Greetings From Bitcoin Island
The Isle of Man is a strange place. Home to four-horned sheep, cats without tails, and perfectly preserved Victorian-era steam locomotives, this rock in the middle of the Irish Sea is perhaps best known for hosting the world’s most dangerous motorcycle race, the Manx TT.
It’s also a place where, after you take a 70-minute flight from London, a car service called The Lady Chauffeurs will meet you at the airport in a silver Mercedes-Benz S-Class. Imagine my surprise, then, when I’m greeted at arrivals by Keith, who, while courteous, impeccably dressed in a gray suit, and an able driver, is most decidedly not a lady. “All of our regular drivers are busy,” says an apologetic Nula Perren, who owns the company and has accompanied Keith to the airport. Not that I mind. I didn’t choose The Lady Chauffeurs for its ladies; I booked for the bitcoin.
Lady Chauffeurs is one of a growing number of businesses on the island that accept the digital currency. Bitcoin startups tend to cluster where the venture capital money is: London, New York, San Francisco. Taking on these behemoths might appear to be a stretch for a tiny British protectorate that can seem more time capsule than Tomorrowland. Yet the Manx government is indeed seeking to make the island the world’s foremost hub for the technology. Some 25 startups working with digital currencies or the blockchains that underpin them are already based here—and that number is growing steadily.
As our S-Class glides toward Douglas, the island’s capital, passing green hills speckled with sheep, Perren explains that her car service caters exactly to this crowd of cryptocurrency entrepreneurs and bitcoin enthusiasts. Many of these newcomers (or “comeovers” as Manx natives term them) are young programmers and tech-savvy professionals from the U.S., Canada, and Brazil who first arrived for jobs in online gambling. During the past decade, some of the world’s biggest such companies have relocated here—including Rational Group, which owns the websites PokerStars and Full Tilt Poker—making the island as important to online poker as Las Vegas and Macau are to bricks-and-mortar casinos. Perhaps unwittingly, they’ve also played midwife to the island’s cryptocurrency community. Although most online gaming companies won’t accept bitcoins, the digital currency is popular among the island’s tech set, and some devotees have traded their jobs for startups dedicated to digital currencies.
Nick Williamson, a toussle-haired American who dropped out of Illinois Institute of Technology to play professional poker, is one of them. In 2011, PokerStars lured Williamson here with a job managing its nontournament cash games. “As long as you can find a chance to get off the rock from time to time so you don’t get cabin fever, it’s great,” says the 29-year-old Midwesterner. His lapel pin implies even more enthusiasm for his adopted home; it’s the Isle of Man’s triskelion, a vaguely creepy heraldic symbol of three disembodied, armored legs.
Williamson became interested in bitcoin for its potential to revolutionize online poker, perhaps one day eliminating the need for a neutral party to administer the game and verify players’ stakes. After moving to the island and messing around with the bitcoin source code in his spare time, he started writing his own blockchain protocol. In November 2014, he left PokerStars to focus on Pythia, a Manx startup he founded that provides off-the-shelf software customers can use to create and run their own customized blockchains.
To prove the feasibility of Pythia’s protocol, Williamson found an unusual partner: the Isle of Man’s government. The government is creating a register of the island’s cryptocurrency companies—and, as a pilot project, that register will itself be stored on a blockchain created using Pythia’s protocol. This will make the Isle of Man the first government anywhere to use a blockchain to store official data, Williamson says.
“It just demonstrates our bona fides,” Brian Donegan, an official who helps spearhead the island’s pitch to cryptocurrency businesses for the Department of Economic Development, says of the blockchain pilot. “But it also signals that we have a balance between the importance of regulation and being open for business.”
The way Donegan sees it, while the U.K. dithered next door, publishing hand-wringing white papers about how to approach bitcoin, the Manx government plowed ahead. In less than a year, it created a regulatory framework and passed legal changes through the Isle of Man’s parliament, the Tynwald, which dates back more than 1,000 years and claims to be the world’s oldest continuously operating legislature.
Cryptocurrency exchanges must now abide by the island’s anti-moneylaundering and know-your-customer requirements, with the Isle of Man’s financial regulator enforcing compliance. “To keep crime out and protect the consumer is our absolute priority,” Donegan says.
Eric Hollreiser, communications director of Rational Group, says he sees parallels between the government’s creation of a regulatory regime for online gaming a decade ago, which helped legitimize the entire sector, and what’s happening today with bitcoin, which also has a Wild West reputation. “That was the tipping point in our decision to locate here,” the Los Angeles expat says of the e-gaming regulations.
