Initial Coin Offerings (ICOs) were introduced in or around 2016 and the Securities and Exchange Commission (SEC) in the US caught on quickly. In 2016, a warning notice was issued to investors by the SEC stating that ICOs could be unlawful. China quickly banned ICOs in 2017.
Notwithstanding, the price of Bitcoin increased worldwide, rising from US$900 at the beginning of 2017 to US$20,000 by year’s end. By January 2018 however, there was dismay all around as Bitcoin’s price crashed 40 per cent. It then rocketed and crashed again. This volatility led to the issuing of further ‘buyer beware’ notices from regulators globally. Apart from the many warnings, cryptocurrencies remain unregulated in most jurisdictions.
So, What about IFCs?
IFCs are, to put it mildly, ‘at odds’ when it comes to cryptocurrencies.
Some, such as the Cayman Islands, appear to have simply adopted a ‘wait and see’ approach when it comes to virtual currencies, providing no guidance on substantive legal issues relating to them but warning investors of their potential issues. Gibraltar is in the midst of drafting ICO regulation which will be ‘market driven’, focused primarily on token sales. The BVI’s regulator appears to have no appetite to regulate ICOs, but their legislation is broad enough to allow ICOs to launch in the jurisdiction. A FinTech and blockchain start-up, Bitt Inc., is in the process of launching the Eastern Caribbean dollar (ECCB) which will be a blockchain-based virtual currency serving Anguilla, Antigua and Barbuda, the Commonwealth of Dominica, Grenada, Montserrat, St Kitts and Nevis, St Lucia, and St Vincent and the Grenadines. Jersey has legislation which anticipates the formation of token issuers and a regulatory sandbox for virtual currency exchanges. And in Bermuda, the government has dived into the virtual currency pool head first and is in the midst of adopting legislation relating to token issuers, and also virtual currency and digital asset exchanges, becoming one of the first IFCs to formally regulate digital assets in such a way.
In major financial centres, cities such as New York, regulated by the SEC, are faced with restrictions relating to securities solicited from unaccredited investors. In the UK, the government has acknowledged the importance of blockchain and has created a crypto task force. In China and South Korea, ICOs are banned. In Japan, where they are welcomed, crypto has become a method of payment and has a huge trading market, albeit one which has also attracted hacking, a recent example being the January 2018 robbery of US$500 million in digital tokens from Tokyo based cryptocurrency exchange, Coincheck.
Singapore is a huge hub for ICOs, and Hong Kong is following suit. And then there is Switzerland’s ‘Crypto Valley’, the European version of Silicon Valley, which is attempting to embrace the culture and become a cryptocurrency hub.
Who are the leaders in the blockchain/cryptocurrency arena? In no particular order: Singapore, Jersey, Switzerland, Bermuda and Gibraltar.
Regulation and ICOs
Clearly, there is no single regulatory view relating to ICOs, virtual currencies or exchanges, and here’s why.
Cryptocurrency presently comes with inherent risks and the potential for cybercrime, particularly with regard to the use of online wallets price manipulation (for example by ‘whales’ – big investors who swing market positions to their benefit); pump and dump schemes, where an ICO promoter ‘pumps up’ their offering to drive prices up and then cashes out as soon as the ICO opens, leaving little behind; and the simple use of FUD - fear, uncertainty and doubt – with investors who know little about what they are buying, how to buy it and what to do with it.
This is why so many major regulators, even the ones which have embraced cryptocurrency, have felt the need to issue ‘buyer beware’ notices. While there may be good ICOs and token sales on offer, there are a lot of extremely dodgy ones taking advantage of their investors.
The Viability of Blockchain
Blockchain is a networked, decentralised platform. Its technology allows cryptocurrencies and their digital tokens to operate securely by controlling and verifying the transfer of the currencies’ digital data.
Essentially, however, any transaction capable of being recorded can look to the use of blockchain.
