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Monday, November 29, 2021

The Crypto capital of the world

Chief among the upsides, he explains in his office overlooking the Dnieper River, is the sort of freedom not seen in developed nations for hundreds of years.

By: New York Times | Kyiv |
Updated: November 14, 2021 12:47:10 pm
Even as the micro debate rages, there is much less appreciation of the macro consequences of privately-issued cryptocurrencies. (File)

A buccaneering 37-year-old educated in a British private school, Michael Chobanian is fluent both in English and the folkways of Ukraine, which he regards as a largely lawless frontier and which he likes to traverse in his black Ferrari 612. He is the founder of Kuna, one of Eastern Europe’s first cryptocurrency exchanges. To him, his native country is a terrific place to run a business, as long as you have the nerve to navigate a system rife with corruption.

Chief among the upsides, he explains in his office overlooking the Dnieper River, is the sort of freedom not seen in developed nations for hundreds of years.

Like, you can get away with murder.

“In this country, you can kill a person and you will not go to jail, if you have enough money and you’re connected,” he said, sipping tea on a plush leather sofa. “If you are not connected, it will cost you more.”

The anything-goes ethos has dogged Ukraine for years, and now the government is hoping to bury it, with an assist from cryptocurrency. In early September, the Parliament here passed a law legalizing and regulating Bitcoin, step one in an ambitious campaign to both mainstream the nation’s thriving trade in crypto and to rebrand the entire country.

“The big idea is to become one of the top jurisdictions in the world for crypto companies,” said Alexander Bornyakov, deputy minister at the 2-year-old Ministry of Digital Transformation. “We believe this is the new economy, this is the future, and we believe this is something that is going to boost our economy.”

He has distilled the pitch into a 90-second infomercial that peddles Ukraine the same way that Apple peddles gadgets. Over a grinding techno soundtrack a montage of bakers, executives, nurses and assorted citizens are seen leading contented lives in a kind of high-tech nirvana.

“We invest in startups and create proper conditions for their growth,” a female narrator says in English. “Our goal is to build the most convenient country in the world, for people and business.”

Bornyakov has taken that message — Ukraine as the ultimate destination for entrepreneurs in search of low taxes, a minimum of paperwork and plenty of skilled engineers — on a road show, including a summer tour of Silicon Valley. The country’s president, Volodymyr Zelenskyy, met Apple’s CEO, Tim Cook, as well as students at Stanford.

Plenty of economists and policymakers are deeply suspicious of crypto, decrying it as the currency of choice for money launderers, terrorists, mobsters and ransomware extortionists. But an international Crypto’s Got Talent contest is now underway, and many countries are competing. As entrepreneurs pour into the field, some governments have made a simple calculation.

If investors are going to pump money into these companies, then the companies should be enticed to relocate. And lately, investors have been pumping at a hectic pace. Funding of all blockchain-related tech — cryptocurrencies, gaming, infrastructure, nonfungible tokens — soared to $7 billion in the first half of this year, according to CB Insights, a firm that tracks the industry.

So Poland is offering tax breaks and financial support to beckon tech professionals, even poaching in Ukraine. (A counteroffensive is in the works, Bornyakov said.) Lithuania, Estonia, Malta, Mexico, Thailand and Vietnam are in the race, too.

For Ukraine, the point isn’t merely new jobs and added tax revenue. Tainted for decades by financial scandals and buffeted by the infighting of oligarchs, Ukraine today is the second-poorest nation in Europe. By tacking hard into a digitally dominant financial system and culture — online passports have already been rolled out — Ukraine’s leaders hope for a massive reset, one that will rewrite the long-running narrative about chaos and crookedness that has shadowed the country since its independence in 1991.

The problem is that many tech entrepreneurs here say they like the system just the way it is, and they are especially fond of its flaws. Which gets to the paradox at the heart of Ukraine’s attempt at reinvention. The country is pushing sunlight and legitimacy to a group of executives who often prefer darkness and quasi-outlaw status.

Ukraine has already lured some Americans and Brits in the crypto industry, and they didn’t come because they’re sticklers about the rule of law. Instead, they rhapsodize about everything from affordable restaurants to unhinged raves. Better yet, the government has not a clue about what they are doing or how much they earn.

“There are no rules,” Chobanian said, with an odd kind of civic pride. “Well, there are rules, but you can break them. It’s the perfect balance between absolute anarchy and possibilities.”

Waking Up ‘a Superstar’

Ukrainians are among the most avid cryptocurrency users in the world, ranking fourth in the Global Crypto Adoption Index compiled by Chainalysis, a data firm. Roughly $8 billion worth of it now enters and exits the country annually, and the volume of cryptocurrency transactions each day, about $150 million, exceeds the volume of interbank exchanges in fiat currency.

This isn’t about crypto-fever so much as a lack of better options. Banks in Ukraine are so sclerotic that sending or receiving even small amounts of money from another country requires an exasperating obstacle course of paperwork.

