The Internet of Tokens: Gibraltar and The New Wealth of Nations

  • by Alex Lightman
  • November 19, 2017
  • 0

As this column was written, Nov. 2, Bitcoin just reached the $7,000 milestone. Bitcoin was unleashed upon an unsuspecting world in January 4, 2009, when Hal Finney received 10 Bitcoin, then worth nothing, now enough to buy 10 houses in Detroit. The time in days between the different US $1,000 prices for Bitcoin give us a very succinct and unprecedented resume for a new money-technology hybrid.

Bitcoin has been around for 3225 days or 8.85 years or 8 years 9 months 30 days.

My, how you’ve grown for an eight-year-old. *

0$ to 1k$: 873 days

1k$ to 2k$: 907 days

2k$ to 3k$: 56 days

3k$ to 4k$: 6 days

4K$ to 5k$: 45 days

5k$ to 6k$: 13 days

6k$ to 7k$: 4 days

* From Arun Mukherjee (@Arunstockguru)

Bitcoin is unique in that it’s one of the few world leading technologies that was global from birth, and, since the authentic identity of Satoshi Nakamoto is a mystery, there isn’t a nation that can claim Bitcoin as its own. There are non-zero odds that Bitcoin is a product of National Security Agency’s cryptographers working with some expert contractor help, so there is an argument that it’s American, but since no agency of the US government claims to have invented Bitcoin or Blockchain, there is low-hanging fruit for governments.

Which nation will develop a reputation as the best place to do initial coin offerings or ICOs? These are also called “Token Generating Events”, especially in the US, out of terror that the use of the acronym ICO will annoy and attract the attention of the Securities and Exchange Commission…a bad sign because it indicates a level of superstition and rumor is operating, in the absence of a crystal clear policy regime for ICOs and TGEs.

Which nations will be able to increase inbound capital via ICOs/TGEs?

Which nations will be able to attract a critical mass of Blockchain-savvy companies to headquarter and invest in financial infrastructure?

Which nations will have adequate Blockchain-savvy developers to handle the massive demand?
This last question is crucial. Jason King of Academy School of Blockchain has been presenting around that world that for every 14 approved Blockchain projects, only one is fully staffed with competent developers, and that there are 18.5 million software developers on earth, but only about 5,000 who are expert in Blockchain.

Distributed Ledger Technology is Now Exciting to Some Governments

Why are an increasing number of governments now ready to compete for leadership in the Blockchain ecosystem? Because taste-makers like the World Economic Forum have blessed Blockchain, and made distributed ledger technology seem like a “must-win battle”.

In a white paper published on the 28th of June 2017, entitled “Realizing the Potential of Blockchain”, the World Economic Forum describes blockchain, or distributed ledger technology (“DLT”) as heralding a “second era” of the Internet. While the last few decades have seen the rise of the “Internet of information… we are now witnessing the rise of the Internet of value”, which promises to “upend business models and disrupt industries”.

As most readers of this magazine know, distributed ledger technology allows for value to be transferred directly and safely from one party to another via the Internet – be it money, stocks, bonds, property deeds, digital royalties or even votes in an election. Such transactions ordinarily pass through various intermediaries to be validated, cleared and processed, and are stored in central ledgers maintained by an authority, (i.e. a central bank in the case of financial transactions, or the Mortgage Electronic Registration System for mortgages).|

The very first real estate transaction was accomplished by Propy in October, 2017, a few weeks after Propy raised $14 million in a successful ICO, as TechCrunch founder Michael Arrington purchased an apartment for $60,000 on the Blockchain.

Distributed ledger technology (in theory) eliminates the need for any middlemen, by distributing the validation and storage of transactions over many computers in a secure and public way, using “heavy duty” encryption.  It can be conceptualized as a spreadsheet that is duplicated thousands of times, across a network of computers which is designed to regularly update this spreadsheet. Thus, information held on a blockchain exists as a shared, continually reconciled database, accessible to anyone on the internet, and with no centralized version vulnerable to corruption by hackers.

Goldilocks Regulatory Environments

While the winners of the last technology standards wars (mainly in Silicon Valley) and the survivors of global finance wars scramble to grasp the breadth of this technology’s potential applications, the impact which it is poised to make on the financial services industry is all too clear. A landscape stretches before us in which any form of digitized value can be transferred directly and securely, without the need to go through a bank or credit-card company, PayPal or Western Union, a social network or central government. Middlemen will undoubtedly fall by the wayside, but the ones that learn to add value to their ecosystems will not disappear. This technology presents the opportunity for innovative companies, institutions and national jurisdictions to “streamline processes, increase their metabolism, create new value and enter new markets”.

