Epicenter - Learn about Crypto, Blockchain, Ethereum, Bitcoin and Distributed Technologies - Siân Jones: An Enlightened Approach to Blockchain Regulation in Gibraltar

Episode Date: June 7, 2017

Our regulatory expert Siân Jones joined us to discuss her work on a regulatory framework for distributed ledger technology (DLT) for Gibraltar. We discuss how the framework differs from other efforts and aims to attract rather than curtail blockchain businesses. We also covered why the rapid changes require the flexibility of a principle-based approach to regulation. Finally, we discussed current trends around ICOs and how they could be impacted by regulation. Topics covered in this episode: How the Gibraltar DLT Regulatory Framework came about How Gibraltar’s approach differs from others like BitLicense Why a principle-based approach is preferable for technology regulation Why the framework focuses on custodial services, not decentralized protocols The path from proposal to regulation Recent trends in how ICOs are conducted Why principle-based regulation could improve the ICO market Episode links: Proposals for a DLT Regulatory Framework Want To Hold An ICO? CoinList Makes It Easy -- And Legal Thoughts on Tokens by Balaji S. Srinivasan Tezos COINsult This episode is hosted by Brian Fabian Crain and Sébastien Couture. Show notes and listening options: epicenter.tv/186

This is Epicenter. Episode 186 with guest, Sean Jones. This episode of Epicenter is brought you by Jax. Jax is the user-friendly wallet that works across all your devices and handles both Bitcoin and Ether. Go to JAAWX.I.O and embrace the future of cryptocurrency wallets. Hi, welcome to Epicenter, the show which talks about the technologies, projects, and startups driving decentralization than the global blockchain revolution. My name is Sebasti Kujo. And my name is Brian Fabian Crane.

We're here today with Sean Jones, who, well, many of you will know she's been on the show quite a few times, enlightening us about regulation, policy, and the exciting word of Bitcoin and blockchain. Thanks so much for joining us today, Sean. Well, thank you very much for having me back on the show. I feel like the proverbial spent penny, you know, just keep coming back and coming back. And the very fact that people want to hear about boring regulations always hugely exciting. for me. Yeah, you're officially our guest who has been on the show the most times. I think I checked as like

11 times now, so you're not falling off that podium many times soon. Do I get a medal or some bottle of champagne would be nice. We'll see what blockchain present we can

make you. That's a good point. Yeah, I'm excited back too. It's been a while. Fortunately, so much yeah and meyer have been covering a lot but i was you know traveling and and just super busy with work and uh and now hopefully it's going to get a bit better yeah welcome back brian how is your vacation yeah it was pretty good i was in a florida going around there doing some scuba diving and so it was fun although ridiculously hot i don't understand how people can live there well let's get started with this topic so jean you sent us this um distributed ledger

framework proposal for Gibraltar that you've been very involved in writing and and you know when we were reading through this it was just such a nice approach to how one could potentially regulate blockchain cryptocurrency businesses of course that's a once upon a time you talk a lot about that right we have a bit of license and I think that was a very poor approach and and this seems a much better approach so why don't you give us some background about Gibraltar and what's going on with blockchain there? Okay, so maybe it's worth just explaining where Gibraltar is,

because for a lot of people, they'll be reaching for their Google map, just to figure out where this place is, but it's a little piece of the United Kingdom that sits at the mouth of the Mediterranean, the opening of the Mediterranean to the Atlantic. It sits there attached to Spain and it's technically a British overseas territory. It's a town and a jurisdiction of its own all in one. It's been part or allied to Britain for a very. very, very long time, several hundred years.

And it has its own government. It has its own institutions. It's part of the European Union by virtue of being a territory of the United Kingdom. But it isn't a member state in its own right. It's sort of tagged on to the UK's membership. So it's maybe just helpful to understand where you're brought. But as I said, it makes its own laws. It has its own government, its own parliament,

its own chief minister, its own financial regulator, the Gibraltar Financial Services Commission. And like a lot of small jurisdictions, it's looking for new niche. It's facing Brexit as simply by virtue. simply by virtue of being connected with the UK. I was going to ask, I mean, that's kind of an unrelated question, but so these British overseas territories, in fact, do have to deal with the realities of Brexit?

Is that right? Yes, I think in fairness, Gibraltar is the only one that's impacted in that way. So in France, in your home, Some of the French department that are in all sorts of other places around the world, little islands in oceans and tagged on to other continents, technically still part of France and therefore by some quirk part of the EU. I think the only British overseas territory that's in any way connected with the EU is Gibraltar because it's physically connected to Spain.