In the non-financial context, there are many uses: (a) healthcare: keeping electronic patient records, hospital and insurance claims information and medical data which can be shared with other hospitals or health insurers on a secure basis; (b) data storage: so that data is kept in a decentralised safe and secure cloud; (c) governance: such as casting votes using a smartphone over a secure blockchain network; (d) shipping and transport: using a secure blockchain to track cargo globally on a reliable basis with a secure infrastructure; (e) insurance: the administration and processing of insurance claims, where the data is kept on a secure blockchain, and (f) AML/KYC: such as data collection between banks or law firms relating to their clients, avoiding the unnecessary duplication of identification of clients.
Blockchain can be used for any transaction or way of collecting data that you can think of. Its application is limitless. It has often been described the ‘new internet’.
But it is still new. Bitcoin was invented in 2008 – only 10 years ago. This is a very nascent technology which has already illustrated its ability to fundamentally disrupt the global financial system. It isn’t however perfect by any stretch.
IFCs and Their Potential
What role can IFCs play in this still relatively new area? IFCs have the reputation for being nimble and innovative. But bearing in mind the potential issues surrounding ICOs, is it possible that this may lead to greater risk?
Let’s look in more detail at two IFCs taking very different approaches:
The Bermuda government has taken a bold approach to ICOs and virtual currencies, allowing for token issuers conducting ICOs for crowdfunding purposes and, separately, issuers of digital assets and digital asset exchanges, e-wallet services and similar structures. Virtual currencies will be regulated via a new piece of legislation, the Digital Asset Business Act, and persons caught by that Act will be supervised by Bermuda’s primary regulator, the Bermuda Monetary Authority. The jurisdiction is already entering memorandums of understanding with several potential and leading digital asset exchanges. The Bermuda government has stated that it intends to create a “Bermuda model”, which it hopes will become a leading international standard for blockchain and ICOs.
The Cayman Islands
Taking a different approach from Bermuda, in its April 2018 public advisory, the Cayman Islands Monetary Authority (CIMA) essentially stated that: “If it sounds too good to be true, it usually is.” Other than to confirm that virtual currencies are not legal tender in the Cayman Islands (as is the case in most countries) no further guidance has been provided by CIMA regarding any substantive legal issues. ICOs are being explored by investors in Cayman, so it is expected that CIMA will provide further guidance in respect of virtual currencies in due course. But as things stand, Cayman, like many regulators in this area, is taking a cautious standpoint, bearing in mind that the existing crypto market is one subject to a high degree of volatility and risk. This approach could be in their favour as this market develops.
Where Do We Go From Here?
Based on the above, the conclusion you’d quickly reach is this: when it comes to ICOs and virtual currencies, each IFC will do their own thing. The space is so very fluid and unpredictable.
Some IFCs will enable successful regulation and legislation in this arena; some will enable regulation which will not work and will need quick amendment, or worse, lead to potential cybercrime, and others will simply wait and sit on the side-lines — along with some major financial centres — while AML and regulatory issues are eventually resolved.
But the one thing all IFCs have in common is this: the ability to see the potential of blockchain. The use of blockchain technology will, over a rapid period of time, have a dramatic impact on how we function on a daily basis.
It feels like the beginning of the internet in the mid-1990s. A lot of businesses are flowing into blockchain and a lot of smart people – entrepreneurs, technologists and executives – are moving into the space. It is certainly exciting. But blockchain will also create disruption. We are now moving from a paper-based, centralised world to a digital, decentralised one.
IFCs are all presented with challenges relating to ICOs and virtual currencies, but when it comes to blockchain, the story is totally different. Blockchain is here to stay.
Like the internet, blockchain is the future and will change the world.
Chris Garrod is a Director in the Corporate department of Conyers Dill & Pearman’s Bermuda office. He joined Conyers in 1997 and is a member of the Firm's insurance practice. Chris specialises in advising on reinsurance and ILS structures, including large commercial insurers, life reinsurers, special purpose insurers, cat bonds, sidecars and segregated account vehicles. In addition to his insurance practice, he also advises on all aspects of Bermuda corporate law, including mergers and acquisitions, takeovers, reorganisations and re-domestications.
Conyers Dill & Pearman
Bermuda, British Virgin Islands and Cayman Islands.