Jersey has dipped its toes in cryptocurrency waters, but its approach has been far more about quality not quantity – and that rings true when it comes to initial coin offerings
If you’d sold one single Bitcoin on 18 December 2017, you’d have received just shy of $20,000 for it. At the end of September this year, the same sale would bring in somewhere between $6,000 and $7,000. Go back to the end of December 2016 and Bitcoins were being traded for a much more modest $800 or so.
At its peak, the market capitalisation of Bitcoin stood at almost $320bn, but it’s more than halved since then, reaching $115bn at the end of September this year.
There’s no doubt that anyone who holds Bitcoin in their investment portfolio has endured quite a ride. Volatility has been the digital asset’s principal characteristic since it hit the headlines five or six years ago.
In keeping with Bitcoin’s reputation as a disruptive economic force and something that most regulators are struggling to get to grips with, aficionados saw a way for cryptocurrencies to be used to fund start-up business ventures. In short, people realised they could sell their own cryptocurrencies in exchange for Bitcoin, Ether or any of the other major coins that had developed an economic life of their own.
This simple, elegant solution to the issue of fundraising for businesses was seen as playing directly into the ‘cryptocurrency as a game-changer’ story. So, as the first initial coin offerings (ICOs) got under way, the dollars – which were usually denominated in Bitcoin or Ether – started rolling in.
Ethereum was itself among the first ICOs back in 2014, raising $18 million in just six weeks. The trend caught on from there, reaching a peak with last year’s Filecoin ICO – Filecoin is a data storage network – which raised $257 million.
The regulation challenge
In the past couple of years, the ICO industry has gathered incredible momentum and billions of dollars have been raised. But the speed and scale of the sector’s rise, combined with a certain element of criminality in the form of scams and Ponzi schemes that have led to investors losing millions, means it has attracted the interest of national regulators.
Estimates suggest that about 10 per cent of ICOs fall into this category, but many more simply fail, with failure rates put at anywhere between 40 and 80 per cent. Some countries have banned them outright, including South Korea and, on the surface, China – although it’s still a major force in ICOs and harbours something of a shadow ICO economy.
Other regulators have sought to find a middle way between protecting investors and encouraging innovation, but they’ve had problems doing so, not least because they’ve found it difficult to attribute characteristics to an ICO that would bring them under their regulatory purview.
“An ICO is a means of capital raising,” says Dilmun Leach, Group Partner at law firm Collas Crill in Jersey. “The traditional way to raise capital would be a company issuing shares in an IPO or via a fund. ICOs are a new way in which investors buy virtual tokens. The significant difference is that in some jurisdictions, these tokens can avoid regulation.”
Many regulators require ICOs to fall under the definition of securities in order for them to be able to adopt an oversight role. Aware of this, however, many ICO promoters have maintained that rather than being securities, the tokens they offer are in fact utility tokens that just enable access to the services offered by the business in question.
In their view, this means that buyers of the tokens are simply buying services, albeit services that don’t yet exist because most ICOs are a means of funding ideas rather than established businesses.
Keen to diversify its economy into the tech space and, as a result, wanting to be seen as innovative, Jersey has sought to lead the way in the cryptocurrency space by building upon its reputation in the financial services sector. Doing so, however, means leading with caution because the island has its good name to uphold.
“2017 saw a global boom in ICO activity and Jersey saw an increase in enquiries,” says Mike Jones, Policy Director at the Jersey Financial Services Commission (JFSC). “As a regulator, we want to attract business while also managing the risks effectively, and so we issued a risk warning in 2017 because there are risks attached and people need to think carefully before investing.”
Alongside this risk warning, the JFSC has issued a Guidance Note to help prospective ICO issuers understand what they will need to do to come under Jersey’s regulatory regime. “The Guidance Note requires that any ICO [business] must be a company, have a Jersey-registered director, provide retail investor risk warnings, and annual audited accounts. It also provides a checklist of things that they can and can’t say in the prospectus,” says Jones.