There’s more for fintech entrepreneurs to like about the Isle of Man than its regulatory regime. The three fiber-optic rings that connect the island to Ireland and the U.K. provide unusually powerful bandwidth. Electricity is plentiful and reliable—as are the island’s ultrasecure, resilient data centers. And then there’s the island’s tax structure: no corporate tax; no capital gains or dividend taxes; and low rates of personal taxation, topping off at 20 percent, less than half the highest rate in the U.K.
The Isle of Man’s swift acceptance of digital currencies comes at a time when the protectorate is under increased scrutiny from the U.K. and other governments for its status as an offshore tax haven. The island—which has enjoyed three decades of continuous economic expansion and has a history of embracing emerging technological innovations, such as satellites and cellular service—is also seeking to further diversify its economy, and e-commerce (which includes online gaming) already accounts for more than 20 percent of the Isle of Man’s £4 billion ($6.2 billion) annual gross domestic product. (Financial services account for about 35 percent of GDP, while other professional services—including law and accounting—make up about 20 percent.) The Manx government wants to avoid the fate of Jersey, another British protectorate and offshore financial center, which faces a potential £125 million budget shortfall by 2019, in part because the U.K. has cracked down on tax avoidance strategies that rely on offshore funds.
But doesn’t regulation undermine the whole point of bitcoin, which was founded on the libertarian promise of unshackling money from government oversight? It’s a question Charlie Woolnough hears often. The Manx native helped set up CoinCorner, a bitcoin exchange, on the island in 2014 as well as the Manx Digital Currency Association, which represents the island’s nascent cryptocurrency community in discussions with the government and regulator.
Woolnough says submitting to “an intelligent regulatory regime” is the only way bitcoin will gain widespread acceptance. “Otherwise, bitcoin could become just the plaything of the dark Web,” he says, referring to the constellation of illicit Internet sites run by anonymous servers. A lanky 39-year old, Woolnough spent a decade working in the hedge fund industry in London before returning to the island in 2013 because he felt it offered his family a better quality of life. Since coming back, he’s become a bitcoin guru, educating many islanders about the cryptocurrency. Of the few Manx retailers that accept bitcoins, most have begun doing so after Woolnough helped connect them to CoinCorner.
Not that the digital currency is exactly ubiquitous yet. My Lady Chauffeurs taxi ride; a couple of cappuccinos at Java Express, a Douglas cafe; and a few pints of Manx-brewed Okells at Douglas’s Thirsty Pigeon pub were the only things I managed to actually buy with bitcoin during three days on the island.
As Woolnough tucks in to a lunch of locally caught hake at The Little Fish Café, a forest of sailboat masts swaying in Douglas’s North Quay behind him, he says he hopes that bitcoin becoming a regulated industry on the isle will also unlock access to mainstream Western European banks. CoinCorner, like most European bitcoin exchanges and digital-wallet providers, has an account with a small Eastern European bank, which deters some customers and business partners who would prefer the added comfort of dealing with a bank whose brand they recognize and respect.
The new regulations divide the Isle of Man’s burgeoning bitcoin fraternity. “You can buy a Rolex or diamonds without going through an extensive know-your-customer process, and these things are much less traceable than bitcoin,” says Isle native Adrian Forbes. The founder of TGBEX, Forbes sells physical bitcoins or—rather, as his lawyer always reminds him to clarify, lest he be classified as a foreign exchange operator—“decorative, metal novelty tokens.” Each token is engraved with a bitcoin private key that enables a purchaser to transfer a set amount of the currency to a digital wallet. Forbes does the engraving himself in a tiny office decorated with CrypArt lithographs that incorporate QR codes for bitcoin digital wallets.
A bitcoin true believer, he sees the digital currency as a step toward a better world: “It’s a global currency that can’t be manipulated by any government, can’t be devalued on a whim,” he says. “You have these debt crises going on; these things couldn’t happen if everyone used bitcoin.”
Forbes grew up on the Isle of Man but left to work in financial services in the U.K. and Ireland before returning in 2013. Being on such a small island has big benefits, he says. “You can meet people at the very top of government, they will listen to you, and you can get things done quickly,” he says.
Unlike locals Forbes and Woolnough, Gareth Jenkins, a 35-year-old British programmer and computer game developer, first set foot on the Isle of Man in September 2014 for Crypto Valley Summit, an industry conference. He came to get exposure for his startup, EVA Plexus, which created a protocol for storing data on the bitcoin blockchain.
Jenkins fell hard for the place; he went home to England, packed his bags, and moved here. “I like that Douglas is a small town that doesn’t feel like a small town,” he says from a perch in Noa Bake House, a hipster bakery, cafe, and flower shop near the town’s waterfront.
Hipster bakeries, locally brewed beer, ultrafast broadband—the Isle of Man has everything a bitcoin hub needs, plus some seriously strange charm.
This story appears in the October issue of Bloomberg Markets magazine.