Brian Donegan - Bitcoin Isle Of Man

Brian DoneganBrian Donegan, Director of Foreign Direct Investment at Isle of Man Finance on creating Bitcoin Island. He has been instrumental in bringing Bitcoin and cryptocurrency businesses to the Isle of Man.

April 1st 2015 the Isle of Man’s Bitcoin specific legislation, the Proceeds of Crime Act, went into effect which has created a very friendly environment for legitimate businesses on the island and was specifically tailored to (1) protect customer funds and (2) keep crime out.


Interview with Brian Donegan on Bitcoin and Isle of Man

Trace Mayer:  Welcome back to the Bitcoin Knowledge Podcast. We have an exceptional interview today with Brian Donegan. He's head of operations of a digital business for the Isle of Man government. For those who don't know the Isle of Man has been very friendly towards bitcoin. Brian, can you give us a little bit of background on how we've gotten here and what the Isle of Man's approach they're taking to bitcoin specifically?

Brian Donegan:  Sure. Sure. Maybe if I could wind it back a little bit, Trace, and just give a little bit of context perhaps. The Isle of Man is a small island between Ireland and England, for those listeners who don't know where it is. We are a population of 85,000 people. And the financial services industry has been our main industry for the last 30 years. Government decided to diversify into digital business about 10 years ago with the eGaming or iGaming. That's gambling online.

That's now become 10% of our gross domestic product or 10% of our economy. And early this year, we started to receive a lot of interest from the digital currency community. They saw the opportunity in the Isle of Man was a place or a destination or a jurisdiction as a go-to place for digital currency simply because we had the credentials in digital business.

We have a technology platform that is second to none. We've got the bandwidth, we've got the power supplies. In fact, we have so much power we're self-sufficient and export power to the United Kingdom National Grid. We also have just introduced a regulatory framework in June of this year 2014, which we believe deals with the needs of the industry and the needs of the industry as far as we see it is to basically do two things.

Welcome quality business into the Isle of Man, while at the same time, keeping crime out and protecting the consumer. And for us it's been very much the case of getting the balance right and making sure that the controls that we've brought in are fair and balanced and encourage good quality businesses, while those laws have got to be enshrined in our legal framework we're expecting that to happen in January 2015.

But in the interim we've found that, we have about 20 to 25 companies have already come to the Isle of Man and had established there in anticipation of that regulation falling into place and early next year. So we’re very encouraged by that. There's about 50 to 60 people gainfully employed in the industry.  Doesn't seem like a lot but when you consider the Isle of Man is a population of 85,000, it’s significant. So we're doing everything that we can to provide the right legal and regulatory environment to support the digital currency industry.

Trace Mayer:  Yeah. I'm actually an investor in Netagio, which is an Isle of Man company.

Brian Donegan:  Sure.

Trace Mayer:  And we pay attorney's fees to Maitland there in Isle of Man.

Brian Donegan:  Sure.

Trace Mayer:  And we  --

Brian Donegan:  Very good firm.

Trace Mayer:  And very good firm. And we’ve actually done business for quite a long time in Isle of Man and in Jersey, because Netagio is a spinoff from another company. It's important for people to understand like when the regulatory climate is not friendly then the business and the job creation goes somewhere else.

Brian Donegan:  Absolutely.

Trace Mayer:  And if we want to be creating the jobs and  --

Brian Donegan:  Sure.

Trace Mayer:   --  we need to create an environment where the innovation going to happen.

Brian Donegan:  Absolutely.

Trace Mayer:  And so that's very exciting to see that the Isle of Man is being friendly towards this innovation in this new technological framework.

Brian Donegan:  Sure.

Trace Mayer:  Now the Isle of Man also it's an international business center.

Brian Donegan:  Correct.

Trace Mayer:  All types of things like registries, like aircraft, yachts.

Brian Donegan:  Private jet aircraft, exactly right. Shipping and satellite slots are very much part of the whole offering in relation to our registration regime.

Trace Mayer:  And the trust industry is also pretty large at the Isle of Man, right?