The regime is administered by Jersey’s Control of Borrowing law and the company registry, with trust and company service providers, as well as the local director, being key to delivering the oversight the island wants.
Gathering speed
This approach means Jersey isn’t leading the way in terms of volume – the regulator has received scores of enquiries, rather than the hundreds or thousands received in Gibraltar, Malta or Switzerland’s self-styled ‘Crypto Valley’ of Zug.
Importantly, this reputation-led, slower approach hasn’t slowed Jersey down too much. The island is home to the world’s first regulated Bitcoin fund, launched by investment manager Global Advisors, and hosts the world’s largest tech fund, Softbank’s Vision Fund. Jersey also launched its first ICO in 2017 – AAA Reserve, a not-for-profit coin designed to be a stable reserve currency to facilitate crypto-to-fiat transactions and vice versa.
There have been a few more, though not many. But this doesn’t mean that Jersey is too late to the party – and it’s certainly ahead of Guernsey, which has yet to offer more than tentative, generic advice about using the jurisdiction for ICOs.
“As crypto becomes more mainstream, we’re positioned to move with the times,” says Chris Griffin, Partner at law firm, Carey Olsen. “Jersey isn’t a crypto free-for-all and only wants quality business. Some jurisdictions have rushed into the space, but Jersey hasn’t, and that’s the place to be.”
Mike Jones characterises the island’s approach as “mid-to-pro ICO activity”, acknowledging that “we want the good elements of this and so we’re focused on regulatory standards and wouldn’t want to treat the space any differently”.
The fact that ICOs fall across financial services and technology means the islands are ideally suited to nurturing them and aren’t short of the necessary skills. “Jersey does have the skills to work with ICOs,” says Dilmun Leach. “We have excellent corporate governance and administrative expertise, there are significant digital businesses and a real community of tech experts, so we’re set up for dealing with high-tech industries.”
Although not directly linked to ICOs, the recent signing of an MoU with Chinese crypto exchange Binance will boost Jersey’s credentials enormously. Under the deal, the firm intends to set up an exchange in the island and, as Chris Griffin points out, “it’s tremendously helpful to Jersey’s digital sector”.
He continues: “Here’s an enormously successful crypto exchange that came to us wanting Jersey to help and it’s incumbent on us to provide that help with a view to diversifying and strengthening Jersey’s economy. It’s an interesting space and the more work we do, the more it becomes a self-fulfilling prophecy.”
If Jersey’s work in the ICO sector does develop into a significant element of the economy, it won’t be because the island was the first-mover. Instead, it’s the more cautious path plotted by industry, the regulator and government working together that will have provided the opportunity for success.
The one thing none of them can be sure about is whether or not cryptocurrencies are here for the long term. If they are, and that’s looking more likely as volatility begins to subside, then Jersey is set to benefit from its preparations. If, however, they turn out to be a flash in the pan, the island will have to continue looking for the next new pillar of its economy.
What are ICOs?
ICOs are a method of raising capital to fund new or established businesses by issuing cryptocurrencies. In the first quarter of 2018 alone, more than $6bn was raised, eclipsing the whole of 2017’s fundraising in just three months.
ICO stands for initial coin offering, but they can also be referred to as token generating events, the latter being a more neutral term that avoids the link with securities (token and coin are essentially interchangeable terms).
Eighty per cent of new coins issued for ICOs are built on the Ethereum blockchain, a platform that enables them to easily operate the smart contracts that give many of the coins their functionality. The contracts can be used to verify transactions or enforce conditions, depending on the token’s intended purpose.
Many, but not all, of the businesses that use ICOs are start-ups, often with little more than an idea and some well-worded marketing material with which to drum up funds. The fact that so many of the organisations behind ICOs aren’t yet real trading businesses means some investors have paid into scams.
However, for those firms that are genuine and succeed in raising capital through an ICO, the fact that they’ve been able to secure funding up front, rather than further down the line, opens up new possibilities, enabling them to eschew the likes of venture capitalists and keep control of their own organisations.