EB-5 in the Digital Currency Age
By Rana Jazayerli
Some people interested in the EB-5 immigrant investor visa are finding it increasingly difficult to move their investment funds to the U.S. This is a result of many countries instituting strict rules and limits on the exchange of their local currency to U.S. dollars and on the transfer of such funds to the United States. This has been an ongoing issue for investors in China, who dominate the EB-5 investor program. However, it is also an issue for investors from many other countries, including Vietnam and Ethiopia. Recent changes in local currency laws, as well as stricter requirements on sourcing of funds by the U.S. Citizenship and Immigration Services (“USCIS,”) have added additional complications and barriers to using traditional currency and banking for the exchange and transfer of funds internationally.
For example, in January of 2017, China issued new rules requiring disclosure of the purpose of the currency exchange, and certification that the exchange is not for the purpose of immigration, or that an individual is not exchanging funds on behalf of another person to assist somebody in exchanging currency. And as of July 1, 2017, new regulations further limited the transfer of funds from China to another country to about RMB 50,000 ($ 7,500) per day per person. In Turkey, the worsening political climate has made it very difficult for citizens to transfer funds out of the country altogether. Simultaneously, USCIS has started requiring evidence of the legitimacy of the source of funds of the third-party individual or entity that assist the EB-5 investor in the exchange of currency through “currency swaps” - where an EB-5 investor transfers local currency to an account for the individual or entity in the home country, and then that individual or entity transfers the equivalent in U.S. dollars to an account that the investor opens outside of the home country.
Despite challenges, there may be a digital solution to this at the tip of an EB-5 investor’s fingers - the emerging and growing world of digital currencies.
WHAT IS DIGITAL CURRENCY?
Digital currency, also described as cryptocurrency, is a peer-to-peer electronic cash system where people can engage in financial transactions without a centralized server or intermediary financial institution(1), for example, sending currency electronically without going through a bank. In other words, digital currency is a digital asset in the form of an electronic payment. Moreover, the value of this digital currency is not tied to that of a particular country or other currency, but is instead determined by the market principals of supply and demand.
HOW DOES DIGITAL CURRENCY WORK?
There are companies across the world known as “mining companies” or “miners” that maintain the “block chain” ledger of transactions that is publicly available and decentralized. Block chain is basically a decentralized shared public ledger or list of entries of all confirmed digital currency transactions. Once a transaction has been recorded, the ledger cannot be unilaterally altered, and can only be adjusted by the agreement of involved parties.
Miners are incentivized to maintain the block chain through the awarding of newly created digital currency, transaction fees (also in the form of digital currency), or some combination of the two. The miner companies will often sell the digital currency to specialty brokers in the industry. The brokers will then sell to individuals, often times through a local or international cryptocurrency exchange.
One such digital currency is bitcoin; and while bitcoin is only one of many different digital currencies in the market, it is currently the most well known and most traded.
SO HOW DOES BITCOIN WORK?
In simple terms, the first step for an individual to purchase bitcoin, or other digital currencies, is to set up a bitcoin wallet online with a cryptocurrency exchange that accepts the investor’s local country currency. That individual then purchases the digital currency using the local currency. The miner companies collect information related to this transaction and add it to the ledgers, which maintain all historic information about actual transfer amounts and dates, but not the names of the individual buyers and sellers. This ledger and its information is public and cannot be altered, but the individuals remain anonymous.
Once the investor’s bitcoin wallet has been funded, the investor can instantly transfer the bitcoin electronically to another bitcoin buyer or exchange(2). The investor then electronically sends the bitcoin to a cryptocurrency exchange in the U.S. and then exchanges or sells the bitcoin for its equivalent in U.S. dollars. This effectively avoids the need to go through a standard bank or financial institution where currency exchange and transfer limitations would be imposed. The investor can then have the U.S. dollars transferred to an EB-5 project for investment in a job creating enterprise.(3)
Private individuals also have the ability to initiate a sale or transfer of digital currency between each other without going through an exchange. To do so they would "broadcast a transaction," i.e., publish on the block chain general ledger that they are transferring X amount of bitcoins.
PROBLEMS WITH USING BITCOIN OR OTHER DIGITAL CURRENCIES
Unfortunately, the reality of using digital currency is not so simple. While some countries such as Japan and South Korea are easing government restrictions, other countries such as China are increasing restrictions on the purchase and exchange of digital currency.
In September, the government of China issued a new rule prohibiting all international digital currency exchanges. While this rule did not outright ban the ownership or use of bitcoin and other digital currency in China, it essentially ended the ability of individuals who do not already own digital currency to purchase or exchange the local currency through formal cryptocurrency exchanges.