So there's a kind of unique, but yes, it's going to have to face up to the reality of Brexit. And that's really a part of what has driven this initiative. So it's actually been interested in crypto currencies for, I should say, about three years now. It's had the interest in doing something there. It's had a couple of local reports and consultations. And I guess the last previous report came out at the beginning of 2016. And it was basically saying we'd like to provide a safe, regulated environment for at that time, just cryptocurrency businesses to be established and that can bring some economic value to the jurisdiction

in exchange for which the jurisdiction can give a proper regulatory base for those businesses that want that want that. I guess in the crypto world, there are businesses that very much want to have the credibility of being regulated in some way. There are many exchanges, for example, that are in that that are in that situation. And there are those businesses that don't. And you brought us trying to satisfy a need for those businesses that would like to be regulated, but struggle to find somewhere in the world that will regulate them well. I think, Brian, you mentioned a few minutes ago, New York State and its bit license regime. And for those who are not fully familiar, bit licenses are very comprehensive and

burdensome and why it's a very broadly scoped piece of regulation and as a consequence it had the effect of only having a small number of businesses that have applied for licenses and even small the number that have been granted licenses because it's expensive to comply with the regime it's not particularly startup friendly it's not small company friendly and so a lot of the innovation has moved out of New York and it's favored just the very large crypto businesses. Some view that as not having been something particularly helpful to the blockchain and virtual currency world. Gibraltar has tried to find a more balanced approach and so it's set out to

to come up with a regulatory framework now for more than just a cryptocurrency businesses, for businesses in the broader scope of DLT. And essentially, it's aimed at businesses that either hold or transmit other people's value, where they use DLT in some way to do that, to hold or to transmit. And those businesses, if they are based, either come to Gibraltar and become based in Gibraltar or may already be operating in Gibraltar, those businesses can now be regulated with a regime that is very much fit for purpose.

It's a regime which is designed specifically for DLT businesses. And as far as I know, that's not been done anywhere else in a world. And perhaps it gives some context and maybe you can fill in on some details here. I mean, it's my understanding that Chibraltar has, as, you know, history also of doing what, I guess, a whole bunch of these countries do, which is kind of like, you know, provide a regulatory arbitrage and an opportunity for regulatory arbitrage where a company can say, okay, we're going to, you know, choose the best jurisdiction, the most friendly jurisdiction, particularly. particularly gambling sites, right, I've done that a lot with online casinos, poker sites.

And I think Gibraltar is a major destination for those businesses. Is that correct? Yes, Gibraltar is very much a jurisdiction that's made a niche out of e-gaming. There are two or three such jurisdictions around the world. some of your listeners and viewers will remember that I've talked before about the Isle of Man in previous shows. And that's certainly one that had also done a lot with poker sites and e-gaming and made a, which now makes a very significant contribution to its economy, incidentally. And Gibraltar is one of the other jurisdictions that successfully attracted.

e-gaming businesses. So yes, I don't know so much about regulatory arbitrage, but what it's tried to do is provide a safe haven for for consumers, giving them the benefit of regulating their new type digital businesses well and effectively and therefore give customers confidence. But in fields where elsewhere in the world, they may not have should we say, exploited the opportunity. So e-gaming 10, 12 years ago, and now is an important part of the economy. Today, hopefully it will be businesses in blockchain and virtual currencies. Can you talk about maybe some other jurisdictions around the world? So we talked about New York and BIT license and the difference,

the sort of radical difference in approach there. Are there any other jurisdictions, I mean, perhaps apart from the Isle of Man, but that are taking this similar approach or at least having these similar types of proposals written in favor of promoting this ecosystem where virtual currency companies can establish? Yeah, I think there are certainly other jurisdictions around the world that have expressed interest. It was quite interesting because I was in Gibraltar when the... The consultation was opened about three weeks ago for this DLT regulatory framework. And the day that it was, sorry, the day before it was sort of announced, there was a statement from Russia saying it was going to provide a kind of regulated space for blockchain businesses. That was good. I may be wrong here, but I think it was announcing that it would do it by 2019, if I remember correctly.

Other jurisdictions that have expressed an interest, well, you've got another EU jurisdiction, Malta, which has also recently said it would like to do something. And then further afield, you've got a Singapore that is very interested in doing things, but it's perhaps a little bit more conservative in its approach. Hong Kong is also interested, but again, maybe a little bit more conservative in its approach. China generally now is moving into the more favorable zone and is certainly encouraging blockchain-based businesses. Within the EU, other jurisdictions that have been partially accommodating at places like Luxembourg, and in Europe, but not in the EU, even Switzerland. Your home country, Brian, has been quite progressive in some respect, but in fairly limited ways.

