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FinTech
Widespread endorsement for world pioneering token regulation
Individuals and businesses that use crypto currencies or tokens to raise funds in or from Gibraltar will have to apply for licenses from this summer
It is the first worldwide move to regulate operation of Initial Coin Offerings (ICOs) - a type of crowdfunding that has become
widespread as a means of raising unsecured capital - and comes amid a chorus of calls for action from countries to clamp down on an activity that could unwittingly help fund terrorism and criminal activity such as money laundering.
Business professionals are receiving dozens of enquiries every day from people wanting to have for their ICO, crypto currency or blockchain (DLT)-based project a Gibraltar license as a badge of approval; up to 90% are being turned away as ‘unsuitable’
Mark Carney, Governor of The Bank of England (BoE) - which flirted with the idea of launching its own crypto currency as one of over 1,300 internationally (of which Bitcoin is the best-known) – argues that virtual coins using DLT and with high volatility have “failed in their most basic role as money”, and need to be “more tightly regulated”. He maintains: “The time has come to hold the crypto-asset ecosystem to the same standards as the rest of the financial system.”
Digital currency risks
The UK Financial Conduct Authority has warned of digital currencies risks, while the US Securities and Exchange Commission cautioned that some online platforms for buying and selling the monetary tokens falsely imply they are regulated. The G20 nations, meeting in Argentina in March,
however, decided simply to call for “information and data” on digital currencies and their potential effect on economies in time for a July consideration of what, if any, co-ordinated regulatory action might be needed!
Speakers at the Gibraltar FinTech Forum 2018 in March - just two months after the jurisdiction became first to introduce licensing for entities using DLT – repeatedly applauded the territory’s ability to give regulatory certainty for financial services entrepreneurs.
“Blockchain technology provides us with the ability to engage in new technology not just in financial services, which seems to be the prime focus in the early stages, but also in science, health, geography; in every single aspect of our daily lives, blockchain will play a part,” Minister for Commerce, Albert Isola, told over 230 delegates from all over the world. He confirmed that tokens legislation, expected by summer, might be extended to new digital funds, possibly also including Protected Cell Companies (PCCs).
James Lasry, a Hassans partner, revealed that the Gibraltar Funds & Investments Association (GFIA) “is in an advanced stage of issuing a policy” - a code of conduct is expected imminently - which will say such funds must be presented as an Experienced Investor Fund (EIF) with licenced EIF directors reporting code compliance annually.
“I expect there to be a resurgence of interest in Gibraltar’s funds industry, particularly in crypto funds, because the ecosystem for crypto has proven to be very good in Gibraltar, so the funds will naturally follow that,” Lasry declared.
The government, subject to Parliamentary approval, expects to regulate the marketing, promotion, sale and distribution of tokens, specifically how tokens are packaged – the level of transparency and disclosure - as well as conduct of the secondary market and the investment side, by expanding its definition of financial services advice to cover tokens. “We have taken a deep dive into token sales and how they are run; best practice is what we want to adopt”, Isola insisted.
Sian Jones, a Gibraltar Financial Services Commission (GFSC) specialist in DLT & crypto currency, explained: “We want
to make sure there is full and accurate disclosure of information to create a level playing field. ICOs are a valid means of rais- ing finance for start-ups and we will ensure that they can be used as a novel means of crowd financing, without compromising the other objectives.”
Echoing the GFSC approach to DLT, she emphasised: “We are not trying to define tokens”, but there will be disclosure rules “to ensure people have sufficient information to enable them to make informed decisions”.
A new category of “licenced introducers” – lawyers, accountants and other professionals “who can afford the time to get closer to the organisers of token sales and understand the ins and outs of the offer” – will be required to present tokens applications to the GFSC. As Isola explained: “Our expectations are high; you are our gatekeepers, the ones who will deal with businesses dealing with token sales. We are relying on you – our front door – to keep an eye out to ensure that the work that we do, and are involved in, is of the highest quality.”
Authorised sponsors for token issuers can give generic, product related advice, but not personal recommendations “to ensure advice is fair, transparent and professional, similar to provisions in the EU Markets in Financial Instruments Directive (MIFID), but appropriate and proportionate”, Jones declared. And they will be required to set up codes of practice for token sales proposals in secondary markets, while also assuring the Regulator that Anti Money Laundering (AML) and financial crimes aspects have been considered.
She said: “We will not be setting a single code of practice, because the market can adapt with new types and flavours of tokens, and ways to bring them to market. We intend there should be some high-level principles incorporated and the resulting codes of practice will become, in effect, their product and we will have oversight of those.”
However, gaining a Gibraltar license is only the first hurdle for promoters of ICOs and crypto businesses.
As Anthony Provasoli, co-lead of Hassans Fintech team, pointed out: “One of the key challenges is how other jurisdictions react to applications for licenses from firms in
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Gibraltar International
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