British territory Gibraltar plans to create the world’s first regulations for initial coin offerings (ICO), according to a report from Reuters.
The nation intends to create a framework that will protect those who wish to invest in ICOs. They believe the explosive growth of ICOs, coupled with the current legal grey area they fall into, poses too much risk for the average investor.
This is a sentiment echoed by many other countries who are scrambling to put into place similar regulations.
“The SEC is devoting a significant portion of its resources to the ICO market,” said Christopher Giancarlo, Chairman of the Commodities Futures Trading Commission (CFTC) during a recent CBHU hearing on how to regulate ICOs.
Gibraltar is the first country to attempt to create new regulations specifically for ICOs and digital currencies. If they are successful, their work may pave the way for other countries to follow suit. Many countries, like the United States, so far intend to fit ICOs into existing securities laws. Other countries, like China, hope to impose outright bans on ICOs and digital currencies.
An innovative new way to raise capital
An ICO uses smart contracts that run on a blockchain platform, like Ethereum. The ICOs smart contract is a hardcoded set of rules that ensure investors receive a set amount of tokens in exchange for their digital currencies.
The advent of ICOs created a new way of crowdfunding, which has led to an explosion of innovation in the blockchain industry. New companies can now raise the funding they need to research innovative new technologies without relying on traditional means of raising capital.
The total capital raised through ICOs in 2017 was approximately $6 Billion CAD, up from the $120 million raised in ICOs in 2016.
Although many applaud this new decentralized way of crowdfunding, it currently lacks a mechanism to protect investors. The ICO craze brought with it a wave of fraudulent ICOs.
Vitalik Buterin recently announced a new form of ICO called a Decentralized Autonomous Initial Coin Offering (DAICO), which has a built-in mechanism to protect investors. Investors participating in a DAICO have the ability to vote to control the number of funds a startup can access. They can also cancel the DAICO if they feel the company is not going to deliver on its promises.
Plans for the future in Gibraltar
“One of the key aspects of the token regulations is that we will be introducing the concept of regulating authorized sponsors who will be responsible for assuring [sic] compliance with disclosure and financial crime rules,” said Sian Jones, a senior advisor to the GFSC.
The new regulations will impose disclosure rules that outline how ICOs should present information to prospective investors, according to a statement from the Gibraltar government.
Many in the industry see regulations as a positive step towards protecting investors while adding an element of credibility to digital currencies. Regulations and buyer protection may encourage a new wave of investors who have been wary of investing in an unregulated marketplace.