And I don't think there's any other jurisdiction apart from New York that actually come up with a specific regime for this space. And even New York was very much about virtual currencies, rather than wider blockchain. So this is really the first out of the starting gate. And I would not be surprised if other jurisdictions follow this model. You need one success story and I think you'll find

that other places around the world will follow suit. That would certainly be encouraging. When you look at the broader scope of things, I think New York is probably the first jurisdiction to, as you mentioned, implement, regulation, which is really the bad example of how to do it, as you said. It has encouraged only the large players to be able to be regulated. Only a few have gotten a license and most have left. So that's perhaps seen by others as an opportunity to do things very differently.

I think it's one of the downsides of being one of the first to do anything, is that if anything, you're going to come up with a more draconian style of regime. And I think that's what happened with New York. I think other places have taken more of a wait-and-see approach, allowed the technology to evolve a little and to see how the land lies, what the business models are, and then think about setting up a regulatory regime. And I think Gibraltar is the first of those to say, fine, we've waited and we've seen, and now we're doing something.

Let's pulsate. So let's talk about the scope of the report. The report is called the proposals for a DLT regulatory framework. What I thought was interesting about this is that it talks about, it talks about distributed ledger technologies quite a bit. It references that term quite a lot. It does talk about blockchains as well and virtual currencies. In fact, the scope of this framework, when you look at some of the use cases here,

And we can talk about some of the use cases that are meant to be within the scope of this framework. A lot of them, in fact, are more on the virtual currency. It feels like the virtual currency and perhaps blockchain technologies, but not so much on the private blockchain stack. Things like trade finance, retail insurance, mortgage and loan applications, etc. I mean, I guess you could put some of those into private blockchains or construction blockchains. But why did you feel it was pertinent to describe this as a distributed ledger technologies and not so much blockchains or virtual currencies? We have a real problem, don't we, in finding definitions that are meaningful and that we can use universally. across time. So, you know, I think a year or two ago, we probably would all have thought that

distributed ledger technology and blockchain was one and the same thing. And of course, they have nuances and those nuances are now much more widely appreciated. But the reality is right now we don't. So what we've tried to do, I think, with this regime is come up with something that says if you use distributed ledger technology, which also includes in which which includes within it blockchains but not necessarily only blockchain. So anything that has the properties of distributed ledgers which which actually are there is a definition in the consultation document for both blockchain and for distributed ledger. But anything that uses this technology to store or transmit other people's money. I mean, I say it actually talks about value, but I'm just

using sort of common parlant. So you should expect, it's not unreasonable as a customer to expect that the people who, the integrity of the people and the professionalism of the people, the risk management approach and so on and so forth, that those things are the same, whether they're in the analog world or in this digital world. And so whether it's a cryptocurrency, whether it's some other kind of coin, whether it's in the permission or the permissionless world, doesn't really matter so far as this regime is concerned.

And I think in some of the examples in the consultation paper, it gives insurance. It gives both trade and post-trade activities. A whole range of activities if other people's value is being handled by third parties. Those third parties should be trustworthy and professional. Yeah, so that was one of the things that stood out to me, because one of a big criticism that had been licensed back then was that there was no real distinction between companies that would hold a person's private keys and not, and we have that here.

But what I like even more about this is that, again, with something like a license, I think a lot of regulatory approaches, you know, very explicit in saying, okay, you got to do that, you got to do that, you got to do that. And then of course, even when they had written it,

the bit licensed thing, there was all kinds of flaws in it or things that just don't make sense or completely go against the nature of how some of these businesses are structured, right? Like a lot of business models, if you look at something like, you know, shape shift being one of them,

it's just impossible to do under a bit of license regime. And what I really like here is this idea of, you know, of a sort of principle-based approach where you say, okay, we have these big ideas, this big concepts that people should follow. And, you know, we're going to just hold them up to that standard without seeing exactly how they're going to have to do it.

And, you know, it will change over time. And at some point, one thing is going to be appropriate and another point another. And it just feels like a really nice, common sense, a clear approach. And the other thing that also I loved about this is because if you actually have these different these different criteria or standards, right, like risk management or you talked about the integrity of people or protecting the interest of all the stakeholders, communicating transparently, all of those things. You know, a company will be a better company

for following those rules, right? And I think a lot of a lot of blockchain companies don't do that and you would look, I wish they did. I'm pleased you like it. And I think that was, I think that has been the challenge across the board. That's where a lot of policy makers and regulators have struggled is in thinking, well, hang on a minute. This is so new this technology. The use cases are still being discovered and new use cases are coming. to light, it seems almost weekly. There are new business models, new products, new ways

of doing old things and wholly new things that never existed before. How can we find a set of rules? How can we define a set of rules that works for all these things that we don't know? I mean, what we know today is that we don't know all these businesses, what they will be, what they will look like in six months, 12 months a year. you know, a couple of years time. Everything that regulators normally have to contend with is around what they know, you know, established business models, a kind of status quo. And so they can say, well, we know how this works.

