Gibraltar: "Hotdogs And Hot Tokens" – How The Crypto World Is In Danger Of Getting Out Of Control And How To Harness It.

Last Updated: 15 November 2017
Article by Marcus Killick OBE

"Welcome to Crypto Club. The first rule of Crypto Club is: you talk about Crypto Club. The second rule of Crypto Club is: you TALK about Crypto Club!" (with apologies to Brad Pitt).

Something has happened; in the Petri dish of capitalism a new life form has been created. Slowly and unsteadily at first, teetering between evolution and extinction, loved by a few, loathed by others, ignored by most.  Yet, in the last couple of dozen or so months, it has turned viral, expanding at an exponential rate. Its early adherents have, at least on paper, become multi-millionaires.

As their wealth accumulates others join, the cycle perpetuates, and the life form grows. Others are sucked in, value increases by 10, then 20, then 100 times. So further "wealth" accumulates. The life form grows; breeds and other new life forms join it. Their novelty excites, their potential thrills. In a stale grey financial world, hampered by low interest rates and restrictive regulations, they exist outside restriction, in vivid Technicolor.  Crypto becomes the crystal meth of capitalism.

Some stand aside and warn, cautioning of bubbles and Ponzi schemes. For the most part the mainstream media ignore or express concern. But this is a world of Snapchat, Instagram, LinkedIn and Telegram (and numerous others). This new life doesn't need the Financial Times to spread its message. Nor does it need stockbrokers or financial advisers. It spreads peer to peer. If it were a virus it would by now be regarded as airborne.

Begrudgingly at first, the mainstream financial and commercial world begins to take an interest. Regulators and governments see both its threats and opportunities. But their response varies wildly. Some ban, some ignore others choose to seek a way to harness it before it is too late.

Yet this life form is complex, it is no amoeba, rather it has many cells, each distinct and dissectible.  At its base is the Distributed Ledger Technology (DLT), often referred to the Blockchain. In reality this is the game changer. This is the element that will alter the way we live our lives, no less than the internet or the internal combustion engine did. It allows a more trustworthy, secure, faster and cheaper way to conduct business. No need for banks, no need for a stockbroker, no need to pay PayPal. Payment is person to person, transactions are peer to peer.

But the lifeform has other cells. One is crypto currency, initially its was Bitcoin but it has been joined by Ether, Dash and numerous others ( said to be in excess of 900 and growing). Each one mimics currencies in various ways and with various degrees of success. None however are backed by a central bank or national government. Their value is based solely upon trust. Trust they will represent a stable store and measure of value, trust they will be accepted as a medium of exchange, trust they will not simply disappear. Bitcoin's value or rather its increase in value, is based at least in part, upon its strictly limited supply. An infinite supply would kill value; the simple economics of supply and demand dictate that.

There is simply no room for the number of crypto currencies being created. Ultimately a couple will dominate, some will stagnate and most will fail.

Another cell in this new life form is the Initial Coin Offering (ICO). Many now prefer the term Initial Token Offering (ITO). However, because both could be confused with the far more conventional and regulated Initial Placement Offering (IPO), others prefer more differentiated terms. Initial Token Distributions (ITDs) has gained support but Secondary Token Distributions are likely to achieve less popular usage.

The general purpose of raising funds by these methods is to provide the capital necessary to develop the underlying product or service. The development should be blockchain based but the link of some to DLT is, at best, loose.

Some of the Whitepapers, upon the decision to put money in are based, would shame a first year economics A 'level student. Others are of a significantly higher standard. However as there are no required minimum disclosures, it is currently a case of caveat emptor. Some organisations have been created to perform an independent assessment but this part of an industry let quality control is still as an early stage.

However in the current feeding frenzy, quality is sacrificed for speed and the need for greed. Individuals who have seen the worth of their crypto currency increase massively are looking for the next locomotive to ride, regardless of destination. There are signs of sense being regained but it is a slow process. 

With apologies to purists, broadly ITOs fall into two camps. Firstly there are the securitised offerings. These are regarded by a significant number of jurisdictions as being securities and therefore subject to all the regulatory requirements of any security offerings. This clearly makes them unattractive from a cost and flexibility point of view. As a result Utility Token Offerings have gained in popularity.

To be clear Utility Tokens are designed to fall outside the scope of conventional financial service regulations. This does not mean they are wrong, malevolent or illegitimate, simply that they are out of scope. They are neither an equity nor a debt, there is no right to a  financial return. The right is simply to use the service that is subsequently developed via the Token. You are a creditor of the company issuing them but, if the service is not subsequently developed, your chance to recover your money is close to zero. Your token's value will ultimately depend both on the creation of the service and the subsequent demand for that service.

To put it in simpler terms, imagine being asked to put money into the building of a hotdog stand. In return you get a number of free vouchers for the hotdogs that are to be produced. If the hotdog stand never materialises, you have lost. If it does become a reality but its hotdogs are disgusting and no one wants them, you have lost. However, if they are amazing and everyone wants them, as they can only buy them with your tokens, your tokens will increase in value. And you can always eat the hotdogs yourself.

To stretch the analogy to breaking point, what would cause you to hand over your money?  Presumably a decent business plan, properly costed with an identifiable market. You would probably want to ensure the person setting it up knows what they are doing, perhaps has run hotdog stands in the past. You would want to make sure they were not a crook and that your money is spent on building the hotdog stand not on "research trips" to the Caribbean. Perhaps it would be good if an independent person held the money and only released it as it was needed to build the hotdog stand. Perhaps also someone to make sure that the stand was properly built and the hotdogs held safely so they couldn't be stolen. It would also help if you liked hotdogs yourself.

From the person seeking to raise money for their, hopefully delicious, hotdogs, they would want to reassure people of the above. They could promise, but who would check they fulfilled their promises. Perhaps they use others regarded as trustworthy to oversee them. On the other hand, wouldn't it be better if there were some rules governing the above. Rules which are flexible enough to cover all manner of stands (from Hot dogs to clothing), and proportionate enough to not make compliance cost prohibitive. Perhaps someone could be tasked with checking the rules are complied with.

Wouldn't this be win win? The prospective hotdog entrepreneur gets to build their stand, those putting up the money get a degree of reassurance. Wow, a set of requirements that work for everyone.

Early next year, Gibraltar will begin to provide that environment. No wonder when it announced the creation of a proportionate and bespoke regulatory environment earlier this year the floodgates opened. Initially the regulations will focus on elements of the DLT eco system such as electronic wallets and exchanges, but ICO/ITOs will follow.

No regulatory system works in a zero failure environment. Regulation is not an alternative for sound financial judgement by individuals. There will be regulated ICOs that fail. The best that can be done is to reduce  and manage the risk, not eliminate it.

The Petri dish of capitalism has produced its new life form, it cannot be ignored and it will evolve. The choice is to pontificate, procrastinate or be proactive. It is only the last of these that give us the chance to influence what it will become. Gibraltar has chosen that course.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions