August 28, 2018 5 min read

Opinions expressed by Entrepreneur contributors are their own.

As the blockchain and cryptocurrency ecosystem evolves, London is emerging as the major financial capital likeliest to become the global hub for the nascent industry. Other potential major hubs, such as the United States, should take notice or risk a brain drain as entrepreneurs move their startups to friendlier locations.

Related: Entrepreneurs Are Flocking to Europe to Open Cryptocurrency Businesses

The combination of a strong judiciary, friendly regulations and access to capital and the global banking system is making the United Kingdom, Canada and Australia attractive to blockchain and crypto entrepreneurs.

Similarly, offshore locales such as Bermuda, Malta and Mauritius are also making great strides to develop a regulatory framework that will encourage blockchain and cryptocurrency innovation.

Shaping the right regulatory framework is vital because startups can move, almost overnight, to a new location. A case in point is Miami-based cryptocurrency startup CBlocks, which recently announced it would move to Canada where regulatory expenses are significantly lower.

The economic implications are huge.

Becoming a global hub for blockchain and crypto has enormous economic implications: We are in the midst of a gold rush that could be worth $2 trillion as blockchain reimagines everything from how stock exchanges clear trades to how we record home mortgages.

However, for this technology to truly reach its potential and create the internet 2.0 age, the industry needs workable regulations. Those rules must protect good businesses while safeguarding the interests of consumers and investors from scams and frauds.

It's also critical that those rules do not stifle innovation. Those countries that take a collaborative approach to regulations will benefit while those that are too aggressive, cautious or slow will lose.

The world already has 1,600 cryptocurrencies, including Bitcoin, that have gained outsized media attention due to their wild price swings. At the same time, blockchain-based products and services are being developed by countless established firms and startups.

Related: Switzerland's 'Crypto Valley' Presents Real Opportunities for Blockchain Entrepreneurs

The industry is on the move.

IHS Markit analyst Don Tait estimates that blockchain-enabled economic activity could amount to $2 trillion within the next dozen years. As this market develops, these inherently virtual, internet-based companies can move their activities almost anywhere. That makes the regulatory framework of each jurisdiction critical to deciding which localities will attract these businesses and which will not.

London is fast becoming a global hub because for years Britain has encouraged blockchain and cryptocurrencies through programs like the Financial Conduct Authority's Project Innovate, which helps startups navigate the regulatory environment.

Australia has drawn attention, too, for its plans to replace its current stock exchange clearing system with blockchain. It's known among industry insiders that Canada is in exploratory talks with blockchain vendors to do likewise.

Interestingly, the company behind the Australia stock exchange project is the American blockchain startup Digital Asset Holdings. The firm boasts among its investors Broadridge, a U.S. financial technology provider that's among the S&P 500.

Related: Thanks to Blockchain Technology, the Entrepreneurial Spirit in France Has Never Been Stronger

Countries are leapfrogging the U.S.

While states like Delaware and Wyoming are taking a welcoming stance toward blockchain, it's not surprising to see American firms are experimenting overseas as U.S. regulators continue to wrestle with how to view the industry. The Securities and Exchange Commission's recent position on cryptocurrencies could end up discouraging innovators from building their companies in the U.S.

Competition is everywhere. Offshore locations like Bermuda and Malta are making aggressive moves to attract the industry. Bermuda, already a re-insurance hub, has set up a Blockchain Task Force to explore how the regulatory environment can make the island a destination for utility tokens, tokenized securities, cryptocurrencies and coin offerings. It is also planning to change its Banking Act to favor blockchain and fintechs.

Malta's Prime Minister Joseph Muscat recently said he wants his country to become a "global trailblazer in regulating blockchain-related businesses." And on July 4, the island nation passed three laws designed to encourage crypto companies to move there.

Related: Which European Countries Are Best for Cryptocurrency Startups?

Sensible regulation is the key.

Any state or country that wants to encourage blockchain innovation needs regulations focused on three areas:

1. In a world where custody rules are based around paper systems and traditional clearing houses, the industry needs clear rules for the custody of assets on blockchains. Industry-wide custody standards around the use of signatures and permissions-based controls are needed to eliminate a key risk in blockchain investing.

2. The industry needs clear guidelines that set out the requirements companies must follow to engage in a public token or coin offering -- a move that Bermuda is doing by creating a new legislative framework for initial coin offerings.

3. The industry also needs clear rules governing how various types of crypto-companies must register with the relevant regulators.

Developing sensible regulations takes a collaborative approach that involves listening to industry leaders, establishing task forces and ultimately writing laws that encourage innovation.

Besides Bermuda and Malta, South Korea is following that approach. The country is in the process of classifying blockchain entities after talking with 43 government ministries, 17 regional municipalities and consulting with more than 160 institutions.

Countries that want to attract blockchain commerce need to pass laws that have come about as a result of a considered, consultative approach.

After all, if you're not sure what you are doing, it's better to take things slowly. I'd rather wait for a sensible law than be saddled with a bad one that could remain on the books for years.