Modern day entrepreneurs have creative ways of raising money like crowdfunding, which is steadily gaining dominance. ICOs operate under similar principles in that investors are offered shares in a currency that is still in development. In exchange, they contribute the more popular digital currency such as Ethereum and Bitcoin. Fiat currency like the Euro and USD can also be used.

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The Environment for ICOs in Malta

In November 2017, the MFSA (Malta Financial Services Authority) released a discussion paper looking at the state of ICOs, virtual currencies (VCs) and related service providers. A Financial Instruments Test will be introduced in a bid to protect investors. This test will check how a Digital Ledger Technology Asset is to be regulated. All service providers will be subject to the Financial Instruments Test.

The Process of Regulating ICOs

Before an initial coin offering can be put under regulation, it must undergo a comprehensive evaluation to see if it passes as a financial instrument. Section C, Annex 1 of the MiFID (Markets in Financial Instruments Directive) sets the provisions for this determination. Part of the procedure also involves determining if the actions of the agency that carries the virtual currency fall into the category of ‘regulated activity’ as outlined in Section A, Annex 1 of MiFID. An ICO that gets positive determinations on both elements is subject to local and EU legislation.

In the next part of the regulation process, the proposed Virtual Currency Act is used to establish whether the initial coin offering meets the criteria of an asset. However, satisfying the requirements of the first step negates the need to go through the second one.

What the Virtual Currency Act Means for ICOs

Malta’s Virtual Currency Act was proposed to help establish and maintain financial market integrity without hindering the growth of new technology. The VCA has provisions for service providers of ICOs. This Act will give the MFSA an opportunity to demand accountability by monitoring initial coin offerings to ensure that they meet the required standards. The MFSA will also have to suspend initial coin offerings if necessary. According to the stipulations of the VCA, an independent and external auditor will be tasked with the role of evaluating the Financial Instruments Test.

Initial Coin Offerings in Gibraltar

The body responsible for regulating financial services activities in Gibraltar, the Gibraltar Financial Services Commission, handles ICOs in a nearly similar approach to Malta. Both the MFDS and GFSC said that initial coin offerings are a risky investment.

The GFSC’s ICOs Guidelines

Regardless of this stand, the GFSC, in collaboration with the government of Gibraltar, has drawn up a draft bill that will govern the sale of cryptographic tokens. The draft is expected to be tabled by October 2018. This move will see the nation become the first in the world to establish regulations for initial coin offerings. Before coming up with the proposal, the government consulted with industry players to get their insights. Local practitioners reacted favourably towards the proposal of ICO regulation.

The government for Gibraltar has also made some moves into developing a secondary market that will see providers operate under regulations to offer tokens. The introduction of a tri-lateral approach will see to the regulation of the ‘promotion, sale and distribution of tokens.’ In comparison, Malta is using the VCA to achieve the same end.

The Concept of Authorised Sponsors and ICOs

Gibraltar intends to regulate initial coin offerings by requiring authorised sponsors. These users will have the obligation of guaranteeing compliance. For this reason, sponsors will need to be well educated on the industry and the corresponding regulations to oversee compliance. It means that any issuer of tokens will have to appoint an individual who will act as the authorised sponsor and supervise the sale. Malta, on the other hand, will have the VCA to monitor service providers according to the established rules.

The Regulation of ICOs in Gibraltar

The bill that is expected to become law in late 2018 will include rules on the disclosure of information during the sale of tokens. Providers will be required to give buyers accurate, adequate and balanced details on initial coin offerings. The regulation of ICOs will start by controlling how tokens are promoted in and from Gibraltar. Proceeds that result from the criminal conduct of ICOs will be categorised in the Proceeds of Crimes Act 2015. This rule is designed to deter criminal elements from using token sales for money laundering and other financial misconduct. Looking at the Maltese regulation, it is not part if the MFSA will have separate rules for handling ICOs crimes or of the local Criminal Code will apply.

Malta and Gibraltar both realise the value that ICOs hold in today’s investment sector and, therefore, permit people to offer token sales but not without a bit of caution. The two nations are committed to monitoring ICOs although in different ways. Malta adapts the Financial Instruments Test while Gibraltar focuses on authorised sponsors.

Governments and regulators globally have struggled with the lack or regulatory boundaries for blockchain technology. As the two countries strive to implement regulations for ICOs and guarantee compliance, the threat of overregulation and what it would mean for investment prospects must be addressed. It is hard to tell if regulatory measures will work until they are in effect. Malta and Gibraltar are hoping to increase the chances of positive results by laying the foundation early.

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