Parts of Western Europe have been at the mercy of the “Beast from the East”, an icy wind that swept down from Siberia bringing havoc in its wake. Now a different kind of chilling wind is blowing in from the USA as regulatory bodies talk about putting ICO token trading on ice for 12 months.
As Mike Lempres, chief legal and risk officer at Coinbase put it, “the market is being chilled.” As crypto entrepreneurs in the U.S. shiver, it seems that months of uncertainty about how the country’s regulatory bodies would approach “wanton market growth” is coming to a head, if perhaps not an end.
Events leading up to this include the SEC’s announcement last week that
it is investigating companies and startups associated with ICOs. As a result, which Brady Dale writes about at Coindesk, “entrepreneurs are largely surrendering on the idea that new cryptocurrencies created and sold to investors could be considered so-called ‘utility tokens,’ a term denoting a digital commodity meant to represent the share of a blockchain protocol.”
However, these companies still have a problem: as yet there are no registered broker-dealers capable of trading security tokens in the U.S. Furthermore, and this view comes from a number f ICO founders, when they do issue tokens under a Schedule D exemption, a 12-month lock-up is still required.
A statement from Nick Ayton, CEO of Chainstarter, who was in a panel discussion at the MIT Bitcoin Expo on 17th-18th March, addressed this issue. He predicted that the SEC will view all tokens as a security and stated: “Most exchanges are listing coins that are securities, and our view is a large number of these exchanges are going to be closed.”
Another voice at the conference, that of Gary Genseler, an MIT professor and former CFTC chair, said: “I think it is without a doubt that numerous exchanges will have to seek exemptions under alternative trading system [rules] because many of the exchanges, not all, have tokens that are securities trading on them.”
Currently, the problem is that even when companies want to comply with the rules, they still don’t know what the rules are. There is some knowledge about what is forbidden, but when it comes to avoiding the wrath of the SEC they are operating in the dark.
Munche is cited as the case that alerted some to what was coming from the SEC. This little known ICO received a bunch of subpoenas from the SEC, requesting information typically includes lists of investors, emails, marketing materials, organisational structure, amounts raised, the location of the funds and the people involved and their locations. In the case of Munchee, “what the federal regulators think of as a utility token and not a security token is so small, and the eye of the needle got even smaller,” said Joshua Klayman, legal counsel at Morrison Foerster.
What will be the end effect of this chill factor in the U.S? Well, Mike Lempres of Coinbase told Congress about one potential scenario if the United States doesn’t “provide a clear, thoughtful regulatory environment, the investment can very quickly move to other countries.” Perhaps that will encourage the government and its regulatory bodies to bring a little sunshine to its crypto companies.
Chief Minister Fabian Picardo kicked off the event with a simple and clear message to all those in attendance:
”Gibraltar is open for business.”
Gibraltar Ahead in the Regulatory Space
With jurisdictions around the world trying to figure out how to regulate the blockchain industry, Gibraltar has already put in place a DLT regulatory framework based on best principles and is currently looking to release new accompanying regulations that focus on token sales within the jurisdiction. A bill is expected through the Gibraltar parliament in Q2 this year showing Gibraltar to be world-leading in this space.
The Minister for Commerce, the Hon. Albert Isola, whose Ministry has been driving the fintech and blockchain agenda in Gibraltar also addressed the full conference hall onboard. When talking about the jurisdiction’s continued development, the Minister made it clear that as a government, “we are not scared of innovation.”
He added that the government is looking to continue to operate with consumer protection at the heart of what they do.
With a wide variety of speakers in attendance, the focus was well and truly on regulations for blockchain and ICO, a sector that is booming and hit an astounding $3.7bn during the course of 2017.
Gibraltar Financial Services Commission on ICO Regulations
Sian Jones and William Garcia from the Gibraltar Financial Services Commission (GFSC) also gave a talk and answered questions from the crowd. The same event last year saw the GFSC present their DLT regulatory framework to attendees and the wider world, this year it was their proposed ICO regulations.
Sian Jones emphasised that the regulator would not be regulating individual ICOs but those that brought the token sales to market, adding that “it’s not the role of the regulator to approve any individual token offerings,” rather highlighting how regulations are implemented is as important as the rules themselves.
Sian added: “We as a regulator will not be setting a single code of practice that should be set by the market.”
A lot like the Gibraltar Blockchain Exchange (GBX) with its network of Sponsor Firms, the GFSC sees this emerging market needing the creation of “authority sponsors that are accountable to us [GFSC].” This format would encompass GBX, which already comes under the scope of the DLT regulations, effectively making it an ‘Authorised Sponsor’ which could open up many pathways of opportunity for the exchange.
