SAN JUAN, PRINCIPALITY OF PUERTO RICO — Gustavo Diaz Skoff encountered the crypto utopians in 2018 during Hurricane Maria’s devastation. He was lured to their unique vision for reconstructing this damaged island just six months after graduating from college.
Skoff collaborated with a cryptocurrency investor who made vague pledges to provide $1 billion for a while. However, only a small portion of the money was ever received, and Skoff began to hear the phrase “Vendepatria.” ‘You’re selling your country, your island,’ says the narrator.
Skoff, 26, is now a skeptic of the island’s tumultuous relationship with the influx of visitors hoping to create a crypto paradise. With attractive tax exemptions attracting affluent day traders, hedge fund managers, and pandemic distant workers, as well as crypto millionaires, a dispute rages about who profits from the $3 trillion industry.
In sections of San Juan, the island’s beautiful coastal capital, home values are surging, while applications for a law that allows immigrants to profit tax-free from crypto and other investments nearly tripled in 2021. Members of Puerto Rico’s socialist independence party are pushing for the tax incentive to be revoked, citing charges that the recipients are failing to create jobs or otherwise assist the local community.
In response, the crowd once derided as “crypto colonizers” is trying to rebrand the industry as more inclusive, empowering, and communal, part of a larger campaign that stretches to Silicon Valley. In Twitter threads and before members of Congress, insiders argue that blockchain, the information-storing technology that powers the crypto market, holds the promise of a more democratic Internet, known as Web3, where users own their content rather than ceding control and profits to Big Tech.
Crypto executives make their first appearance on Capitol Hill, advocating for less regulation of their burgeoning business.
Many Puerto Ricans are enthralled by it. On a recent Wednesday in Condado, a touristy district on the city’s northern shore, a 22-year-old who earns $8 an hour maintaining a row of e-scooter rentals boasted of having $2,000 in Ether, a fast-growing cryptocurrency that some predict could overtake bitcoin as the most popular cryptocurrency.
“Even my grandpa, my great-aunt — she gets the relevance of bitcoin,” Pedro Cruz, 28, co-founder of LooperVR, a start-up that creates virtual reality music events for Latino audiences, said. “They want to participate.”
At a recent launch party for Based, a new magazine launched by Skoff to highlight Puerto Rico’s domestic entrepreneurs, both excitement and mistrust about crypto were on exhibit. In the courtyard of a 19th-century convent-turned-coworking facility, local firm founders interact with Bay Area transplants and politicians while a four-piece band transitioned from salsa to baladas.
Ernesto Ojeda and Steven Rivera, both 25, are Puerto Rican software developers who believe in crypto as an economically transformational technology. They praised Neftify and its capacity to assist people in Puerto Rico, Venezuela, and the Philippines qualify for “play-to-earn” blockchain games, which are a way to get digital investments while sipping champagne. People from impoverished countries fear “being left out of this entire economy” if such games do not exist, according to Ojeda.
Jose Domingo Soto Rivera, 23, executive director of ACOMERPR, a food security NGO that also serves food to the elderly across the courtyard, was one of the skeptics. He claims he has yet to receive a donation from the crypto affluent, who are obligated to give to local charity under the provisions of the tax cut.
As the night came to a close, Skoff stood near the exit, thanking visitors. While he recognizes the potential of blockchain technology, Skoff is skeptical of mainlanders who approach crypto with a gold-rush attitude.
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“Promoting anything blindly might have dangerous ramifications,” he added.
Puerto Rico’s transformation into a tax shelter for the wealthy began in 2012. For decades, the United States’ commonwealth has relied on tax breaks to attract businesses like manufacturing and pharmaceuticals. When those businesses went out of business, officials decided to try something different: they would recruit affluent people from service industries like finance and law, who would buy homes, create bank accounts, hire locals, and otherwise help to revive the island’s ailing economy.
The resulting legislation, known as Act 22, promises tax-free earnings on investments to persons who spend at least 183 days a year on the island, which would otherwise be subject to federal taxes of up to 37 percent. Most native Puerto Ricans were not eligible because they had not lived on the island in the previous 15 years.
Then calamity hit in 2017. Hurricane Maria struck just months after the island declared bankruptcy, with a big chunk of the debt due to US hedge funds. The storm killed almost 3,000 people and left the majority of the island’s 3.4 million citizens without power, running water, or cellular service. At the same time, a meteoric rise in the cryptocurrency markets ushered in a flood of newcomers.
The initial wave of settlers vowed to transform Puerto Rico into a crypto utopia by perhaps creating a new city governed on the blockchain, led by financier Brock Pierce, chairman of the nonprofit Bitcoin Foundation.
However, they provided few specifics. Blockchain had few practical applications at the time, other than virtual currency, which early users, many of whom were libertarians, regarded as a way to avoid taxes and other types of government monitoring.
A torrent of initial coin offerings, or ICOs, fueled the 2017 boom, in which investors poured money into often speculative ventures in exchange for tokens. In Puerto Rico, some saw the crypto newcomers as exploiting the troubled island to establish its own rules, as they were fat on get-rich-quick scams.
Puerto Rico was without power for 181 days, 6 hours, and 45 minutes following Hurricane Maria.