Brian Donegan:  Yeah, it is. Corporate Service Provision or CSP's as we call them or TSP's Trust Service Providers is a huge part of our financial services industry. So, their financial services industry comprises traditional and offshore banking, but also the life sector, insurance sector, investment funds and as I say CSP's and TSP’s.

Trace Mayer:  So what is it that the Isle of Man kind of sees with bitcoin and its potential application to all these different industries and sectors?  I mean, is it bitcoin 2.0, where we’re able to represent other assets  --

Brian Donegan:  Sure.

Trace Mayer:   --  on top of block chain?

Brian Donegan:  Sure.

Trace Mayer:  Is it like trust management?  I mean --

Brian Donegan:  Sure.

Trace Mayer:   -- what?

Bitcoin Isle of Man

Brian Donegan:  We see that the underlying technology which is the peer-to-peer encryption piece is the most significant development that we've seen in years. And while the first iteration of that or the first application of that is in currency, and we're happy to embrace that, we see that long-term, the opportunity really lies in the other applications that are going to come from that.

And we see that the long-term opportunity for the Isle of Man government is that, as these new iterations emerge the demand will be for the core developers to be attracted into these new emerging sectors, the demand will actually come on for developers who have already done the first iteration out there in the Isle of Man then clearly that will attract new businesses in.

So that's very much part of our thinking. So we’re very much a center of excellence for technological businesses. We've got a very strong technology platform in the Isle of Man, where we've got massive bandwidth, fantastic array of web data centers and also we've got the telecoms interconnectivity piece.  So it's that combination of things, that amalgam of things, that really is attractive in the Isle of Man.

The other one that we haven't mentioned is corporation tax. They are hugely significant part of any firm's needs and demands. The Isle of Man has a neutral rate of corporate tax or zero. So all companies in the Isle of Man are rated at zero for corporate tax, except banks who are rated at 10 percent.

We have no tax on dividends and there's no capital gains tax. So it's a very, very attractive proposition for businesses particularly in the early and startup stages of their development. And we also spend a lot of time talking to startups particularly in the digital business and also in digital currency.

One of the first pieces of advice that we give them is that they have to understand that the real intrinsic value in their business is going to be in their intellectual property and that is important. Early on they get good advice to make sure that they get their intellectual property registered in a jurisdiction like the Isle of Man which has very, very favorable tax rates.

Whereas if they wait and delay that procedure, they could find that the IP is actually worth several millions and then they might find the difficulty of moving that valuation of IP into an offshore jurisdiction where they might find that difficulty of  --

Trace Mayer:  And the revenue recognition that’s generated from the use of that IP.

Brian Donegan:  Correct.

Trace Mayer:   --  where you can actually decide where to have that revenue recognition happen. It might be better to have recognize revenue on the bitcoin Isle of Man then some other --

Brian Donegan:  Correct.

Trace Mayer:   -- jurisdiction.

Brian Donegan:  And, of course, you know, people ask all the time, you've got very, very little tax to pay in the Isle of Man, what's in it for you?  Well, what's in it for us simply is that as we attract in new digital businesses into the Isle of Man all of those firms will require legal assistance, they'll require banking assistance, accountancy, auditor systems. And, of course, the Isle of Man professional service community is a very well-established and a very successful sector of our economy.

So as those businesses come in they will require those services and, of course, those accounting sectors will expand and, of course, require additional jobs. So we get this trickle effect into the broader Manx economy which is really what we're after. It's driven by high quality sustainable jobs.

Trace Mayer:  It seems also very similar to kind of Singapore's approach. They have a very big carrot and a very big stick. And so it actually generates lots of compliance.

Brian Donegan:  Sure.

Trace Mayer:  If the incentives are set up so that people are more worried about creating value instead of trying to figure out how to shelter the value that they have created then they might be a much better use of those --

Brian Donegan:  Sure.

Trace Mayer:   -- intellectual abilities.

Brian Donegan:  Yeah, I mean, that speaks to the regulatory piece again. And, I think the announcement that the Isle of Man government made back in June of this year was very clear. We said that we want to protect the consumer and we wanted to keep crime out, and we wanted to approach the opportunity in a balanced way.