During the presentations Q&A, the GFSC spoke of their core desire to embed consumer protection at the heart of their work, whilst being supportive of helping grow and develop this innovative industry: “Tokens as a new asset class are isolated from financial advice, but it is right that it should be regulated for consumer protection.”
The DLT Licence Experience
In the morning of the first day, GBX CEO Nick Cowan moderated the panel “The DLT Licence Experience to Date.” Joining Nick was Joey Garcia from Isolas, Anthony Provasoli from Hassan’s and Jay Gomez from Triay & Triay.
Nick prophesied 2018 to be “the year of the regulator,” pointing out that Gibraltar has the unique first mover advantage of having a regulator that truly understands this space, and is so accessible and open to dialogue. Nick began the panel by categorising the ‘DLT licence experience’ into three distinct areas, Government & Regulators, DLT advisors such as Gibraltar’s law firms and the users of DLT licences such as GBX, each with their own distinct experience.
Joey Garcia, who was a part of the working committee regarding the original DLT framework explained the reasons for a best principles approach by stating: “Let’s build a ground-up framework that is evolutional.” Nick complimented Joey’s sentiments by highlighting the collaborative nature of the DLT framework: “There is a trinity of bodies here, government, industry and users, coming together to find a solution”
The panel concluded that although Gibraltar has been successful in locating and nurturing emerging markets, such as e-gaming, it has seen an explosive reaction to its leading role with the DLT regulation.
Anthony Provasoli pointed out “3 years ago nobody knew where Gibraltar was, but that is very different today, especially in the last 12 months.” He also highlighted his experience on the perception of Gibraltar saying: “Clients love the fact they can come and sit down with the regulators and have an open discussion.” The panel’s experience echoed the Chief Ministers opening comment that Gibraltar is open for business.
The panel also touched on the subject of Brexit in relation to Gibraltar, which despite the outcome is making strides in placing itself strategically between Britain and the rest of Europe. Joey Garcia believes that due to the global connection of blockchain and the cryptocurrency market that Brexit would not have a negative impact, by saying: “High level, I don’t think it [Brexit] will affect this space.” It is a testament to that strategic approach of Gibraltar to pioneer itself in this emerging technology and become a forerunner ahead of the Brexit transition.
Challenges in the Current Crypto Exchange Landscape
Nick later participated in a panel entitled “The Crypto Exchange Landscape for 2018” moderated by Joey Garcia with Vitaliy Kedyk of CEX, David Honeyman from Lendo, and David Gyori of Banking Reports alongside Nick. The panel discussed the challenges of AML/KYC with current cryptocurrency exchanges, with Nick detailing how the GBX intends to create a new industry standard of governance and due diligence for token sales within a rules-based system that would gain access to a large pool of KYC cleared participants.
The question of centralised vs decentralised exchanges was debated, with a consensus forming that if blockchain technology is still in its early developments, then decentralised exchanges are far off in that timescale development. With the current challenges that existing exchanges face around AML/KYC, accountability and consumer protection, decentralised exchanges would not contain a solution. Vitaliy emphasised this by saying: “Decentralised exchanges can’t deliver the real user experience” which the panel agreed that if this space is to be adopted by mainstream consumers, the user experience would be of paramount importance.
Nick was invited to close the 1st-day proceedings of the conference. He championed Gibraltar for its bold stance on the global stage as a home for those businesses that are utilising DLT technology. Mirroring the success story of GBX and its successful completion of raising $27M in the RKT token sale, with the way Gibraltar fostered the exponential growth of the e-gaming industry a parallel to what we are witnessing in the blockchain space. Nick finished by telling the packed out audience that Gibraltar is open for business and made a call out to those looking to Gibraltar as a home for the business to “give us a chance”.
Blockchain Innovation in Gibraltar and Beyond
A key moment during the 2nd day of the conference came from Philip Young, the Marketing Director of GBX. Phil gave a presentation on the Blockchain Innovation Centre (BIC) an initiative set up by the Gibraltar Stock Exchange (GSX) to help create a hub of blockchain innovation in both Gibraltar and further afield. Phil gave the three bedrock tenants that would “Educate, Inspire, Connect.” Phil spoke of the BIC’s offer of a network of experts that would help select, fund, advise and guide blockchain-based startups in Gibraltar. Additionally, Phil proposed the idea of the BIC helping to establish educational programs seeking out universities both abroad and in Gibraltar to encourage collaborations.