Equally bad, inflation has nibbled away at the hryvnia, the national currency. Ukraine doesn’t have much of a stock market, and foreign ones are essentially out of reach. For those who want their savings to appreciate, that leaves real estate and crypto. The latter is often spectacularly volatile; Bitcoin lost half its value between April and July of this year, then recouped its losses and set a record high in October. But it’s more liquid than, say, an apartment, and frictionless compared with the fiat system.

“The banks,” said Chobanian, “have been very good at creating demand for my services.”

Kuna now handles about $3 million a day in transactions, a pittance compared with Goliaths such as Binance, but enough to land the company on a recent Forbes list of Ukraine’s most valuable companies. It took years to achieve this level of popularity. The first time Chobanian sold crypto, he said, it felt like a drug deal.

It was March 2014, the month he had launched Kuna, named for an animal skin that long ago was used as currency. It was a three-man company at the time and little more than a website with a phone number and a posted exchange rate. Chobanian had staked Kuna with about 50 bitcoins, which he had acquired after studying the banking and payments industry in 2011 and concluding that crypto could change the world.

A customer called who wanted about $100 worth of Bitcoin. The two met on the street in the center of Kyiv. The guy handed over cash; Chobanian wired Bitcoin through his mobile phone.

“I was petrified,” he recalls. “I thought I’d be arrested immediately.”

It took a little longer. The police showed up at his apartment in November 2015, in a then-common attempt at a shakedown. Kuna at the time conducted all of its business online and had become the exchange of choice for a growing number of crypto fans. Five police officers spent hours searching Chobanian’s apartment and confiscated his mobile phones, computers, even his Wi-Fi routers.

“They assumed I had cash, too,” said Chobanian. He didn’t. He knew he was supposed to show up at the police station and buy back his equipment. Instead, he wrote an impassioned essay on his lawyer’s computer, posted on Facebook, describing the ordeal.

“I woke up the next morning a superstar,” he said. “I was on five or six talk shows, including the top-rated political show in the country.”

Penny ante corruption, such as traffic cop bribes, have all but vanished, and since 2012, the country has improved its results in Transparency International’s corruption perceptions index. A free-for-all mentality, on the other hand, endures. Ukraine is cracking down on fake COVID-19 vaccination certificates, and nobody seems very bothered that the mayor of Kyiv, former heavyweight boxing champion Vitali Klitschko, lives above a strip club known as a place to meet prostitutes. (Whether the mayor owns Rio, as the club is called, is unclear. Although it does seem to operate under its own rules; a group of entrepreneurs singled out Klitschko in an April protest in front of City Hall, complaining that Rio was open during the pandemic while other businesses were forced to close.)

During a walking tour of Kyiv, Chobanian talked about politicians on the take and construction projects that audacious developers just started building, skirting zoning laws and licenses. He related these facts with a rueful sense that something was terribly broken about Ukraine. That said, those defects allow him to run his company with no oversight. What makes this country ideal for Kuna — a weak government, a dearth of guardrails — is a national tragedy for the wider population.

For now, the government knows nothing about the size, revenue or structure of his company, including staffing figures. When a woman brings him tea during our interview, he describes her as an “entrepreneur,” which, he explains, is why he doesn’t pay her a salary.

“Right now, there is no government in my business,” he said. “None.”

‘You Need to Have Lawyers’

Ukraine has suffered through too many financial scandals to expect a major influx of executives from large, international investment banks, with or without inducements. But then along came crypto, which has reputational woes of its own. Maybe this is a perfect match.

That wasn’t how Bornyakov described the upsides of crypto during a pivotal meeting earlier this year with Zelenskyy, a former television comedian who was elected president in 2019 and is perhaps best known as the guy on the phone with former President Donald Trump in a conversation that led to the first Trump impeachment. Bornyakov emphasized opportunities, in terms of jobs and economic growth, as well as the downsides of inaction.

“There’s a shadow economy here,” Bornyakov said in an interview, “and if we don’t do anything about it, there’ll be more and more, and we don’t know how it will end.”

He was speaking in a deluxe communal office space in a stylish corner of the city. Creative States is billed by its owner as a “five-star hotel for businesses,” and the ground floor has a cafe with art deco touches and plenty of furniture in taupe upholstery, including a sofa with throw pillows that each feature a photograph of the cast of “Friends.” The place is home to three floors of new companies.

There’s room for Bornyakov at the ministry’s drab Soviet-era headquarters, but planting himself at a hip entrepreneurial hub underscores that his mission is a radical departure from government as usual. And he’s just getting started.

“We’re going to create sort of digital embassies around the world,” he said, “staffed with what we call digital ambassadors.”

The goal is to double the percent that tech adds to the gross domestic product, from 5% to 10%, and double the number of people in the tech industry, to about 500,000. By 2025, when the World Bank forecasts Ukraine’s GDP will be $180 billion, tech should contribute $18 billion to that figure.