And the way that we've proposed doing that is to put an amendment on to existing legislation which is our Proceeds of Crime Act, that's currently going through Parliament at the moment. And we would expect that to be in place for January 2015. Essentially, in the fullness of time, it will allow our regulators to be able to have access to the books and records of the firms that have become registered in the Isle of Man, as opposed to being licensed which is a subtle difference between the two.

And that anybody that isn't abiding by the usual AML codes and the KYC codes will obviously have questions to answer, and have to bear the consequences of that. Anybody that is running a first-class business or premium quality business has nothing to obviously be afraid of in that sense.

Trace Mayer:  Yeah. And when companies are, I mean, we can take the current AML/KYC framework and apply it to bitcoin and that's what FinCEN has decided to do and they testified before the U.S. Senate that, you know, they have the tools to do the investigations and they need to do with regards to criminal activity. So, you know, you can keep the crime out and yet have all this innovation happening.

Brian Donegan:  Yes. Just on that subject in relation to the innovation, what we're finding is that outside of the exchanges, the other types of businesses that are coming to us that we're seeing in governments are mainly in the compliance space but they're also in the hardware-software, mining space as well.

And indeed some of the miners are very attracted to the fact that the Isle of Man is self-contained in relation to its ability to generate power. So that's a hugely significant part of our package if you like, in terms, of selling the Isle of Man. We derive our power from natural gas, from some hydro, and from oil. It's a diversified approach again on the power side.

Trace Mayer:  Yeah. That's going to become, I think, increasingly important finding jurisdictions where you're mining equipment is safe.

Brian Donegan:  Yes.

Trace Mayer:  Because mining is such a critical aspect to the bitcoin ecosystem that we’re seeing that as bitcoin gets larger, there is more centralization happening in the mining industry and you don't want to make these large capital investments, but do it in a jurisdiction like Venezuela, for example.

Brian Donegan:  Mm-hm. Mm-hm.

Trace Mayer:  I mean that could be very problematic.

Brian Donegan:  Sure.

Trace Mayer:  When we're looking at bitcoin, like what are the things that you're concerned about?  I mean, besides obviously the crime, like what else might be on the concern of a government or a regulator?

Brian Donegan:  I guess one of the things that the Isle of Man is most widely known for is how open the government is and also a nimble a government is in terms of being able to identify niche opportunity and to be able to address that in a fair and balanced way, always protecting the consumer and always keeping crime out. I think, one of the challenges perhaps in the current iteration of the digital currency is keeping abreast of developments because things are moving so incredibly quickly.

We heard at the conference today that you know, one month in the world of bitcoin is like a year on the Internet. And, I think, what we're going to see in the future is that speed increasing rather than slowing down. So one of the challenges for us is to actually keep abreast of developments.

Trace Mayer:  Yeah. I would completely agree with that. And, I think that it's actually very difficult for the larger institutions out there to just have the institutional knowledge about bitcoin.  I mean, this is a highly complex specialized space.

Brian Donegan:  Yeah.

Trace Mayer:  I mean I'm involved in it. And, you know I have a profit motive like it's not like I'm just drudgery 9 to 5 job, I mean, like I’m passionate and love this stuff.

Brian Donegan:  Sure.

Trace Mayer:  And, yet there's so much happening in it that I'm just not aware of any more --

Brian Donegan:  Sure.

Trace Mayer:  -- because it's turned into this whole industry and grown in its size and scope.

Brian Donegan:  Mm-hm.

Trace Mayer:  And like I personally, you know, I've spent significant amounts of time helping people from SEC, IRS, FBI understand bitcoin and things of that nature. And, you know, being able to distribute out this institutional knowledge is very important. And part of it is just being able to have someone that you can go to lunch with and talk about it.

Brian Donegan:  Sure.

Trace Mayer:  I mean if you've got the companies on your island like, “Oh, man that's super helpful.”  Like now you've got people that are in the industry that understand what's going on there the good actors, not the criminal actors --

Brian Donegan:  Yeah.

