Introduction: The ICO World.
ICOs [Initial Coin Offerings] or TGE [Token Generation Events] have attained a ubiquitous status within the world of Cryptocurrencies – as their introduction in the financial services sector has sparked a number of different views on how to tackle and eventually regulate these inevitable novel coin offerings.
Crowdfunding initiatives are innovative ways for new digital currencies to create financing – by offering investors the new currency in exchange for other established ones such as for example Bitcoin and/or Etherium. In certain cases, the new currency can also be exchanged for fiat Currencies such as the Euro or US Dollar.
Prospective ICOs in Malta.
As already discussed in previous articles, the MFSA [Malta Financial Services Authority] had issued a consultation paper in November 2017 specifically dealing with ICOs. Under the prospective framework provided, a ‘Financial Instruments Test’ would be applied to all practitioners/person willing to offer ICOs.
ICO Steps for necessary regulation.
The first stage would primarily determine whether the ICO qualifies as a ‘financial instrument’ in terms Section C of Annex 1 of Markets in Financial Instruments Directive (MiFiD) and whether the activities of the firm involved in such a VC constitute a regulated activity as listed in Section A of Annex 1 of MiFiD. If this is the case, then EU and Local legislation would apply.
The second step would entail whether or not the Virtual Currency/ICO would also qualify as an asset under the proposed Virtual Currency Act. If a user manages to satisfy the criteria attributed to the first stage, then the second stage analysis would not be necessary.
VC Act and ICOs.
More importantly, the now-certain Virtual Currency Act will also establish the principles/requirements needed for persons willing to offer ICOs. In this connection, the Virtual Currency Act will also empower the MFSA to carry out the necessary checks and balances in ensuring that ICOs are properly monitored and if need be suspended whilst also ensuring that the ‘Financial Instruments Test’ is audited by an independent and external auditor.
The Gibraltarian Approach to ICOs.
Working in a similar analogous framework to Malta, the Gibraltarian Financial Services Authority [i.e. the GFSC – Gibraltar Financial Services Commission], has first and foremost stated that ICOs are strictly speaking — risky to invest in. These sentiments were also expressed by the MFSA back in 2017.
GFSC guidelines on ICOs.
Nevertheless, the Government of Gibraltar as well as the GFSC have released a proposal for the sale of cryptographic tokens with a draft bill expected to be launched by not later than October 2018. It goes without saying that these will be the first ever set of regulations specifically developed for ICOs published in the world. To note that a consultative approach was also adopted by the Maltese Government which was met by a warm embrace by local practitioners.
Gibraltar’s government has also introduced a ‘tri-lateral approach’ that would moreover deal with “the promotion, sale and distribution of tokens,” eventually leading to the creation of a well-regulated secondary market related to token offering. Malta on the other hand, will seek to do this via the introduction and implementation of the Virtual Currency Act.
Authorised Sponsors — to manage the ICOs.
One of the interesting aspects of Gibraltar’s ICO regulations will be the introduction of the concept of authorized sponsors – users who as such, are supposed to be “responsible for assuring compliance with disclosure and financial crime rules’’.
Moreover, these sponsors must possess the necessary knowledge and experience of this subject and will primarily be responsible for ensuring compliance with the new ICO regulations. We can compare this to the rules and regulations which will eventually also be found in the Maltese VC Act – specifically ensuring that persons offering the ICOs are constantly monitored.
Regulating an ICO.
The draft law will also establish disclosure rules that will require ICO projects to provide “adequate, accurate and balanced information to anyone buying tokens”- as stated by the GFSC. The first stage of regulation will be that of controlling the promotion of tokens in or from Gibraltar. [In Malta, as noted before, the first step of regulation will be that of classifying whether the ICO passes the Financial Instruments Test].
The proceeds of tokens will eventually fall directly under the auspices of the Proceeds of Crimes Act 2015 [aimed at specifically curbing any money-laundering or illicit activities.] From a Maltese perspective, it is yet to be seen whether separate provisions will be promulgated to deal with crimes emanating from ICOs or whether local legislators will refer to the local Criminal Code.
Whilst both Malta and Gibraltar are fully committed to implement and eventually regulate ICOs in their jurisdictions, a degree of caution can be seen to be exercised from both sides.
One prevalent factor which is seen in both is the issue of monitoring the ICOs. Whilst the Maltese perspective will focus on service providers and whether the ICO can be classified as a financial instrument, Gibraltar will adopt the ‘authorised sponsor’ approach – ensuring caution and compliance.
Whilst it can be evidently seen that there is a certain degree of competition between both these micro-states, the question both jurisdictions need to answer is whether over-regulation will curb prospective business opportunities. Moreover, the true success story of the ICO Laws can only be measured once regulations actually kick-in. That is why both Malta and Gibraltar are both doing their best in preparing the necessary ground work to ensure that crowdfunding will be eventually be a success story.