The government of Gibraltar has released a proposal for the Regulation of the sale of cryptographic tokens and investment services in relation to them.
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The territory has been a relatively welcoming jurisdiction for the cryptocurrency industry, first committing to creating official regulations in October 2017.
The 8-page document follows up on a discussion paper on the same subject which was published on the 1st of December 2017, and the digital ledger technology guidelines which were made official in the territory on the 1st of January. These guidelines govern businesses that create Cryptocurrencies that behave as currencies, but they do not specifically mention ICOs.
Initial coin offerings
The Gibraltar Financial Services Commission (GFSC) notes that ICOs are risky to invest in. The document likens token sales to buying minutes from a mobile phone company before the network has been built, knowing that your money will be used to do so. Because they represent the advance sale of products, they cannot be defined as securities. However, because they often can be sold at later date for a higher price, they do fill some of the characteristics of an asset.
The document notes that cases in which tokens do constitute securities are already adequately covered by the existing law.
Proposals
Regarding the sale of tokens, the document repeats that investors are buying something that often does not yet exist: "In such cases, purchasers risk that the product or service might never be delivered and often waive any right to the return of the price paid. Purchasers may well be prepared to take that risk but it is appropriate that they be presented, in advance, with all relevant information to enable them to make an informed decision."
Thus, the first stage of regulation is to control the promotion of tokens in or from Gibraltar. The requirement will be "adequate, accurate and balanced disclosure of information to enable anyone considering purchasing tokens in the primary market to make an informed decision". The regulations will specifically define what is meant by adequate disclosure, according to the proposal.
Proceeds of token sales will fall under the Proceeds of Crimes Act 2015, basically meaning money laundering and terrorism funding. The GFSC will supervise this according to a new set of guidelines, yet to be drawn up, under the law.
Authorised sponsors
A sponsor will be assigned to every ICO project. The sponsor will possess "appropriate relevant knowledge and experience" and will be responsible for ensuring compliance with the regulations.
They will be required to have in place what the document calls "codes of practice", which they will use to govern the behaviour of the ICO project. Such codes are not offered by the GFSC, rather, sponsors will need to submit their own codes to the regulator as part of the application process.
They will be free "to set their own methodologies for implementing the principles." Non-compliance with the rules on the part of a authorised sponsor will constitute a criminal offence, specifically created for this purpose.
Once a project is approved, it will appear on the official register. Only projects that appear on the register will be able to conduct business to or from Gibraltar.
Exchanges and financial advice
Exchanges, or "secondary markets in tokens and their derivatives" as the document refers to them, will be regulated by provisions modelled on MiFID II and MiFIR, "so far as is appropriate, proportionate and relevant." Advice is defined as generic advice ("neutral"), product-related advice ("selective and judgemental"), and personal recommendations. Types of financial advice are adequately covered by existing European regulations, and the GFSC will rely on MiFID II in order to write up its rules, although the activity of providing advice specifically regarding tokens will need to be added to the law.
Date of implementation
The GFSC expects a completed draft bill to be ready by October 2018.