So let's define a set of rules for it. Most of what's happening in virtual currencies and the whole blockchain domain is unknown. Some is known, of course. now. This technology has been running a few years. Some models are quite well established. Obviously, virtual currency exchanges would be a model which is now well understood. But there are a lot of new products that are being thought about and new business models and new ways of doing things and the technology which is evolving virtually daily. How do you tackle all of that? And the approach that that Gibraltar has taken is to say we recognize that we cannot possibly write a set of rules

that's going to be valid next week, next month, next year, five years' time today. We can't do that here because it's just too early and it's evolving so quickly. So how do we provide a safe haven? How can we protect consumers? How can we give legitimacy to those businesses that want it without knowing everything there is to know? And so you've really put your finger on it. The approach that they've taken is to say, what are the outcomes that we want? And obviously they are customer-focused outcomes.

And then how do we get? about achieving those outcomes when we can't write a lot of detailed rules. Now it's at that point a lot of regulators and policymakers throw their hands up in the air and say, don't know. But what Gibraltar's done here very progressively, boldly, I would say, is to identify what the principles are of running financial services type businesses. and then to say, well, then we will adapt rules from time to time that achieve the outcomes by meeting those principles. And what it takes to meet those principles tomorrow will be different in a year's time perhaps,

but we will adapt the rules to keep up with the technology and the evolving industries that are in this technology. And that's pretty unique in financial services. But actually, a lot of fintech should be viewed in that way, I think. Yeah, I couldn't agree more. And I don't know if it makes sense to go too much into detail about some here. I think one I want to point out that I particularly like is the principle of kind of acting, you know, protecting the interest of all the stakeholders. And I think that's something that, you know, often doesn't happen, right? Because if you have today a lot of these network,

these projects, you have this distributed ownership, this distributed control, but that also means that there's not so much accountability, really. And I think, you know, we see that even with something as large as Bitcoin, where, you know, to what extent are the core developers or the main developers in charge of Bitcoin accountable to Bitcoin holders? Really not at all, right? They do what they think is right. And whether it really serves the interest of the Bitcoin holders, there's no accountability on that.

And so I think that's something really nice. And even just having that as a standard and having things like transportation. communication and an honest communication, right, without having, you know, misinformation. You know, those are, I think, the great, great things. Yes, I think it's worth pointing out that there isn't an attempt here to regulate the technology. So that there's no attempt here to regulate Bitcoin or Ethereum, not the one could because of the way that they're constituted. The purpose here is to provide a regulatory framework for those businesses that hold or transmit other people's value and do so using technology. That's the key point.

I know we always say that this technology, one of its features, is that it disintermediates. It does away with third parties. But in reality, that's not actually what's happened. I mean, it absolutely has that capability in the decentralized space, in the permissionless space. But in a lot of cases, you entrust other people to perform various things with your money, with your value. Again, the simplest example would be a virtual currency exchange. Whether it's only for a short time or a long time, in some way, shape, or form you're entrusting the exchange with either directly with your money or indirectly with your money. And it's quite right that those businesses should have you, the customers' interests as much at heart as,

as their own interests. And so that's what we expect of any other financial institution. We expect that of any other kind of financial intermediary. In fact, anybody that we give our money to who then does something with that, whether they then give it back to us or invest it or whatever, it doesn't really matter. If they're handling our stuff, then we expect a lot of them. There's been no way of adequately assuring that by a regulatory regime other than in New York State.

So here is an opportunity to do that across a broad swath of businesses if they're looking after your money, basically. Let's take a short break to talk about Jax. Jacks is your wallet, your complete user interface to cover all your blockchain needs. I've been using it and I've been loving it. Now, Jack supports a lot of different cryptocurrencies. I suppose Bitcoin, Ether, Lightcoin, Ethereum Classic, Zcash, Augurap, and they're adding many more. Keep responding to users' needs. Now with Jacks, the nice thing is that you can manage all of those coins within a single

wallet and you are in control of your own private keys, they're not on their server. and there's a single 12-word seed that you can use to backup your wallet, all your coins, and sync them across different devices. Talking about devices, they're on pretty much any device that you can think of. You can get it on PC, Mac, Linux, you can get it on smartphones like Android and Apple and iPhone. You can get it on tablets or even browser extensions for Chrome and Firefox. And on top of that, in Jax, you can actually exchange different cryptocurrencies for each other because they've integrated a shape shift.

