In the context of fundraising for startups or established businesses at seed stage you will have recently been hearing the words ‘token sale’ and ‘token launch’ bandied about every two or three conversations, unless you’ve been on an extended leave of absence on the moon. If you have, in fact, been on the moon, you’re at least likely to have seen a couple of these ‘cryptos’ soar past you as you wondered what was going on.
So what is a token?
Unlike a cryptocurrency like Bitcoin (the purpose of which is to act as a store of value), a token can literally be anything at all, a symbolic marker of value which is tied specifically to the business/project in respect of which it has been issued. Tokens are created cryptographically on the blockchain chosen by the token developer to build its concept. Most tokens, and the businesses/concepts that can be accessed by them, are typically built on the Ethereum blockchain as the current reference smart contract blockchain (but watch RSK..)
Tokens can be of different varieties and they can represent any function or purpose, the most common of which, for reasons which will shortly become apparent, are utility tokens e.g., a token that can buy you access to my theme park for 20 minutes at a time, the value of which therefore naturally depends entirely on the success or otherwise of what I put in the theme park. If I go on to build Disney 2.0, the value of your tokens will likely go ‘to the moon’ but if I then stick a park in Paris, well, I’m never going to make money and who knows what’s going to happen to your token then. The reality is that, despite the fact that the vast majority of tokens are created as tokens which grant access to, or represent some other value in the specific context of a blockchain application, you could arguably offer tokens in the kind of context I just described above, but it probably wouldn’t make for a brilliant white paper.
Speaking of white papers
White papers are the documents outlining the business model and the purpose/function of the relevant token — these documents will generally contain a detailed explanation of the concept and the need in the market that it targets; it’ll explain how the business’ solution on the blockchain smashes all the key deliverables of distributed ledger technology such as democratisation, distribution, no central control, etc; it will refer to the people who are working or associated with the product, explain what the token is for, how much they want to raise and how the business plans to spend the money it raises, what the token is, what it does and why it is needed. A white paper is one of the key elements of research that investors should be conducting when deciding whether or not to buy any given token, which necessarily prompts a discussion of the less attractive features of token sales.
High risk, high impact
The reality of investing in tokens can be quite brutal. You can lose everything — both because you could fall prey to a scam/the business model fails and the token you own becomes worthless or, perhaps worse still, you really actually can just lose it all — literally. In the crypto world, if you’re not very careful you can easily lose your tokens by simply doing something wrong. Get it wrong and, there’s no recovering it — it’s all gone. Let’s say though that, for the purposes of this article, you’re proficient at actually holding on to your tokens — regardless of your proficiency, the fact is that investor protections are non-existent (they’re not even covered by any investor compensation scheme) and you need to have your wits about you to consider the many issues you need to bear in mind before investing any money:
As the Chairman of the Gibraltar Stock Exchange recently observed at the World Blockchain Forum in London last month ‘in blockchain there is bullshit’, and that much is certainly true. There are 100s of projects being pitched/developed in this space with more than 140 token sales already conducted in 2017 to mid-September, and it is for this reason that the need for regulating this space is such a key feature of any discussion of token sales.
Regulated vs Unregulated
The distinction between a utility token and a token which is, in function even if not in name, a security token, is an important one. Currently, in jurisdictions that have not imposed an outright ban on ICO activity (China and South Korea have imposed such a ban, for example), ICOs for utility tokens are entirely unregulated. Any tokens which are, in effect, security tokens, will fall in scope of the very thorough and onerous regulatory frameworks in existence around the world which, given the specific characteristics of tokens, are hopelessly unfit for purpose.
Regulators around the world have been grappling with the issues relating to this business and the approaches vary significantly from centre to centre. From outright bans in Asia, through ‘sandbox’ solution deployed in the UK to the out and out embracing of this new phenomenon in finance of centres like Switzerland (Crypto Valley) and Gibraltar.
Gibraltar’s approach to Distributed Ledger Technology
During the course of the last two years, the Cryptocurrency Working Group, co-chaired by the well-known Joey Garcia, Partner at ISOLAS LLP, has been working with the Government of Gibraltar to build the regulatory environment that would balance the needs of the investor with the promotion and development of business in this space. The publication by the Gibraltar Government in May of the DLT consultation resulted in a massive increase in the number of ICOs that have made Gibraltar their home — in addition to a significant amount of work being done ahead of the deployment, in January 2018, of the DLT regulatory framework. Ambitious as the timeline for its deployment was, the publication of the Financial Services (Distributed Ledger Technology Providers) Regulations 2017 in October 2017 heralds the on-time commencement of this new regulatory environment from which Gibraltar based token sales will be conducted within a fully regulated space, and unleashing the full potential for the establishment of regulated and licensed crypto exchanges and other spin off businesses.
What is the Distributed Ledger Technology regulatory framework going to be like?
In order to balance investor protection with the promotion of business, the Gibraltar Financial Services Commission, the financial services regulator, will be regulating on a principles-based approach which it is aimed to deliver the right level of protection without stifling or limiting the development of this burgeoning global industry. There are nine principles which constitute a general restatement of the key aspects of prudent business practice which offer, by their nature, protections to investors along the lines of those we commonly associate with other financial services business, e.g., honesty and integrity, fair and clear communications, adequate financial and non-financial resources, the protection of clients’ assets/money, the maintenance of a high standard of security, and building in of resilience and contingencies for orderly winding down of business, amongst others. Within these principles, the regulator retains the flexibility which, allows it to strike the balance of interest between all sides of a token sale.
With the massive success we’ve seen in Gibraltar already and the successful promotion of a number of token sales this year, ISOLAS LLP, through Joey Garcia and his team, have emerged as clear leaders in this field. Already a veteran of the launches of Gnosis, STOX, Coindash, Cindicator, BrickBlock, the licensing of XAPO as an e-money licensee and the appointment of the firm by Coinsilium to advise on Terrastream as well as countless other token sales in the pipeline, the team at ISOLAS LLP adds a layer of irresistibility to an already very compelling case for Gibraltar, on its own two feet and on merit, as one of the handful of key places in the world to do this business.
Selwyn is the Head of Business Development at ISOLAS LLP and forms part of the Fintech team at the firm www.isolas.gi