There is no doubt that blockchain, cryptocurrencies and initial coin offerings (ICOs) are now part of the international financial mainstream. It was reported in April 2018 that the total cryptocurrency market capitalisation had topped US$400 billion, and the underlying blockchain technology is being put to ever more elaborate and creative uses, from music licensing to diamond provenance. Similarly, funds raised via ICOs have recently gone through the US$4 billion barrier.
But when something is new it often divides opinion, and views on these innovative new products are certainly diverse. On the one hand, there are evangelists who regard them as central to the ‘next (or current) big thing’ – key components of a digital revolution. Conversely, at the other end of the spectrum, there are sceptics who believe the ‘next big bubble’ will inevitably burst and that an awful lot of people are lining up to lose an awful lot of money.
That said, the scale of the investment — US$400 billion and counting — suggests that it's not just evangelists and speculators who are putting their money, and faith, into blockchain-related products.
And we have come a long way in a short space of time. Not too long ago, Bitcoin and crypto-currencies were still very much unfamiliar and slightly scary concepts for many. Now more fully understood and accepted, they have been followed by a second wave of financial innovation in the form of ICO tokens. Trending now is the use of tokens and blockchain technology to transform existing products and services in other areas such as entertainment, education, real property ownership and even everyday objects such as eye glasses.
When you consider the total value of cryptocurrency assets, it is clear that any holistic investment strategy needs to consider a position on crypto currencies. Some large financial institutions are investing their own resources in developing blockchain driven systems and products, as well as investing in cryptocurrencies. Hedge fund managers in particular are starting to set up dedicated funds, or are allocating parts of their existing portfolios to cryptocurrency investments.
All of this activity has led to an issue for regulators, who have had to make decisions and adopt positions in respect of crypto and blockchain-related developments. That has included offshore regulators. There has been reasonable risk aversion in some quarters, and for many the issue of regulation has been made more complicated by the speed of innovation and change, compared to the slower pace of regulatory adaptability.
The winners are likely to be those jurisdictions that take a balanced approach to this regulatory conundrum. In Jersey, for example, the ‘digital sandbox’ concept demonstrates the healthy blend of innovation and pragmatism with which the island has approached the question of virtual currency exchange. Among the other IFCs, Gibraltar, Singapore and Malta are also leading the field by taking pro-active steps to regulate the digital sector.
And many would say it is very much worth their while. From the perspective of offshore centres, blockchain and ICOs represent a real opportunity – not yet a rival to the trusts, funds, finance or corporate work that we are more familiar with, but a rapidly developing accompaniment to them. The potential benefits from the perspective of clients innovating in this space are similar to the benefits enjoyed by those dealing in more traditional financial products: tax neutrality is often key, as is the support provided by a sophisticated and highly developed financial services sector and internationally-recognised court systems.
All of this is part of the general diversification within the financial services sector that has been a theme over the last few years. This has led, not only to developments in regulation, but also to new structuring options being offered by the IFCs. Cayman, for example, has led the way with the innovative Foundation Company model, despite being best known for alternative investment funds activity. Meanwhile, the BVI is targeting funds work with a new, modern Limited Partnership structure which complements its historical focus on corporates.
With any innovation in the marketplace — particularly one with the potential scale and reach of blockchain and ICOs — there are going to be early adopters, a growing mainstream, and those who embrace it only once a tipping point has been reached. Those waiting for the tipping point are probably doing so for a variety of reasons – possibly including reticence to dip into a new and untested market, a concern that unilateral regulatory action could lead to reputational issues, or simply a feeling that some of the many other regulatory developments are more worthy of urgent attention.
Virtual currencies and the technologies unpinning them divide opinion. You can see them as the next big thing or the next big bubble, as an unfathomable mystery or a familiar part of everyday life in 2018. What you cannot deny is that Pandora's Box is now well and truly open – how we respond will dictate the shape of our world for years to come.
Partner at Ogier, Jersey. She co-heads its competition law practice.
British Virgin Islands, Cayman Islands, Guernsey, Hong Kong, Jersey, London, Luxembourg, Shanghai and Tokyo.