Trace Mayer:  And they'll talk with you and share their knowledge with you.

Brian Donegan:  Yep.

Trace Mayer:  Like, I would think that would be very helpful for you guys.

Brian Donegan:  Yeah, absolutely right. And, I can't emphasize enough just how exciting it has been for us as a government to see not only the speed and the development of this industry on the island, but also the reputation of the island has been enhanced simply because when we brought in the regulations for gambling online or eGaming or iGaming as they call it in the States, we had two clear objectives

We saw that there was, on the one hand, there was the need to really go after the premium end of the business, but also to keep crime out and to have a regulatory framework that was going to be first-class within a very short period of time once we put that in place we had poker stars arrive on the Isle of Man and then the cluster effect quickly followed after that.

I believe what we're starting to see a similar example of that happening now with digital currency. So we made the announcement back in June that the government is going to introduce these measures to protect the consumer, keep crime out of the island. Also the fact that we're here this week in Vegas at this convention. We've got lots of other plans, in terms, of getting the word out by promoting the Isle of Man and building awareness of the Isle of Man.

And what we're finding is that our credentials in gambling are very well-known now and very well-established. And the correlation that exists between gambling and crypto is becoming well entrenched. So this has made our life a little bit easier in the sense that when we engage people in conversation they recognize the bitcoin Isle of Man brand. They recognize it's success as a jurisdiction in eGaming. And so it makes the transition into the discussions about digital currency that bit easier.

Trace Mayer:  Yeah. So, Marc Andreessen, one of the largest Silicon Valley VCs. He's kind of made this comment that, you know, we won't just have like Silicon Valley. We'll have Drone Valley and like that particular jurisdiction or area might have regulations that are friendly towards drones and then that will attract a lot of entrepreneurial actors there. And, then there will be maybe like Biotech Valley and 3D-Printing Valley.

Brian Donegan:  Sure.

Trace Mayer: Well, maybe it's not going to be valley, it's going to be an island, right? It's going to be a Bitcoin Island.

Bitcoin Isle of Man - Vision 2020

Brian Donegan:  It's funny you should say that because one of the strategic visions that we have in the Isle of Man is a government document called Vision 2020. And Vision 2020 is basically a strategic roadmap as to how we're going to achieve our strategic objectives by the year 2020 across technology.

And we do refer to the Isle of Man as tech isle because we're now finding that, you know, we have a proposition in relation to biotech, we have a proposition in relation to digital business and when you break that down we've spent a bit of time now talking about eGaming, digital currency. Some of the other sort of areas that are interesting to us are computer games for instance, Gartner Forrester have valued this industry at over 100 billion forecast by 2017.

The Isle of Man is in a very, very good position to take a piece of that little portion of the market share.  It has the credentials.  It has all of the necessary elements to put a investment grade proposition together. And so that's another area that we're working on behind the scenes.

Trace Mayer:  Yeah, I think that’s going to be a huge area for bitcoin to penetrate is like with BitPay and Zynga, for example, we have a 2-click purchase inside the Zynga game where you're able to buy your Carats or your Farmville House or whatever it is --

Brian Donegan:  Sure.

Trace Mayer:   -- with bitcoins likely 2 clicks, bam, done.

Brian Donegan:  Yep. So we're getting convergence going on between the eGaming and the digital currency space and bitcoin. And, I think we're going to see more and more of that as time goes on.

Trace Mayer:  I guess, I was just distinguishing not just the gaming that’s not gambling-related?

Brian Donegan:  Right.

Trace Mayer:  Like Kim Kardashian’s app, I think, it does $700,000 of sales every day or something like that.

Brian Donegan:  Right.

Trace Mayer:  I mean, it’s just a huge amounts of money --

Brian Donegan: Sure.

Trace Mayer:   -- go through these Farmville game or Zynga games or things like that. And, you know, having it go through a jurisdiction where you’ve got to favorable valuation on your IP --

Brian Donegan:  Sure.

Trace Mayer:   -- and good tax treatment.

Brian Donegan:  Sure.