Pierce, a former child actor best known for his role as Gordon in “The Mighty Ducks,” was the target of local wrath. Even inside the bitcoin community, Pierce is a divisive figure. Marc Collins-Rector, who was later convicted of child sex abuse, co-founded a digital video company. (According to court documents, Pierce was named in a lawsuit against Collins-Rector, but two of the plaintiffs abandoned their claims against him, and Pierce settled with a third plaintiff for $21,000.) It was the expense of the plaintiff’s lawyer’s costs, according to Pierce.) When Pierce was first elected to the Bitcoin Foundation’s board of directors in 2014, at least ten members of the organization quit. He promised to donate $1 billion and sought public attention for his promises to help the island.
Skoff was working with storm recovery when he met Pierce, going about the island in a pickup vehicle collecting information on local needs. He was also collaborating with satellite firms to help put up an electronic benefits transfer (EBT) system so that areas cut off by the storm could get financial aid.
Pierce and his friends proposed using an EBT system to distribute universal basic income and blockchain to create a decentralized energy grid, which piqued Skoff’s interest. Solar energy was already being used by community leaders to restore electricity to hundreds of houses. Skoff reasoned that blockchain, which keeps data over a network of computers rather than in a single database, could aid in scaling up that effort.
After locals attended a scheduled “day of listening” and asked the crypto transplants to leave after a conference hosted by Pierce sparked protests, Skoff offered to connect Pierce’s team with local NGOs and advise them on community engagement. “However, after that, it just stopped.” There was a lack of consistency. “There was a lack of continuity,” Skoff explained.
Pierce said in an interview with The Washington Post that he donated $8.9 million to charities on the island in 2021. The billion-dollar offer, however, was not made just for Puerto Rico, according to Pierce, who lives in a Ritz-Carlton-owned private enclave in Dorado, just outside of San Juan. “These were just thoughts,” he remarked, “nothing concrete or well-thought-out.”
Some utopians hunkered down for the “crypto winter” after the cryptocurrency market fell in 2018, while others fled the island.
“A lot of folks just vanished,” said Cruz, the CEO of a virtual reality startup who organized a blockchain hackathon for Pierce. “Everyone was losing money at the same moment, so the money dried up.”
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‘Racismo = Act 22’
In Puerto Rico, the covid-19 epidemic triggered a crypto thaw. Some islanders turned to social media for help when they were stuck at home, out of job, and looking for ways to generate money. They found Spanish-language teachers who explained how to invest. NFTs gained traction as tokens in blockchain games or as online avatars — similar to skins in the video game “Fortnite” — making crypto concepts more approachable.
The pandemic, as well as Puerto Rico’s status as a crypto hub, attracted a new type of crypto holder, including developers and dabblers, to the tax benefits. According to the New York Times, Facebook whistleblower Frances Haugen went to the island in part to be with her “crypto buddies.” Haugen told The Washington Post on the encrypted chat app Signal that all of her pals own cryptocurrencies and that some of them are businesses.
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Meanwhile, the value of cryptocurrency began to climb once more, and some local crypto investors saw their fortunes grow. Jose Santana Torres, a taxi driver, claimed the increasing value of $12,000 in bitcoin he took from trips in 2017 and 2018 allowed him to pay $100,000 in cash for his ocean-view condominium in 2021. He now recommends that other taxi drivers take all cryptocurrencies.
However, just as opposition to crypto grafts was waning, a reaction against their tax benefits erupted.
Senator Charles E. Schumer of New York and Rep. Alexandria Ocasio-Cortez of New York have both urged for increased scrutiny of possible tax cheating. The IRS calculated that Act 22 was costing the government hundreds of millions of dollars in missed tax income each year, and started a campaign to audit Act 22 recipients.
Local politicians began to criticize the incentives as well, citing a study that found tax recipients produced only 4,400 new employment between 2015 and 2019.
Act 22 was repealed after YouTube sensation Logan Paul stated a year ago that he was coming to the island to avoid California taxes. Maria de Lourdes Santiago Negrón, a member of the Puerto Rican Senate from the island’s left-wing independence party, has filed legislation to repeal Act 22.
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According to the data, the majority of Act 22 recipients’ expenditure went into luxury real estate, amounting to $1.3 billion, helping to drive up home prices.
Real estate prices are soaring around San Juan, not just in tourists areas like Condado, but also in hipster neighborhoods like Ocean Park, where graffiti stating “Act 22 = Racismo” is scrawled across the street from a commune founded by a San Francisco tech entrepreneur. Fights over overpriced rentals are escalating in a secret Facebook community for sublets and accommodation. “Puerto Ricans don’t need your cash or bitcoins,” one user remarked in response to a post about a $1,900 one-bedroom condominium.
Though the repeal of Act 22 is improbable, lawmakers are exploring modifications, according to Senate Finance Committee Chair Juan Zaragoza of the centrist Partido Popular Democrático.
Some individuals want to “throw them off the island” and “retroactively repeal the statute,” according to Zaragoza. “There is a lot of animosity toward these guys.”
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The enticement offensive
The crypto set is re-emerging after a few years of dormancy. Rather than discussing how to repair the island, they are emphasizing the potential benefits of crypto to islanders and offering to teach them about blockchain as a way of economic independence.
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The Puerto Rico Blockchain Trade Association (PRBTA) launched a free four-week introductory program called CryptoCurious to explain topics like NFTs after debuting in June. The first Puerto Rico Blockchain Week, held in December, featured talks on financial inclusion and cryptocurrency’s impact on Puerto Ricans’ daily lives, including a panelist, Uber driver Giomar Alvira, who began trading cryptocurrency last year after driving PRBTA executive director Keiko Yoshino to a CryptoCurious session.
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