The cryptocurrency craze that hit Puerto Rico last year—with many investors flocking to Puerto Rico in droves—may be over, but the tax incentives under Acts 20/22 continue to lure some to the “Isla del Encanto.”
“Dozens left when the crypto market went down by about 90 percent last year, and a few withdrew their Act 22 decree applications,” said attorney Giovanni Méndez of Global Economic Optimization, whose clients include crypto investors. “But was this really the time to leave or actually to come in?” he asked rhetorically.
Méndez noted that while the cryptocurrency market is “very volatile,” many investors in the crypto community are expecting a comeback. When that happens, he predicts, there will be an increase in crypto investors returning to Puerto Rico.
The latest government figures show there are more than 3,000 Act 20/22 beneficiaries on the island, and of these, more than 200 have crypto decrees. Most are Act 22 beneficiaries, but some also have companies under Act 20 that are related to the crypto space, Méndez said.
Today, the total market capitalization of the cryptocurrency (i.e. digital currency) market is about $180 billion, a huge drop from more than $800 billion in Jan. 2018, he pointed out. “All the frenzy happened around March , but the market was already coming down for the main players.”
“The returns in less than two years were more than huge… you are talking about people who went from $80,000 to $10 million,” Méndez said.
No wonder the tax benefits of Act 20/22 are such a big lure for crypto investors, particularly Act 22’s zero percent tax rate on dividend and interest income for bona fide Puerto Rico residents.
The market has bounced back nicely, but there is still a long way to go from the unbelievable peak, Méndez indicated. Today, Bitcoin is at $5,500 or so, from an all-time high of $19,000 more than a year ago. In May 2017, Bitcoin was at $900, he said.
CPA Isabel Hernández, of Kevane Grant Thornton, said crypto investors and other Act 20/22 decree holders are helping Puerto Rico become a leader in both export services and technology. “If you can do consulting services… and trade from California and Texas, you can do it remotely too from Old San Juan, Condado and Dorado,” she said.
“We have been so focused on manufacturing jobs, but that has to change to a different mindset, to be an entrepreneur. The great advantage of these tax incentives is the talent coming in… that we are bringing in people who are knowledgeable about this new technology,” she added.
“The market has rebounded and the tax incentives are still here,” said crypto investor Drew Cutkomp, chief visionary officer of Golden Rule Supply, during a recent investment forum on Puerto Rico sponsored by real-estate investment firm Lifeafar.
“There are a lot of positives here,” he added, noting the tropical climate, the culture and people of Puerto Rico. “I’ve gotten pushback from only about 2 percent of the population. This isn’t about a ‘taking’ mentality. We are reinvesting. You have to be respectful and you have to know their culture,” said the Act 20/22 decree holder.
As an example, fellow crypto investor James Slazas, the founder of Darma Capital, said that he is part of an initiative that has bought and is refurbishing a building in Santurce that will be developed as a business incubator. Other crypto investors have also made real-estate investments in Puerto Rico and opened a café in Old San Juan.
ConsenSys, a global blockchain-technology company, also teamed up with the Puerto Rico Science Trust and sponsored scholarships for college students on how to be blockchain programmers. “They have done one round and they are going to do a second one,” Méndez said. “This is a way of giving back to the community. They are training and hiring from here, and the starting salaries are high.”
This is a clear positive for Puerto Rico, he added. “College students are getting training and an opportunity for employment that pays competitive salaries. Crypto investors are bringing in new groundbreaking technology to Puerto Rico and expanding job opportunities for the labor pool.”
According to Slazas, he has helped bring in about 10 crypto investors over the past year and from a trading perspective, he said the SJMX going on line is a positive development. “There were regulatory concerns and [SJMX] is very important for what the market needs. It is an opportunity for Puerto Rico as an experiment to address U.S. regulations,” he said.
A New Digital Bank
Slazas was referring to the recent opening of the San Juan Mercantile Bank & Trust International (SJMBT), which announced earlier this month that it had received its first client deposit and began operations, following the bank’s receipt of its license to operate from Puerto Rico’s Office of the Commissioner of Financial Institutions.
“SJMBT offers fiat and digital asset custody and settlement services, and it is expected to be integrated with the trading platforms offered by its affiliate, the San Juan Mercantile Exchange (SJMX). Together, SJMX and SJMBT will provide an integrated end-to-end solution for institutional customers seeking a familiar, efficient and secure way to trade digital currencies,” said the company in a statement.
SJMBT is reportedly one of the first institutions of its kind to give customers the ability to hold and manage both “fiat” currency and digital assets on a single integrated platform. Fiat currency is any currency, like the U.S. dollar and the British pound sterling, that is declared legal tender by a government.
“Commencing SJMBT banking operations is a significant milestone. Institutional market participants in the digital asset space now have access to a licensed, fully regulated and operational banking partner that provides a secure environment for the matching and settlement of digital asset trades,” said Nick Varelakis, president and COO of SJMBT. “As more liquidity venues onboard with SJMX to trade digital assets, SJMBT will provide critical services, such as real-time settlement and account re-balancing, in support of our customers’ trading activities.”
Here to Stay
When the frenzy started, New Progressive Party Rep. Eddie Charbonier Chinea filed House Resolution 829 to investigate “blockchain” technology and how to implement it on the island. The bill was referred to the House Committee on Consumer Affairs, Banking and Insurance, where it has remained since April 2018. A blockchain is a secure digital ledger that is used to record transactions and is the basis for digital currencies like Bitcoin.
However, the lack of a legal framework in Puerto Rico has not been an impediment to the industry, as various federal regulations do exist. Regardless, the Puerto Rico government has established a blockchain advisory council to promote the industry.
“Coming from San Francisco, which is a big place for tech, people here are accessible. It’s easy to talk to them. We can keep the ecosystem going,” said Jamie Shiller, founder of Cryptx Labs. He moved to Puerto Rico after attending a crypto conference on the island last year, as did Cutkomp. “The tax benefits are a great plus,” Shiller said.
Méndez said crypto investors have received mixed coverage from the local and stateside media, while some locals are not happy about the island becoming a tax haven for the rich. “The New York Times article didn’t help,” he said with a shake of his head. That article gave a less than stellar portrayal of the crypto community in Old San Juan and featured several colorful characters, such as former child actor Brock Pierce, who was leading a movement to create a crypto utopia in Puerto Rico.
“Crypto is new everywhere and we are becoming a hub, slowly. Crypto is here to stay and I expect the market to recoup and surpass its previous highs,” Méndez said.
We shall have to wait and see.