The market reacted to this government regulation by increasing the trading volumes of over-the-counter markets and direct peer-to-peer trading platforms such as local bitcoins(4). The local and global bitcoin market was able to work around the Chinese government’s restrictions. Faced with this reality, the Chinese government has indicated that it will likely resume cryptocurrency trading and exchanges by implementing a licensing program that will allow them some oversight of the market. It is not clear how this oversight will impact digital currency trading, but the market has clearly demonstrated a remarkable ability to operate and thrive at the global level irrespective of individual country restrictions.
There are also other issues and concerns with the use of bitcoin, and other digital currencies, separate from country-imposed restrictions, that could impact an EB-5 investor’s ability or willingness to use it to exchange and transfer funds. Some of these issues include the fact that the:
VALUE OF CRYPTOCURRENCIES ARE HIGHLY SPECULATIVE
The value of bitcoin, and other digital currencies, can change drastically, and while current trends with bitcoin have seen a rapid increase in value, a drop-in value before the investor is able to exchange it to U.S. dollars would reduce the investor’s capital funds to below the minimum required EB-5 investment amount.
COST OF CRYPTOCURRENCY MAY BE HIGHER FOR GOVERNMENT CONTROLLED CURRENCIES
Aside from being a volatile market with fluctuating values for digital currencies, there are often additional costs involved due to the conversion and exchange rate for currencies. With respect to the conversion of the Chinese RMB/Yuan to bitcoin, there may be a different or higher exchange rate than the government controlled exchange rate of Chinese RMB to a traditional country currency (fiat currency). This is a result of the value of bitcoin and other digital currencies not being tied to or impacted by the value of any local currency and government controls that may be placed on that currency, but rather is set by the supply and demand forces of the international market.
LIMITS ON THE AMOUNT OF BITCOIN THAT CAN BE PURCHASED AT ONE TIME
Many of the exchanges, including the top exchanges in the United States, limit the amount of bitcoin an individual can buy on any given day or any given week. In New York, the maximum amount of bitcoin that can be purchased in a week is $8,000. At its current value, tThis translates to less than twoonly one bitcoins per week. Such purchase limitations would greatly restrict an EB-5 investor’s ability to exchange the equivalent of $550,000 in a reasonable time frame.
THE FUTURE OF DIGITAL CURRENCIES
While the use of digital currencies is still a very small part of the global financial flow of funds, it is without question, a rapidly growing means of effecting financial transactions. More and more, individual businesses have started to recognize both the value and the importance of this global form of currency, with leading companies such as Microsoft, Expedia and PayPal already accepting bitcoin as payment for the purchase of products and services.
Many markets, such as the EB-5 immigrant investor visa market, have been reluctant to make use of digital currencies in any significant way, in large part, because of the lack of information about the process and the concerns about the legitimacy and acceptance of the cryptocurrency industry and the volatility of its value. As the exchange and transfer of local currencies becomes more difficult amidst the backdrop of an increasingly global economy, the use of digital currencies will continue to grow. And while countries can attempt to regulate and restrict these digital currencies, market forces have demonstrated that such restrictions - unlike the restrictions placed by a government on its local currency - are far from effective. In light of this, digital currencies may become more and more relevant and useful to EB-5 investors from countries with such strict government controls over their local currency.
(1) Satoshi Nakamoto, Bitcoin: a Peer-to-Peer Electronic Cash System, (November 2008), https:/bitcoin.org/bitcoin.pdf.
(2) Currently, bitcoin is trading at an all-time high value of over U.S. $8,000. So, an EB-5 investor seeking to exchange the equivalent of U.S. $550,000 for an EB-5 investment (and an administration fee), would currently need to purchase approximately 69 bitcoin.
(3) It may even be possible for an investor to transfer the bitcoin directly to an EB-5 project with the bitcoin serving as the capital contribution. USCIS stated at an EB-5 Stakeholders meeting in March 2017 that it is “considering issues involving virtual currency such as bitcoin” related to the “use of bitcoin to transfer investment funds to the new commercial enterprise.” EB-5 National Stakeholder Engagement, Washington D.C., Remarks by Immigrant Investor Program Office (IPO) Division Chief Lori MacKenzie, U.S. Citizenship and Immigration Services 3 (March 3, 2017), https://www.uscis.gov/sites/default/files/USCIS/Outreach/IPO_Division_Chief_Lori_MacKenzies_Remarks.pdf.
(4) See Joseph Young, China Will Likely Resume Cryptocurrency Trading by Licensing Bitcoin Exchanges, CryptoCoinsNews (Oct. 6, 2017) https://www.cryptocoinsnews.com/china-will-likely-resume-cryptocurrency-trading-by-licensing-bitcoin-exchanges/