And more partnerships and integrations are coming down the line in 2017 that are going to make Jax even better. So Jax is really making blockchain and cryptocurrency successful for the masses, easy to use for the masses. Make sure to get your own Jax wallet at Jax.I.O. Or you can get it from any of the app stores you are using. We'd like to thank Jax for their supportive epicenter. So, Sean, one thing that also stood out to me

in this document is that it talks about out of scope, you know, use case, just out of scope example. So it mentions Bitcoin being one that, you know, doesn't fall under this and there shouldn't be regulated that way. I mean, even if one said it was included, one would wonder, you know, who would be accountable, right? It doesn't quite make sense. But it said, you know, decentralized networks are excluded. Of course, way, change, this changes a little bit is when we talk about something for example like Ethereum right where you had the decentralized network but you also the foundation that raised the money and you know developed it and of course this now is you know Cosmos what I'm working on at

tasers and so many more projects are doing a similar thing so do those generally fall outside of the scope of this regulation and this doesn't apply or does that there's no attempt here to regulate any part of the governance machinery of say a virtual currency scheme in other words of the underlying technology so yes you're quite right the the consultation paper gives some examples of what Gibraltar believes will fall in scope and some examples that it feels it probably outside scope so a good example of something that's outside would be a merchant who accepts virtual currency

in payment for goods or services. You wouldn't expect them to be regulated as a financial intermediary. Similarly, people who invest in coins or virtual currencies for themselves as to think for those people who do it on behalf of others. So those are the kinds of distinctions

that are made. I sense it. in your question, though, something that probably we all have in the back of our mind, which is, you know, there's all this decentralized stuff going around. And yes, it's, it, that there's the mechanism for, for effectively voting change. But there isn't necessarily the governance regimes in place to ensure that all stakeholders' interests are taken into account. I think the one that's often given as an example is that so much of the mining power in Bitcoin rests in the hands of a relatively small number of players.

And that is certainly very challenging. This particular regulatory regime doesn't attempt to address that. But there are other initiatives that are starting, I think, to address that. And so if you'll permit me just to slightly go off topic of where, Gibraltar but there's a there's an initiative going on in the standards field right now so many folks have heard of the International Standards Organization or ISO and we come across you know ISO numbers for all sorts of different standards for all sorts of things from you know parts in cars to messaging for

financial services to health and safety, to quality management, a whole raft of stuff. And these are agreed standards by standards bodies across the world who get together in an international body and agree a set of standards. And in distributed ledger technology, there is an initiative that started last year. So the International Standards Organization formed what's known as a technical committee in the autumn of last year and it had its inaugural meeting in Sydney in in April and I'll declare an interest I sit on that technical committee and it's looking at a number of areas so initially the standards will be around definitions you know that we actually know across the world what we're talking about when we talk

about distributed ledger technology or where we talk about blockchain and that we have a common understanding. But other work streams that are being looked at include amongst other things interoperability and governance. And governance has a, I think, a very important part to play in the kind of concerns that I think you're talking about or hinting at, Brian. And so I think in time, as these standards emerge and we'll probably see a series of standards, there probably will be a set of criteria that you will know whether if those criteria are followed, if those guidelines or whatever they emerge as are followed, that this particular coin system or decentralized system of some description,

if it complies with that, that you have confidence that all stakeholders, interests will be adequately taken care of. I think it'll take some years for those standards to emerge. These things are never done overnight. But they will probably be good for the permissionless and the permissioned world. Of course, governance is a super interesting topic and I'm always interested in on-chain governance. I think it's going to be hugely important. But that wasn't exactly where I think I was kind of leading to with this question. Because if you look at today and maybe we can speak about this also a little bit later in the episode. There is a huge trend towards tokenizing products, tokenizing applications or networks, right?

So we have, of course, this is coming with the enormous amounts of money that are being raised like that. But so this includes both like blockchain networks, but also applications, right? So examples of that would be Golem or Gnosis. which is incidentally is based in Gibraltar and I'm just wondering whether all of those would be excluded because they don't really have custody of of users funds right as I mean in a way you know they they receive funds from a user but kind of in return for for tokens more or less you know legally, I guess sometimes it's not structured like that, but that's kind of the mechanics.

