspondent account, please contact me at firstname.lastname@example.org or call us at (619) 550-2743. We’ll be happy to assist you to set up offshore or negotiate terms with a correspondent partner.