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“I think the future of ICOs will be far more successful and have the longevity we all want it to have if there is more trust.” Albert Isola, Gibraltar’s Minister for Commerce

This was the overarching theme of the panel discussion in which Gibraltar’s Minister for Commerce, Albert Isola, participated during his visit to the #Switch blockchain conference in Vilnius last week.

Minister Isola was sharing the stage with Marius Skuodis, Lithuania’s Vice Minister of the Economy, Mindaugas Glodas, of Nextury Ventures, Ada Jonušė, of Limpo, and Martīņš Libertš of Debitum Network, alongside moderator, Jacki Davis. The panel discussed the positive and negative aspects of ICOs and with a backdrop of the sudden downward spiral of ICOs int he past week, the discussion was particularly pertinent.

ICOs, claimed the panel, are both beautiful and challenging. The beauty of ICO’s lies in the positive contributions they have made to the ability of start ups to create, innovate, disrupt and bring to market ideas that would never have seen the light of day if left to traditional methods of raising investment funds. However, this is paralleled by an uglier side – volatility, a high level of risk, and the involvement of ‘bad players’.

Both the beauty and the problems of ICOs were highlighted by the phenomenon that was 2017 when an unprecedented level of capital was raised for start ups, said Minister Isola. Just as the ability to raise substantial investment outside of traditional methods had been highlighted in 2017, which served to free up small businesses to create new products and services, so had the risks and volatility of this type of investment been brought to light at the same time. “They [ICOs] are an efficient way of raising money,” said Mr. Isola. But, he continued, ICO’s do carry a high level of risk and a balance needs to be found whereby people who invest in an ICO can do so with confidence in the fact that the business is acting correctly. This is what Gibraltar has aimed to achieve through a robust yet flexible system of regulation.

The panel proceeded to discuss how ICO’s function as an effective instrument to generate substantial capital for start ups. More people are investing in ICO’s – an opening up of business investment to the mass markets, a form of democratisation of the investments industry – and an increasing number of small, innovative businesses have been enabled to start up. However, under discussion was the issue of risk – “If the people understood that any ICO is a lottery!” claimed Martīņš Libertš, highlighting the point. “Many of the participants in ICO’s are regular people,” he added. For Martīņš Libertš, the cornerstone of regulations is the risk warning that should be provided by companies to their potential investors.

This begged the question of whether ICO’s deliver – do they achieve what they set out to achieve? In terms of raising capital, undoubtedly they can be tremendously successful. Ada Jonušė turned the question on its head and asked whether in fact, start ups, with their high failure rate, actually deliver to their investors. She made the interesting point that this group of start ups are in a way acting as a form of research laboratory, testing out new technology, new products, new business models and ICO’s have created the possibility of trying out things that could never have been done under traditional equity funding investment models.

While for Mindaugas Glodas ICO’s are a form of investment instrument, for Marius Skuodis, who spoke about the €100 million that the Luthianian government has dedicated for the establishment of risk capital funds, ICO’s are a way of bridging the gap between new creative businesses and the traditional, conservative forms of investment. However, the challenge lies in finding a balance between encouraging innovation and protecting consumers, investors and also safeguarding the reputation of the financial system.

The issue of mitigating risk is the driver behind jurisdictions such as Gibraltar and Lithuania, among an increasing number of others, who are working to provide appropriate regulatory frameworks. The panel made comment that blockchain technology by its nature is a trustworthy technology and yet without regulation, trust in the business using that technology and in the investment potential of that business is nebulous, with uncertainty over-riding confidence. Lack of knowledge in how the blockchain space and ICO’s work can ruin trust, Mindaugas Glodas pointed out. This is something that regulation can address and therefore regulation does not necessarily act to slow down innovation. “It will encourage more participants which will provide more stability,” he added.

For his part, Marius Skuodis highlighted the uncertainty that is also caused by there being different approaches to ICO’s and virtual currencies by different countries and the varied attitudes of the world’s banks. It is this uncertainty and these widely divergent attitudes that hold back progress and stifle innovation in an environment where the technology is, by contrast, developing so fast. From a start up perspective, Ada Jonušė was clear that regulations are needed to help provide the certainty that a business needs to be able to develop and grow. Let’s keep the beauty of ICO’s and not smother them in the ugly straightjackets of inappropriate regulations that are driven by lack of understanding, was the message from the panel.

Meanwhile, Minister Isola pointed out that he believed that: “Trust is something that is earned and the key to that learning, that education and that trust that will be garnered over a period of time is regulation…trust begins to start slowly and I think the future of ICOs will be far more successful and have the longevity we all want it to have if there is more trust…regulation is not the end all and be all but it is certainly an important step forward to begin to develop that trust.”

He went on to explain that Gibraltar’s stance is that regulation needs to be pragmatic, to take the starting point of accepting that there are issues such as terrorism finance and money laundering that must be dealt with. Mr. Isola explained that by the end of the month Gibraltar’s proposal for ICO regulation will be ready. He commented that this will include a system of authorised sponsor firms who will sponsor token issuers and ensure compliance with the regulations. The proposed regulations will be looking for proper governance, disclosure and transparency. There will also be an audit of the token issuer’s technology and business plan, all of which points to a continuation of Gibraltar’s practical stance to regulating and working with the blockchain space.

The vital role of regulation for future development of blockchain-based businesses was clearly communicated, with Minister Isola continuing to draw the world’s attention to Gibraltar as a forward-looking jurisdiction that welcomes and works with innovative start ups. Gibraltar evidently continues to nurture the benefits of ICO’s, within a framework that aims to limit the challenges but avoid smothering innovation and masking the beauty of ICOs.