Trace Mayer:  Like they could all be very friendly to developers.

Brian Donegan:  Well, from an Isle of Man perspective again you know, people ask the question, why do these businesses come to the Isle of Man specifically?  From the tax perspective, all businesses are global now. So, a lot of the businesses that we're seeing are actually coming to the Isle of Man to setup their global hub or their global headquarters in the Isle of Man simply because of the reasons a) because of the technological platform that I mentioned in terms of the telecoms, the bandwidth and the data centers and power, but, also because of the zero corporate tax or neutral tax that we offer.

So essentially what that means is that if you are a global business and you're headquartered in the Isle of Man, all of the revenue that you generate in your enterprise provided they routed through your Isle of Man headquarters and going through Isle of Man banks and through the Isle of Man registered company that money is effectively treated for zero corporate tax. So you hold on to profits that you make. So the ability to affect the bottom line is absolutely enormous.

Trace Mayer:  Yeah. And how are we going to see being able to bring talent to the Isle of Man?  Like we’ve got like Chile, for example.

Brian Donegan:  Yes.

Trace Mayer:  They have the startup Chile.

Brian Donegan:  Yes.

Trace Mayer:  Like forty $40,000 from the government. If you're sponsored by a VC you can get a visa into Canada --

Brian Donegan:  Right.

Trace Mayer:   -- much easier or like are there any types of programs like --

Brian Donegan:  Okay.

Trace Mayer:    -- that with the Isle of Man to bring in our talent?

Bitcoin Isle of Man Talent

Brian Donegan:  Sure. Two things I would say about that, Trace. One is that we have an ICT University planned to be developed in the Isle of Man, in the immediate future. The plans for that are currently before our parliament to be approved which we would expect to see in the next few weeks. From our perspective, we would see that there's a particular angle on the ICT University that we see.

In the UK a lot of ICT Universities have produced graduates that have debt of 40, 50,000 pounds but with no job to show for it at the end. We see an opportunity to be able to do something completely different which is to have a first quality degree or first cohort of graduates. But we would actually give them an ability to be able to be completely able to start in the industry on the Isle of Man immediately simply because we would integrate them into the private sector from day one.

So this is government and private sector working closely together so that graduates in their first-year, second and third-year would actually be released from the studies to work in the eGaming space or in the digital currency space for a day or two to get the critical skills needed. And, of course, up to each individual undergraduate to make themselves indispensable and secure a job offer for themselves at the end of that period. We think that's a very practical and realistic way to basically deal with the issue of ensuring that there's a continuous stream of well-educated talent in the digital space on the Isle of Man.

Trace Mayer:  Yeah. Having this pipeline of talent, I think, is going to become increasingly more important for the industry. And like, right now we did the bitcoin drop at MIT. So we gave every MIT students $100 worth of bitcoin. That’s, you know, good but it's only kind of a onetime thing.

Brian Donegan:  Sure.

Trace Mayer:  It's not a long-term sustainable pipeline of new talent --

Brian Donegan:  Yeah.

Trace Mayer:   -- coming in.

Brian Donegan:  Sure.

Trace Mayer:  And the talent being able to get bitcoin specific experience it sounds like they're going to be able to do internships and all types of things like from day one --

Brian Donegan:  Correct.

Trace Mayer:   -- of going into school right?

Bitcoin Isle of Man Financial Assistance

Brian Donegan:  That’s the plan. You also mentioned on the financial assistance side. Our government has a financial assistance program currently available on an application basis. And essentially what it can deliver is up to 40% of your capex required in year one if you're a new business coming into the Isle of Man, but it's on a successful application basis, of course.

And the ability for that to affect your bottom line in a positive way can't be emphasized enough. We think that would also be another major positive feature if you like, to put into the mix when anybody's considering coming to the island. So we sort of covered the technological platform in terms of --

Trace Mayer:  Regulation.

Brian Donegan:   -- the regulation etc, etc. The ability to be able to find talented staff. But also the ability to be able to access government assistance, grants assistance for those emerging businesses as they startup in their first and second-year.