And so they don't hold, they don't really have custody of a user's fund. So is it correct that essentially all of those are wouldn't fall under this regulatory regime? So I think you're exactly right. I see this regulatory regime isn't about ICOs, but there are existing. regulations in many jurisdictions and certainly throughout North America and throughout Europe that govern how these kind of financial these kind of investments and I'll use the term and loosely investments how these kind of investments are promoted and so yes some some of these ICOs will be treated like

investments like securities many try to structure them in a way that they're a product rather than an investment so typically access tokens and so on and I think we will see regulators starting to take a greater interest in these types of tokens and really start to deconstruct them to see whether they're really quasi investments, quasi securities of some sort or not. And if they are investments, they'll be expected to follow existing rules that govern those kind of investments. Unfortunately, like everything in this space, it starts off being a bit like the Wild West. So more or less at the moment, anything goes. Some of the things I've seen

promoted, and I'm sure you too, have certainly looked like they're in a very gray area. some businesses, some promoters of ICOs have spent lots of money getting legal advice to make sure that they don't infringe investment type rules. And quite often the answer to the advice they get is, well, on the one hand, it could be and on the other hand, it might not be. It's a tricky, tricky area. Personally, as you know, regulatory compliance is my thing. I think that in time, the rules will get stricter. In much the same way as with crowdfunding generally, rules got stricter. It's a trend when lots of people are throwing lots of money at something,

then the regulators, well, first of all, the policymakers, and then the regulators get interested. So what I think the situation we have here is actually kind of analogous with the situation we have with these. I mean, the situation we have with ICOs and crowdfunding campaigns is kind of analogous with the situation we had with, you know, general cryptocurrency and blockchain services. Where, you know, in Bidilicence, for example, you try to to apply this rules of financial services onto this thing and it doesn't really fit, right? So now we have with in Gibraltar, this principle-based approach. which seems much more reasonable and appropriate to the environment. And I think similarly, if you just try to sort of put this,

it's a security, comply with existing securities regulation thing onto ICOs, it doesn't really fit because there's just fundamental ways in which it's different. So what people have done, you know, the most frequent approach so far has been to set up foundations in Switzerland And then those foundations essentially, you know, do those, those crowdfunding campaigns. They raise the money. They develop the network. And then, you know, that network essentially indirectly gives value to this token. So try to increase the value of the token or at least deliver on the promise they made to the people donating.

And, you know, that it's not absurd, right. I think there's a case to be made that this is kind of sensible, but it does feel awkward, right? Foundations weren't really intended to be used like that. And for that reason, I think a principle-based approach to regulating ICOs would be a great opportunity and a great service. And I think if somebody did that and then companies went through that, you may really say, okay, this is a legitimate project. It has lived up to certain standards that you currently don't have.

And there's also a certain set of accountability that those people have that they currently just often don't have. So I hope somebody is actually going to do that. I think it would be an excellent thing. I'm sure that the rules around ICOs will. go the way of crowdfunding in other words they'll start to be narrowed down and made more appropriate to this this new this new paradigm i i think it has to be approached in a slightly different way because the way that they're promoted is well in some sense it it is it is very similar in other ways it's it's very different from conventional securities.

The one thing you all want to be sure about is that the people who promote it have the capability of understanding what it is they're promoting and of giving representations to potential investors that they can properly understand. I think one of the really risky areas today is that unless you understand well the underlying code in a particular

ICO you probably don't really understand what it is that you're investing in which means that a very large proportion of people are investing in ICOs don't actually understand all the risks of that particular coin that they're investing in. And what you hope is that the people who promote the business, who promote that investment, that they are responsible in the way that they do it, just as they have to be in the traditional investment space, so they should be in the ICO space. We all know that when the Dow happened, the Dow incident a year or so ago, we all know that the first thing that was challenged was, well, did we understand what we were investing in, really understand what we were investing in? And did we just take at face value what people who were promoting it?

what they were saying, could that be relied upon? And I think the answer after the so-called Dow hack was that people didn't necessarily understand what they were investing in, and they couldn't necessarily take at face value everything that had been told them when they put their money in. I think that's right. My feeling increasingly, I mean, of course,

since the Dow, there have been, there have been a number of very important crowd sales that have raised several millions, tens of millions of dollars in only a few minutes, and that there's an enormous fear of missing out. You know, when you talk to people sort of in the space, you know, people in your office, right, and you start talking about crowd sales, like people just get excited. Oh, there's another crowd sale. And like there's inherently like a desire to want to invest in these.

things out of fear of missing out without even considering the you know the even just the the the the function of the token or what they're investing in it's just oh this new crowd sale i don't want to miss out like i did in the last one what do you think yeah i mean of course that's absolutely there there's no question and that it certainly is driving a lot of decisions and and i have no doubt that people are doing are making you know uninformed and irrational decisions. Yeah, uninformed decisions, yeah. I don't think that's something a regulator can or should do something about.