Nations now realize that the missing link is Goldilocks regulation.
Not too hard. Not too soft. Not too tight. Not too loose. Just the right amount to filter out the bad offerings, bad entities, and bad actors, but not so much that ICO innovators and entrepreneurs and investors are angry, confused or frustrated, especially experienced investors who make their own due diligence and don’t want or need a government to prevent them from making their own choices.
Governments have proven themselves non-expert: no government recommended that its citizens buy Bitcoin, but if one had back in 2010, they could have generated a $100 billion or more windfall for those lucky citizens. But that’s water under the bridge.

Some governments have realized the opportunity and are rushing to seize it.

The US, with somewhere between 323 and 333 million people? Nope.

People’s Republic of China with somewhere between 1.35 and 1.75 billion people? Nope (PRC is possibly the worst government for Blockchain regulation, treating property rights like Grand Theft Auto players treat automobile ownership)

The Blockchain Economy’s new emerging leader in regulation is one with just 30,000 humans and a few hundred monkeys situated at the bottom of Europe, across from the closest point to Africa.

Gibraltar – Embracing FinTech

Faced with a nascent technology with such far-reaching ramifications as the Blockchain, you would think it would be important for governments to show restraint and foresight, and allow this potential to be harnessed and benefits realized.

Gibraltar just changed the game for governments by announcing the first truly innovative and wise plan, which has moved to embrace DLT, in stark contrast with world superpowers such as China and Russia, which have sought to stifle the emerging markets founded on Blockchain technology in recent months.

On the 20th of October 2017, the Government of Gibraltar published the Financial Services (Distributed Ledger Technology Providers) Regulations 2017, following an extensive consultation period with various working groups and industry experts. The Regulations, which come into force in January 2018, essentially consist of 9 key principles which will be applied on a proportionate basis to any provider of services which utilize distributed ledger technology (“DLT Providers”).

The Regulatory Principles require DLT Providers to:

  1. Conduct their business with honesty and integrity.
  2. Pay due regard to the interests and needs of each and all their customers and communicate with them in a way that is fair, clear and not misleading.
  3. Maintain adequate financial and non-financial resources.
  4. Manage and control their business effectively, and conduct their business with due skill, care and diligence; including having proper regard to risks to their business and customers.
  5. Have effective arrangements in place for the protection of customer assets and money when they are responsible for them.
  6. Have effective corporate governance arrangements.
  7. Ensure that all of their systems and security access protocols are maintained to appropriate high standards.
  8. Have systems in place to prevent, detect and disclose financial crime risks such as money laundering and terrorist financing.
  9. Be resilient and have contingency arrangements for the orderly and solvent wind down of their business.

Gibraltar has, over the last decade, proven its ability to adapt to evolving technology with the success of its online gaming community, as measured by wealth creation from companies listed in the UK, and its willingness to seize new opportunities with the rapid expansion of its insurance sector.

By positioning itself as the first jurisdiction in the world to license and regulate the providers of DLT-based services, and by avoiding rigid legislation, which could potentially stifle innovation, Gibraltar just did it again. Gibraltar’s plan exhibits admirable foresight and flexibility, and underscores how its effective collaboration between government, regulator and industry offers a uniquely welcoming environment to blockchain-based start-ups.

It’s easy for power-mad despots to bark orders and ban anything that bothers them, which includes anything that could reduce the ability for the Extractive Class to steal from the masses using the tool of government. It takes at least 50 more IQ points equivalent, instead of banning new technology or new markets, to be the first in the world to create a way to accommodate this tech and allow it to flourish and create new industries, new companies, new jobs, new wealth, new markets and new products and services.

ICOs in Gibraltar – A Token Community

It is impossible to talk about blockchain start-ups without a discussion of Initial Coin Offerings, or “ICOs”, by which companies pre-sell a cryptocurrency or token granting investors early access to a future product or platform. This year has seen an explosion in the popularity of this means of funding DLT-based projects, such that by August, it eclipsed early stage venture capital funding for online companies.

Tokens can be equity-linked or have warrant-type characteristics, and therefore fall within the remit of the existing and extensive legislation governing traditional Initial Public Offerings, though most fall outside the scope of such regulation. This has led many to characterize the world of ICOs as a “Wild West”, in which a lack of regulation has allowed unscrupulous individuals to profit off their unfounded promises to investors, who have no means by which to hold them accountable.