What about the corruption that has plagued this country and might daunt would-be emigres? Future administrations might not allow tech companies to flourish without raids and seizures. Russia threatens from the east. There are also revolutions to worry about. There have been two since 2004.

Even without another revolution, Steven Hanke, a professor of applied economics at Johns Hopkins University and a vocal Bitcoin skeptic, argues that the combination of Ukraine and crypto sounds like a fiasco in the making. Most studies he has seen have found that roughly half of all Bitcoin transactions are for some illegal purpose. To him, this is not an industry that Kyiv should target with enticements.

“The country has endemic corruption and criminal syndicates swarming all over it,” he said. “Ukraine will appeal to shady characters because shady characters like to penetrate countries like Ukraine.”

Bornyakov disagrees, although he offers a peculiar form of reassurance. No matter who is in charge, he argues, foreigners will have a kind of built-in protection, simply because they are foreigners.

“You can go to Egypt, which I know there’s a lot of problems, too,” he said. “But if you’re a tourist, nobody is going to harm you, nobody is going to touch you because on some DNA level, people there know that tourists bring them money. We want to kind of create a similar situation here.”

As Chobanian proved after the police searched his home, the primary assets of a tech company can’t be confiscated the same way that a malign player could take over, say, a power plant or a nickel mine. It would be a challenge to appropriate a knowledge company such as, for instance, Kyiv-based Hacken, a cybersecurity firm that specializes in blockchain work. Its value resides in a cadre of white-hat hackers who are spread around the world.

Its co-founder Evgenia Broshevan sat in a conference room in Creative States and mused about how she ended up a leader in such a male-dominated industry. All credit to her grandmother, she said, a mathematics teacher who also seems to have gifted her a knack for practical thinking that is clearly a requirement in Ukraine.

“Anyway,” she said, discussing the possible risks to the company, “you need to have lawyers.”

‘I Like That It’s Corrupt’

The 11 Mirrors Rooftop Restaurant has a $180 rib-eye on the menu, signed photos of celebrities on a wall and a panoramic view of downtown Kyiv. It feels like a steakhouse that has been airlifted from a Las Vegas casino, and it’s owned by the mayor’s brother, fellow heavyweight phenomenon Wladimir Klitschko. The location is ideal for carousers. Rio, the strip club, is a few paces down the street.

Sitting at a small, round table one recent evening are two members of the international crypto talent pool. Hartej Sawhney, who grew up in Princeton, New Jersey, co-founded Zokyo, a crypto auditing firm, which evaluates the security of tokens and smart contracts. Shadi Paterson is a Brit who runs a company that recruits employees for crypto companies. He’s wearing a T-shirt that reads “Take Your Pills.”

Both men are residents here, and both radiate the sense that they have found the right place and the right sector at precisely the right moment.

“Today, we have multiple opportunities to 100 X your money in crypto,” Sawhney said. “At its peak, the internet was growing, in terms of users, at 63%, year over year. Crypto, since its inception, has been growing at 137%.”

Like many foreign crypto entrepreneurs who live here, the two men describe the country as a kind of utopia of the senses. Everything from food to chauffeurs is one-fourth the price of Manhattan. Ketamine and MDMA are plentiful at the raves. Plus, the dating scene — by their account, anyway — sounds modeled on a season of “The Bachelor.”

“They’re actually competing to try to impress you,” Sawhney said of his experience with Ukrainian women. “It’s happened dozens of times here, where instead of me hitting on a woman, the woman is hitting on me — a woman I think is out of my league.”

The two men are a little reluctant to praise Ukraine too publicly. The country has so much to recommend it that they worry that if the secret of its charms is widely known, more people will move here, which could erode the advantages of life as a foreigner.

Sawhney and Paterson are of two minds about the new crypto law. They grasp the potential benefits of the legitimacy that comes with a government imprimatur. They also like running companies that sweat no regulations and pay no Ukrainian taxes. As for the country’s tenuous relationship to scruples, that is a selling point.

“I like that it’s corrupt here,” Sawhney said. “Here, we get to play the game that only elites in the U.S. play. I don’t need a lobbyist. I need to pay someone at the border, I can. I need to pay politicians, I can.”

Sawhney prefers that his business remains not merely under the radar, but off it entirely. Paterson understood the impulse. But he said that he’d either have to pay a percentage to gangsters to launder his money or a percentage “to the other gangsters,” namely, the Ukrainian government, which would transform his crypto savings into a fully protected stash.

In its future road shows, the Ministry of Digital Transformation will surely phrase it differently, but Paterson had gotten the gist of the government’s message.

“I can legalize all my money and there’s nothing any country can say about it?” he said, as if describing a dream. “I can send it anywhere? I can buy a house with it? That, to crypto people, is pretty crazy.”

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