Despite the heavy wind and rain hammering the Rock of Gibraltar, attendance was still high over the two-day event, with great networking opportunities between the panels and presentations. It was encouraging to see that more than 180 of the 300 attendees had travelled to Gibraltar for the event demonstrating that Gibraltar is quickly establishing itself as a global hub for all things crypto & blockchain.
Although there has been some negative press around ICOs since they skyrocketed in 2017, it hasn’t stopped them from raising more funds for blockchain-based startups than traditional venture capital (VC). Indeed, according to Jason Rowley, a contributor at Techcrunch, ICOs are on track to do even better in 2018.
The investment from VC in 2017 was $900 million and in the first two months of 2018 it amounted to $375 million, but this looks like chump change compared with the ICO fundraisers.
Crunchbase recorded a total of 527 funding rounds by both VC and ICOs for 2017 and 2018 to date. In terms of numbers of startups, VC still has 68% of the market, but, whilst ICOs may only have 32%, the dollar volume is considerably higher.
Basically, as Jason Rowley says: “despite the smaller number of ICOs, these funding events — on average — attract much more capital than the average venture funding round.” In fact, if you look at the dollar volume, ICOs take 78% of the market for blockchain-related startups. In figures, this equates to $1.3 billion raised through VC and $4.5 billion raised by ICOs, according to Crunchbase.
Of course, not all ICOs have been a runaway success. Bitcoin news reported that out of 902 businesses raising an ICO, some 142 failed before they could even close the funding round, and another 276 failed after the fundraising was completed. A further 113 projects have been classified as ‘semi-failed’, either because they have stopped posting on social media, or because experts have assessed that the community is too small to give the project a chance of success. Ultimately, “59% of last year’s crowdsales are either confirmed failures or failures-in-the-making.”
This doesn’t mean that the ICO sector is doomed, there are still going to be many successful coin offerings – Telegram’s ICO is just one example of healthy show of support. Undoubtedly some will continue to view this form of fundraising with scepticism, but if investors do their due diligence and more regulation comes into play, there are no good reasons to think that the ICO does not have a secure and sustainable future.
Generally, having a celebrity endorse your product is a ‘good thing’! Advertisers will give their right arms for a famous face to front their product. In 2017, Paris Hilton, Floyd Mayweather, Ghostface Killah (Wu Tang Clan) and Jamie Foxx were among the celebrities who were most vocal about their support for crypto and ICOs and they all used their social media platforms to let their followers know what they’re doing in the crypto world.
One thing that ICOs who use celebrity endorsements need to note is that if celebrities don’t disclose if they are benefiting from making an endorsement, the Securities and Exchange Commission in the USA may view it as illegal.
And that is what has happened to Bitcoiin2Gen (B2G) ICO, which has been using Steven Seagal to endorse its offering. As reported in Cointelegraph and many other outlets, New Jersey Bureau of Securities (BoS) regulators issued a ‘cease and desist’ order on 7th March and have accused the team behind the ICO of “fraudulently offering unregistered securities in violation of the Securities Law.”
Clearly the B2G team didn’t get the memo from the SEC about the dangers of celebrity endorsements!
The BoS order focused on what it said was “the secretive nature” of Steven Seagal’s involvement with the business and its ICO. A statement from the regulators said:
“The Bitcoin Websites do not disclose what expertise, if any, Steven Seagal has to ensure that the Bitcoiin investments are appropriate and in compliance with federal and state securities laws.” And added, “Additionally, there are no disclosures as to the nature, scope, and amount of compensation paid by Bitcoiin in exchange for Steven Seagal’s promotion of the Bitcoiin investments.”
Perhaps Seagal was not the best choice of celebrity for a blockchain business, as he is better known as an actor specialising in martial arts, but then none of the other celebrities backing crypto in 2017 are immediately linked to Bitcoin or the blockchain either.
But, it is easy to see where the problem lies from a regulatory perspective. These celebrities have an enormous power over their fans, so when Steven Seagal tweeted on March 6th that B2G would shortly be listed on major exchanges, his fans will take his word as gospel. If he says, “invest in this ICO because I have” in so many words, then that is what his followers will do, and many of them will not be savvy investors who understand the risks and rewards of crypto assets. This is something that the SEC is well aware of, and now it is acting on its previous warnings.
So, whilst a celebrity may do wonders for your alcohol brand or similar consumer item, they are not quite so desirable when it comes to promoting your ICO – unless every aspect of their involvement is completely transparent and regulators can see that they are active in and knowledgeable about the blockchain and cryptocurrency.