That's just a fact of human nature and human psychology. I think there are, but if you look at these principles, you know, that were outlined, you know, for the other. I think most of them you could just carry over, you know, you could say, okay, you know, are the people honest? Okay. You know, do they protect interests of all stakeholders? That's going to be difficult to evaluate in many of those cases, right? There will be a lot of gray zones. But in some cases, probably in the real scams, right,

who aren't just like genuine attempts but didn't work out or, you know, genuine disagreements, but, you know, clear scams. I think it will be very clear. So again, I think that's something that one could apply very nicely. You know, the money being is, is it, you know, or the, is it, is it, deployed appropriately, you know, is there, um, are, are there sufficient financial resources planned for the promises being made, you know, is there some kind of risk management, uh, corporate governance, I think as well, um, keeping funds separated, you know, if it is even between

a sort of foundation where the money is taken in for a specific purpose, uh, from other funds that may be around. Um, so I think actually, most of those you can carry over and I think, that those are good things to follow and they will not prevent irrational exuberance and they will not prevent a massive bubble and prices going through the roof and crashing and I think that those are going to happen but I think what they could prevent is or they could really prevent the scams right the ones that are just outright schemes and dishonest schemes making, you know, false promises to get money because it seems easy at this point. And I think that's something worth doing.

There are two kinds of misrepresentation. There's, well, it's just probably more than two kinds. But first of all, you've got fraudulent misrepresentation. So, you know, people who, which would be typical in scams, you know, you just make promises without having any real intention of carrying them out, just to get other people to invest in the scheme. You've got negligent misrepresentation, which is the representation where really you're holding yourself out

as someone who understands and knows this thing, but you haven't really exercised your responsibilities of checking it all out and making sure that the representations that you make are accurate and can be relied on. And I think some of the things that happened in the Dow last year would probably fall into that category. And then I suppose you've just got honest misrepresentation where, you know, you truly believe something was the case and you had pursued it. And it isn't so much misrepresentation. it just didn't work out. But these things are the same things that apply in pretty much everything to do with investing.

And you say, well, you can't protect against people's natural exuberance. You can't necessarily protect against the fear of missing out. And of course, all markets and pricing is driven largely by that. But what you can try and do is certainly what regulars. is trying to do in the investment space is to ensure that products are sold to people who may have the ability to understand what it is that they're investing in. So, you know, there are different regimes in different jurisdictions, but they usually are rules that say that certain kinds of investments can only be offered to people who, who are professional investors or who have significant, sufficient wealth that they understand about investing and that they're not about to, you know, that their people of modest means who are about to throw

their life savings into something because they, you know, they believe it's going to be the next big thing. Yeah. I mean, I think that's, it's great that you bring that up because it's something I did want to bring up as well. And I have huge, I think it would be terrible. going down that direction and we are seeing the first example of that at this point right which is file coin so they have announced and they've set up this

new platform called coin list to do a dare ICO and of course file coin many of you will be familiar with the project we've had Juan Benet on before so file coin is basically the sort of economic incentivization system behind IPFS which is a very well-known project, a lot of interest around that, a lot of enthusiasm about the project, very competent investors in it. So what happens when you say, and they are going to restrict their ICO to accredited investors? So what happens in that case? Well, first of all, in the US, I think it's about 3% of people qualify for that.

So they need to have more than a million dollars of net worth, I think, including their house and or $200,000 in salary per year. So, so you've cut it down, right? You've eliminated most, I don't know, let's say 80% or 90% or not something or maybe even more of people commonly investing into, in cryptocurrency systems, ICOs, et cetera. So you cut those out and you do this, you do this crowdfunding campaign. All the tokens go to those guys.

but it's I mean it's transferable it's peer to peer I mean the whole point of this technology so it goes on exchanges and then all the others can also go and buy it in there at probably like a 5x premium or something so that seems just a complete disaster going that direction so I'm and and I think also the idea okay if you have a million dollar or if you are this credit accredited investor I mean actually nobody there's no accreditation it's simply how much money you have so i'm i think it would be a shame if uh more crowdfunding campaigns going that that route and it would be very negative for the space i think um i think in a way there'll be a form of before we see any significant regulation in this space we'll see a kind of self-regulation so there are those organizations

that help ICOs get off the ground. And the ones that I've encountered, the vast majority, seem to have their own internal criteria for checking out what the true value is behind the coin, what the technology is, what it is that people are investing in, because their reputations depend on it. And I think we'll probably see then a scenario scenario where you know that if it's being promoted by this particular

organization or person that you trust that they have that they've carried out that kind of due diligence because they understand it better than you do and I think I think in a way a lot of the funds management business in the traditional in the analog world works in that way so you have management managers who handle a variety of collective type of investment funds of one sort or another. And you end up trusting the investment manager because their past performance is good, because their skills are good, because they've got a great team who do all the due diligence and so on. I think we might see more of that emerge in the ICO space.

