Jurisdictions embracing bitcoin and bitcoin-related businesses can dramatically improve their countries' economies in a multitude of ways. But, what exactly would a favorable bitcoin jurisdiction look like?

For starters, it would ideally have no VAT or capital gains tax on bitcoin transactions and would encourage an active two-way exchange market with national currencies.

Commercial banking partners would not be subject to costly and overbearing regulatory guidelines that threaten or impede innovation. Furthermore, wallet providers, merchants, and payment processors would be under no restrictions.

As the bitcoin protocol expands globally, we are already witnessing some jurisdictions announce their intentions to become welcoming business hubs for bitcoin innovation.

Most recently, UK Crown dependency, the Isle of Man, outlined plans to provide an environment that enables companies operating within the bitcoin space to flourish and its government posted an informative Questions & Answers document.

Capitalizing on the inability of more bureaucratic jurisdictions to embrace bitcoin, group General Counsel for Counting House Services Paul Davis emphasized:

Furthermore, the island’s Financial Supervision Commission, confirmed in March that a bitcoin exchange holding client funds with a licensed overseas payment service provider is not required to obtain a licence in the country for its activities.

Luxembourg also made headlines earlier in the year when it publicly advertised its intention to start an open dialogue with bitcoin businesses seeking a jurisdictional home.

Several teams of bitcoin industry experts have already met with Luxembourg officials. Michael Jackson, partner at Luxembourg-based Mangrove Capital Partners, characterized his conversations with the country’s regulators thus:

Jackson also expressed optimism that Luxembourg’s decision would carry weight in the broader European community, noting that it is a financial center of Europe.

Somewhat reluctantly, Gibraltar has recognised its leadership role in the electronic payments industry for e-gaming and what that means for bitcoin. The British Overseas Territory has hosted two conferences, one in 2011 and one in 2014, that highlighted the strong business benefits for taking a leadership role on bitcoin integration.

KPMG’s Archie Watt told New Statesman:

Two operators in Gibraltar have expressed to me privately that senior members of the Gibraltar government want the jurisdiction to lead rather than follow and that the responsive framework is already in place to make that happen.

When discussing bitcoin's benefits for an economy, one must distinguish between the economic benefits of a jurisdiction making itself appealing to bitcoin business versus the jurisdiction adopting bitcoin as its territorial unit, which is an entirely different strategy (to be covered in a future analysis).

The economic benefits of the former can be seen as setting the stage for bitcoin jurisdictional arbitrage.

'Jurisdictional arbitrage' is defined as the practice of taking advantage of the discrepancies between competing legal jurisdictions. According to Wikipedia, it takes its name from arbitrage, the financial practice of purchasing a good at a lower price in one market and selling it at a higher price in another.

Patri Friedman

, grandson of economist Milton Friedman, explains that, just as in financial arbitrage, the attractiveness of jurisdiction arbitrage depends largely on its transaction costs – in this case, the costs of switching legal service providers from one government to another.

With respect to extreme economic benefits, a jurisdictional hub for bitcoin with an independent and functioning court system would immediately experience an influx of new capital and new businesses, thereby contributing to a growing GDP (Gross Domestic Product).

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Due to bitcoin's inherent lack of a third-party intermediary, the leading financial service industries of today would gradually become dis-intermediated and this newly open jurisdiction would serve as the disruptors' laboratory.

New, disruptive operators geared towards building out the bitcoin mobile payments infrastructure, funds transfer business and asset management industry would flock to the region, spurring vigorous job growth and opportunity.

The hub would soon find itself a magnet for related advisory services, venture capital, and other professional support services seeking to capitalize on the bitcoin boom. Retail banks could be rejuvenated as demand increases for true bitcoin services, such as foreign exchange, transaction escrow services, and trusted safekeeping.

Most significantly though, a forward-looking jurisdiction for bitcoin business would demonstrate strength and leadership for the new digital economy, catapulting the country and its people to the world stage.

Much like Gibraltar became the worldwide hub for e-gaming in 2004 and Zurich became the world's gold trading hub in 1968 due to the collapse of the London Gold Pool, a jurisdictional bitcoin haven would make history.

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Disclaimer: The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, CoinDesk.

Search, Isle of Mann, Luxembourg and Gibraltar images via Shutterstock