A minority of bad actors has thus tarnished public perception of companies operating in this area, such that many legitimate start-ups see great value in Gibraltar’s DLT Regulations, which will allow them to differentiate themselves as a professional business upholding the corporate governance, systemic, fiscal and moral standards required by the legislation.

Gibraltar is not regulating or limiting the technology itself, nor the inherent risks in tokens and cryptocurrencies, but the principles-based DLT Regulations afford an element of consumer protection by ensuring the required infrastructure, safeguards and corporate governance of the operators in this space. This is part of the reason that publication in May of the framework on which the Regulations are built led to a surge in the number of blockchain start-ups seeking to domicile themselves in Gibraltar.

The Gibraltar Blockchain Exchange – A Safe Harbour

Against this backdrop, the Gibraltar Stock Exchange (GSX) recently announced the launch, in January, of The Gibraltar Blockchain Exchange (GBX), which aims to become the world’s first nationally regulated exchange for tokenised securities. GBX’s mission is to establish a centralised cryptocurrency exchange for the highest quality cryptocurrencies and tokens, focused on investor confidence and liquidity.

GSX aims to achieve this via its community based platform, overseen by an Alliance Council comprised of a cross-section of the community (tech firms, operators, legal advisors, investors and industry experts), which will work with GBX to establish guidance and standards for listing and trading. The Alliance will also be responsible for establishing the criteria by which entities can be licensed as Sponsor Firms, which will play a role akin to listing agents in traditional stock exchanges, to ensure a rigorous standard of quality, safety, transparency and execution in token sales.

The Gibraltar Blockchain Exchange will be founded on strong and secure technology, attracting top tier token sales through high barriers to entry and rigorous AML and KYC standards, to compliment the confidence, trust and credibility fomented by the DLT Regulations.

We asked Blockchain entrepreneurs who closely followed government regulations what they thought of Gibraltar’s announcements.

David Orban, Network Society Ventures, and a long-time resident of Bergamo, Italy, said, “In today’s globally connected world the size of your home market matters less than your ability to execute, overcoming every possible obstacle. For blockchain businesses often these are represented by the regulators, their slowness to issue a clear guidance, and the consequent uncertainty that hampers investment and support for the project. The reason of the excitement around GBX is not only because it is a smart project, but also because they have full support from the regulators locally. Gibraltar is part of the European Union, for the moment there will be a broad application immediately for the set of rules that they are going to implement.

This is a new kind of role for nimble and fast territories. Estonia has been able to become a world leader in digital services for its local and remote residents. Luxemburg became the world capital of private space initiatives, In the course of a couple of years, thanks to Smart legislation. And similarly Gibraltar has the opportunity to establish itself ahead of everybody else for forward-looking clear blockchain regulation.”

Gordon Einstein, attorney and resident of Los Angeles, CA, emphasized the value of coordination between the Gibraltar Stock Exchange (GSX) and Gibraltar Blockchain Exchange, “Two entities. GSX and GBX. The idea behind GBX is an exchange dedicated to trading crypto assets. There is a very complimentary relationship between government, law firms, professional community in Gibraltar. It’s currently the best national regulatory framework on earth for Blockchain companies. ICOs will be vetted and guided through a process. Will have an IPO-lite level of disclosure. After the process, the company leaders can legally register and get them listed. Gibraltar will be first with this. They are creating a sister relationship between GSX and GBX.”

Mark Jeffrey, Guardian Circle, and a resident of Marina Del Rey, California, put it succinctly:

It’s an officially government sponsored and regulated crypto exchange.  Think of it like NASDAQ suddenly listing Bitcoin. Instead of kind of living at the edge of regulation and wondering all the time what new ‘crazy ivan’ the SEC is going to pull, the gov was all like “Hey.  We like this. Just do this and this and this and you’re good to trade crypto.”

Our hope is that Gibraltar just created a friendly peaceful arms race to see who can create the greatest jurisdiction for Blockchain offerings.

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Alex Lightman is an MIT graduate (’83), attended graduate school at Harvard, and is the winner/recipient of four global technology awards, including the Economist magazine Reader’s Award for the “innovation that will most radically change the world” for this decade 2010-2020. He is a co-founder of Token Communities Plc., a Gibraltar corporation that invests in tokens; the CEO of a publicly traded energy company; and advisor to seven ICO/token sales, including Propy, Science, and Academy for Blockchain Technology mentioned in this article. He is the author of the first book on 4G wireless, Brave New Unwired World and the co-author, with Brett King, of the bestseller, Augmented: Life In The Smart Lane, which was no. 1 in seven different categories in 2016.