Trace Mayer:  Well, I know, you know, having invested in quite a few of these bitcoin companies. I would prefer that my companies get this preferential like 40% on capex instead of spending all this money paying attorneys to --

Brian Donegan:  Correct.

Trace Mayer:   -- decipher regulation --

Brian Donegan:  Yeah.

Trace Mayer:   -- that’s not even friendly or coherent in a lot of cases --

Brian Donegan:  Mm-hm.

Trace Mayer:   -- and very uncertain.

Brian Donegan:  Mm-hm.

Trace Mayer:  I mean that definitely impacts the potential ROI decision for the investors --

Brian Donegan:  Sure.

Trace Mayer:   -- for the VCs. And so, you know, it looks like Isle of Man is just trying to put an offer out there that is just irresistible for venture capitalists to consider the island and fund companies that want to be based out of there.

Brian Donegan:  Right.

Trace Mayer:  And people who want to go there to --

Brian Donegan:  Sure.

Trace Mayer:   -- like create the value.

Brian Donegan:  Sure. One of the things that we haven't touched on and that is the island has in the past been used as a test bed for research and development for technology. Very good example of that was the O2 develop the 3G technology in the Isle of Man. And was second to launch it after Yokomo, Japan back in 2000.

They installed 27 base stations around the Isle of Man to develop the technology there. The Isle of Man is considered to be an ideal miniaturized ecosystem of the U.K. from a population profile and from a geography profile. So we have lots of opportunities to take new technologies in the digital space that are in the R&D phase. And again, venture capitalists would be very interested in this side of it. It's another string to our bow if you like that the Isle of Man can actually offer the R&D piece as part of the package.

Trace Mayer: Yeah. Yeah. You get to do a lot of your testing, you get a --

Brian Donegan:  Correct.

Trace Mayer:   -- like figure out what your target market wants, to know whether or not to actually build it because, you know, everybody knows about the segue and it was going to change the world not just flop.

Brian Donegan:  Yeah.

Trace Mayer:  You know the last thing we need to be doing is building stuff that people don't want and spending all the money doing it. And then paying lawyers to tell us about regulation it's like totally uncertain.  Instead we can know like which itches are there that need to be scratched because our consumers can tell us because we're able to test and experiment there.

Brian Donegan:  Sure.

Trace Mayer:  I think this is highlighting a larger trend that jurisdictions are going to have to be more friendly to innovation into the human capital in order to attract it and retain it. And that's really what the Isle of Man seems to be doing.

Brian Donegan:  Yeah.

Trace Mayer:  They've identified this huge potential trend --

Brian Donegan:  Right.

Trace Mayer:   -- that's currently sucking in all the mindshare of the brightest computer developers out there and they're saying, you know, what come to our place.

Brian Donegan:  Yes.

Trace Mayer:  You know, the educated people. The people that are going to be generating lots of money, that the employees that need to be paid lots of money, I mean, you're like come here, come here --

Brian Donegan:  Sure. Sure.

Trace Mayer:  We want you in our jurisdiction.

Brian Donegan:  Yeah. Very definitely. Very, very definitely. You know, investment money will go to where it's best treated and you know, we see the Isle of Man as an investment grade jurisdiction.

Trace Mayer:  Yeah. And North Korea, you know, they don't treat investment money very good and they're still, you know, they're using 1950s technology. And, so that's really what happens to the jurisdictions that don't embrace and create a climate for this innovation in this technology in this change.

Brian Donegan:  We see our role in government as being two things really, to create the necessary environment to allow business to flourish, and we also are using jobs and the number of quality sustainable jobs as the measure of our success. And that’s ultimately how we can define how successful we are.

Trace Mayer:  Well, that's been wonderful. We're a little bit over time now. I'd just like to really thank you for being on the podcast with us.

Brian Donegan: No, my pleasure.

Trace Mayer:  Brian Donegan, head of operations of digital business at the Isle of Man. One of our crown dependencies in the U.K. So, thanks for being with us.

Brian Donegan:  Thanks very much for the opportunity.

Written by Brian Donegan on November 24, 2014.