Once an obscure technology misunderstood by many, blockchain has been unleashed with the seemingly unstoppable rise of its best-known application, cryptocurrencies, and a mounting wave of start-ups that promise to bring innovation across the board, from e-governance to asset management.

Many of these currencies and start-ups have failed even before they leave the drawing board; others are still at the proof-of-concept stage. Regardless, a consensus among policymakers is emerging over the potential of blockchain. At least 40 central banks across the world are currently, or will soon be, researching and experimenting with cryptocurrencies and blockchain, the Bank for International Settlements said in a report in January 2019.

After a first wave of pioneers such as Malta, Switzerland and Gibraltar introduced special blockchain regulations, or deregulated the technology altogether, several countries in the developing world are following suit by setting up regulatory sandboxes to become testbeds for new such applications. They often combine them with the tax and customs incentives typical of special economic zones (SEZs) to persuade tech companies to set up locally and help domestic economies upgrade their digital profile.

“It’s important to have smart regulations, or no regulation at all to experiment [with new technologies and applications],” says Valery Vavilov, co-founder and CEO of blockchain technology company Bitfury, which has set operations under SEZ regimes characterised by financial incentives and flexible regulation in Georgia and Kazakhstan. “Generally, we need regulation to address a trust issue. But if we use a technology such as blockchain, where trust is implemented by design, we don’t need any regulation at all.”

Zoning in

Bitfury hit the headlines in 2015 when it acquired 18.5 hectares of land in the Gldani Free Industrial Zone just outside Georgia’s capital, Tbilisi, for just $1. Beyond fiscal and customs advantages typical of SEZs, the zone guaranteed the UK-based company access to electricity at discounted rates for a brand-new, power-thirsty 40-megawatt datacentre devoted to the mining of cryptocurrencies. The facility, the company’s second in Georgia after the 20-megawatt datacentre launched a few years earlier in Gori, cost about $30m.

Other SEZs providing tech companies with the special regulatory environment they need to thrive are springing up across the globe, particularly in countries that have embraced blockchain and cryptocurrencies. The Cagayan SEZ in the Philippines has licensed as many as 37 crypto exchanges since receiving a special mandate to develop the 'Crypto Valley of Asia' in May 2018.

“We expect demand for labour and capital expenditure as the exchanges fully set up their back-office operations within the zone,” the head of the Cagayan Economic Zone Authority said in an interview with cryptocurrencies website Coin360.com.

Chinese and Russian authorities also launched early plans to develop blockchain start-ups under an SEZ regime in, respectively, Xiong’an in east China and the Bolshoi Ussuriysky island in Russia's far east. In Belarus, the government issued an SEZ licence for blockchain-powered investment platform Relex to develop its business in the Orsha district. Finance hubs such as the Dubai International Financial Centre and the Astana International Financial Centre (AIFC), which provide special, separate jurisdictions altogether, are also keeping a close eye on the blockchain fintech space.

Thinking outside the sandbox

Beyond more typical SEZ fiscal and customs advantages, these zones generally set up regulatory sandboxes that give companies enough room to test their technologies and models. “A lot of countries have different sandboxes. It is a critical development for any country that wants to support innovation,” says Bitfury’s Mr Vavilov.

Regulatory sandboxes also signal a strong degree of interest of host countries in scaling up new applications once ready and adjusting the national regulation accordingly. In Georgia, Bitfury began working with the Georgian government to apply blockchain technology to e-governance models, leading to the development of a first milestone project aimed at registering land titles on a blockchain network.

The company, which also has datacentres in Iceland, Norway and Canada and operations globally, has recently expanded across the Caucasus with the launch of a subsidiary registered within the Astana International Financial Centre (AIFC) in Kazakhstan, where it plans to make the most of a local sandbox regime, combined with the AIFC’s special jurisdiction based on the principles of English common law, to develop blockchain-related projects and build datacentres.

However, Belarus-based Relex is thinking outside the sandbox. “We didn’t decide to locate in Belarus just because of the SEZ in Orsha,” says Keith Hilden, founder of Relex. “It has more to do with the government’s openness to digitalise the whole economy and embrace digital transformation.”

Horizons open

Relex developed a cryptocurrency-based crowdfunding platform to finance real estate developments from Canada to Russia and Myanmar. The company used the benefits of a Belarus sandbox to go beyond the typical limit to crowdfunding in place in other jurisdictions and thus give real estate developers potential access to a substantial pool of investors other than more traditional institutional investors or banks. The company’s horizon has quickly widened since starting up in Orsha in early 2019.

“Taking up an offer in a jurisdiction open to develop blockchain has landed us in more boardrooms than we expected. Instead of focusing on what we can do in the real estate space, we are thinking of what we can do to digitalise the whole economy,” Mr Hilden said a few days before the company landed a mandate from the economy ministry to team up with the Sino-Belarusian Great Stone Industrial Park on digital transformation solutions.

As blockchain gains a reputation beyond the hype that has surrounded it in recent years, blockchain companies are also attracting the interest of mainstream finance. Venture capital (VC) investment into blockchain and crypto companies increased fivefold to $5.6bn over 617 deals in 2018, according to data compiled by research company PitchBook for Reuters.

If still a drop in the water in the broader VC market, which moved about $300bn in 2018, it is another sign of the increasing acceptance of blockchain-driven innovation, and its increasing financial firepower. Countries across the globe are now scrambling to gain the investments and services of blockchain companies. Theirs is a gamble, but it may well pay off beyond the borders of the crypto zones they set up to lure investors, propelling forward whole economies at the forefront of the blockchain revolution.