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The IMF last week published a working paper on cross-border bitcoin flows. Its main conclusion is interesting, but not that surprising: when there’s dollar volatility or a change in risk appetite, flows logged on the official blockchain (used mostly by whale traders/crypto exchanges) move inversely to regular assets’. Off-chain transactions, bitcoin’s equivalent of over-the-counter trading, carry on as usual. For a full discussion of how and why, the PDF is here.

What caught our attention, though, were the heatmaps. Here’s one:


That’s a map comparing countries’ on-chain bitcoin inflows to GDP, and a good place to start is with the distribution buckets. The lower three quartiles fall within the range of 0.0 to 0.1 per cent of GDP; the top quartile has a frankly absurd range of 0.1 to 2.5 per cent of GDP.

That’s the Seychelles effect.

Africa’s smallest and least populous country is a global crypto trading hub. Exchanges including Bybit and OKX have taken advantage of the Indian Ocean archipelago state’s low taxes and light-touch regulation.

As a result, Seychelles’ incoming on-chain bitcoin flows between 2019 and 2022 were equivalent to nearly 2.5 per cent of GDP, the IMF finds. Relative to everywhere else, that’s huge. Second and third on the list are Venezuela (0.8 per cent of GDP) and Moldova (0.7 per cent).

Tax haven use is common in both crypto and tradfi, of course. FTX’s global trading business was incorporated in Antigua and Barbuda, and the firm rather famously had its headquarters in Bermuda. Binance, the biggest crypto exchange, holds a Cayman Islands registration but has no local accreditation and, it claims, no fixed abode.

Seychelles’ crypto cluster is nevertheless notable, as is the international scrutiny that many of its operators attract. The local regulator says there are around 50 unlicensed virtual-asset service providers in its jurisdiction. It’s an estimate that looks very conservative.

Among them was HTX, the Chinese-founded exchange formerly known as Huobi Global. Crypto promoter and HTX “adviser” Justin Sun has claimed to have tokens with a value of $1.6bn deposited with the exchange, and said in 2022 that it was considering relocation. HTX has since been struck off the Seychelles corporate register and, like Binance, claims to be nomadic. The SEC last year charged Sun and three of his companies with fraud and violations of securities law.

The world’s second-biggest spot crypto exchange by web traffic is, according to CoinMarketCap data, Seychelles-registered Bybit. It has had a run-in with Canadian authorities, was recently censured by Hong Kong’s Securities and Futures Commission, and has been disowned by the British Virgin Islands where it was founded.

Its neighbours on Mahé island include KuCoin, whose founders are under investigation by US authorities over alleged anti-money-laundering failings. Founders of Seychelles-incorporated BitMex pleaded guilty in 2020 to the same charge. Seychelles-incorporated Atom Asset Exchange collapsed in 2022, with its unidentified founder allegedly still on the run.

Seychelles-incorporated vehicles also played supporting roles in the OneCoin pyramid scheme, the pursuit of Sam Bankman-Fried, the Craig “Fauxtoshi” Wright saga, and the £1.4bn Hampstead bitcoin mystery. Even Binance retains a Seychelles office (though, apparently, nothing crypto-related happens there).

Of the top 12 crypto exchanges incorporated in Seychelles, we could find physical addresses for six.

Seychelles has no legislative or regulatory framework for virtual assets and virtual-asset service providers, meaning it fails to comply with the Financial Action Task Force’s anti-money-laundering code. Last year it was blacklisted by the EU for non-cooperation on tax.

A risk assessment commissioned in 2022 by the national financial watchdog was scathing, finding a “very high” risk that its unlicensed companies were using crypto for money laundering, terrorist financing, tax evasion and extortion via ransomware. In response, the regulator said it aimed to have legislation in place in 2023.

In December, Seychelles’ National Anti-Money Laundering and Countering the Financing of Terrorism Committee announced that it had opened a consultation on the possible licensing of operators. The plan was to finalise the text by February but, since the regulator was still holding briefings for National Assembly members in late March, it’s another target that looks to have slipped.

While we wait, the IMF data suggests that approximately $340 of on-chain bitcoin has been flowing into Seychelles per year for every one of its nearly 120,000 residents (along with all the difficult to trace off-chain volume, and the trade of alt-coins, memecoins, NFTs and native exchange tokens). How many citizens are benefiting from these outsized flows is a tricky thing to estimate.


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About the Author: Daniel