Gibraltar Blockchain Exchange is set to launch by the end of the year with a service to allow licensed listing and trading of digital tokens, making it the world’s first conventional hub for initial coin offerings (ICOs).
“ICOs are scaring everyone, and everyone is wondering how to handle them,” Nick Cowan, GBX’s founder, told DigFin. “We’re saying: if your business operates on blockchain, or you want it to, then come to us and get a license.” This isn’t a securities license, as ICOs on GBX wouldn’t be considered securities by conventional regulators. “We’re not regulating ICOs; we’re providing regulatory certainty,” Cowan said.
Jehan Chu, whose Hong Kong firm Kenetic Capital is advising GBX (via a subsidiary, Kenetic Consulting), said, “This is the world’s first global safe harbor for ICOs and tokenized securities.”
The exchange plans to complete an ICO capped at $30 million by mid-December to seed its own token with the ticker name RKT (“the Rock token”). Sponsors, issuers and investors will be able to transact on GBX by using RKT as a membership or access vehicle. RKT will not confer ownership or other securities-like attributes to holders.
GBX has a strong Asia connection. In August, the exchange sold a 25% stake to Hong Kong-based Cyberhub Fintech, a vehicle for Benjamin Soh, co-founder of Hong Kong-based Broctogon FinTech Group and founder of Stellar Partners, a family office.
In addition to partnering with Soh, GBX has other Hong Kong-based partners: Kenetic Capital, while a Hong Kong-based consultant with a Big Four accountancy is advising GBX on governance issues.
Other advisors include law firm KWM and Smith+Crown, a token specialist.
Cowan says Gibraltar opened a traditional exchange, Gibraltar Stock Exchange (GSX), only in 2015. He was brought in to consult on that project. “Then I bought the company,” he said.
His background is trading: he was London-based global head of equities at ING Barings from 1996 to 2004, and then set up his own trading fund in Gibraltar in 2008.
Putting ICOs in a licensed environment
He says GSX based its activities on what the Gibraltar Financial Services Commission could handle, and today it is limited to listed debt and closed- and open-ended funds, with global issuers and pan-European Union investors.
Brexit will change that equation, as Gibraltar will follow the U.K. out of the European Union. “Gibraltar was always a gateway to Europe, but now we will be a gateway to the U.K. capital market,” Cowan said. While GSX may no longer be able to serve as an easy passport for E.U. investors in traditional products, its blockchain affiliate, GBX, aims to become a global center for sponsors, issuers and investors in the emerging token economy.
The Gibraltar regulator took the initiative back in May, when it announced it would set out principles to supervise blockchain businesses and the ICOs that fuel them.
Those regulations go live in January 2018.
GBX, in line with the regulator, has created principles-based regulations to determine when an ICO is fit and proper, when it protects client assets, what constitutes adequate capital and technology to support a token, and the number and types of qualified directors. There will also be accounting and tax standards, and a code of conduct.
One impetus for these governance standards has been the accusations around Tezos, a Switzerland-based company whose ICO raised over $230 million, but which subsequently has suffered from its senior managers trading accusations of self-dealing and other allegations, and which could find itself the subject of investor-led lawsuits.
“Tezos is a warning that ICOs need proper AML, KYC and governance standards, such as a cap on fund raisings and declaring how proceeds will be used,” said the Big Four accountant, who requested anonymity due to non-disclosure agreements. Although he acknowledged that Gibraltar may have the reputation of an offshore center, he said GBX is trying to put in place best practices. “Yes there’s fraud in ICOs because of bad apples, but there are bad apples committing fraud in the traditional securities world, too,” he told DigFin.
Stamps of approval
“When an ICO issuer comes to GBX, it must appoint a pre-vetted sponsor, who in turn puts the company through what I call ‘ICO bootcamp’,” Cowan said. This is meant to be a rigorous process that produces a white paper that meets audit, disclosure and other standards. Companies who meet those are guaranteed a listing on GBX.
Investors likewise must be vetted and pass traditional anti-money laundering and other criteria.
“Issuers get a stamp of best practices with regard to disclosure and transparency, investors get access to high-grade ICOs, and sponsors can bring ICO companies to market in a licensed regime,” Cowan said.
Chu said interest among potential issuers is running high, but GBX will measure success in terms of quality, not volumes: “We’ll probably say ‘no’ 99% of the time.”
Banks and brokers are members of the traditional GSX, but Cowan doubts they will serve as sponsors on GBX. Rather it will be companies who understand crypto-currencies that are likely to serve that function, such as a Kenetic Capital. To prevent rampant flipping, sponsors will have to underwrite and retain stakes in issuer ICOs for at least six months.
Cowan acknowledges the irony of inserting a centralized institution into a world of creating, validating and transacting decentralized assets. “We’re a private blockchain,” he said. “You come into our theme park.” GBX will be the permissioned party that sees all buy, seller and issuer data.
The Big-Four consultant says in the short term, what counts is how the ICO-level operations are run. “The token sale is what matters, not the exchange,” he said. Once a framework for ICOs has been established, however, new challenges will arise concerning the secondary market: will it center around a central exchange, or devolve to a peer-to-peer network? “I have no idea what will happen,” he said.
Cowan sees a day, soon, when GBX may be able to decentralize aspects of what it does. “Decentralized is the future, but none of the rules or standards have been set for that,” he said. He hopes bitcoin exchanges will look to connect their networks to GBX’s, and perhaps allow for dual listings, assuming the platforms’ transaction speeds are fast enough.
“I can see us going decentralized, or having a hybrid model, in 2019,” Cowan said. “But first we need to have standards and best practices.”