Unfortunately, probably only after some people. lose money and others don't. I rather suspect with this exuberance around ICOs at the moment a lot of people are going to lose some money and a few people are going to make some money. But once the reality hits that not all ICOs are equal you will start to see I think reputations being built on on the pickers. What would have been the right stock pickers in the analog world will be the right ICO pickers in the in the digital crypto world i i kind of agree with with sean's position on this uh increasingly i think that a lot of the a lot of the protections also will come from self-regulation i've i had discussion recently

with someone uh who who who is sort of on the on the side of brian um essentially I would say even more that his position was was even more I guess on the free market side where he was saying okay well there's going to be a bubble people are going to get hurt and that's okay

I think that obviously that's not something that's desirable and that we don't want to put the brakes on innovation and I think as you mentioned Brian it would be pretty disastrous for this space if all of a sudden only 3% of people could invest in cryptocurrency projects or ICOs when in fact you know as you mentioned you know people can just go through exchanges afterwards and probably end up paying a premium on the other hand i've also met people that you know people

not necessarily in the cryptocurrency space or in the blockchain space like i met this one guy recently and he's like oh you work in in blockchain well i invested in this like insert scam name blockchain here and he's showing me the app and there's like literally a pyramid with like him somewhere inside this little pyramid with like the people that have referred him to be able to buy it into this currency and you know there's there's two ends of the spectrum and we have to find ways in which we can on the one hand continue to have innovation in the space and and allow for these projects to be funded but also protect uh people that are are going to get taken advantage of on one side of the spectrum. I think self-regulation in a lot of ways is one

way to do that. Hopefully that'll happen before some kind of crisis. Maybe the DO was the first crisis. Now we're already starting to see that. So I mean, actually there, I'm self-regulation, of course, is a desirable thing, no question. But I think it's going to be very hard to get appropriate levels of self-regulation because just the incentives aren't there like nobody really has incentives to do the kind of thing that that will be good so I actually again I think there's some kind of principles saying okay you follow certain structures certain frameworks certain rules so you know there's some accountability but afterwards yes I mean people are going to put money in and they are, they're going to, some of them are going to do it without due

deletions and some of them are going to do it at the wrong time and sell at the wrong time and they're going to lose money and and they will be regretful of that. I mean, I've certainly noticed personally that just in the last few months, there's been a, last two months even, a significant number of people outside of this industry who are like, I mean, I need, I want to, you know, invest in some of these projects. and you know who don't know much you know they don't have bitcoin you know haven't bought bitcoin they haven't like used some cryptocurrencies before but you know they see i mean they see this opportunity and uh and of course if this increases more prices would go up more and more people will get

interested and at some point it is going to come down uh even even though in the long run it may you know it may go up much more and and and i think um i think that's in my view it's unfortunate but there's so much innovation happening and at such a rapid pace that it's it with the downsides of shutting this off even if it's possible which i don't think it is would be um too big in my view yeah i think there's some low-hanging fron that you can have in terms of what I would call self-regulation. Things like security, like having proper security protocols that are sort of frameworks that everybody doing a crowd sale or a token sale adhere to.

Specific types of governance mechanisms or governance frameworks, right? So whatever those may be that, again, you know, have been sort of tried and tested and are recognized by the community at large as viable governance models. Of course, there are things that you can't put into these frameworks, but I think there's some low-hanging fruit there that you probably, of course, I haven't thought of this much, but you probably account for some level of security and protections in just the way that things are built as a standard. Of course, you know, doing multi-sig and all kinds of things.

Yeah, people should do it, right? They should have like security, you know, proper security, etc. But what does self-regulation mean? I mean, who is actually going to enforce that? You know, people will try to do it or not. Most of them, I'm sure, will try to do it and they may do a good job at it, but that's not regulation, right? That's just people trying to do something that's common sense.

and there's no accountability there besides things going wrong and then people get angry at them I think when we start to see international standards exist and they will I'm sure cover things such as well we've already talked about governance and interoperability but other areas around identity privacy smart contracts and so on. And work has already started on some of these topics. I think once there are standards and they're published, they may not be enforced, but if you are trying to promote

the next big thing, you want to be able to say, but this thing that I've created complies with, you know, I serve one, two, three, four, five, whatever it's going to be, part one or two or three or four or whatever. And that has some meaning that you then know, ah, right, that has a satisfactory governance regime, or it's been a certain approach to security has been followed, or a certain approach to privacy has been followed. And I think these things will start to become valuable. Unfortunately, they will take time to emerge. I said this earlier, and I think we need to take a reasonable view about the time horizon.

But I think these things will emerge and they will lend credibility in areas that you can't necessarily regulate, but which become meaningful. So you know when certain kinds of electrical products or children's toys, you see a CE mark in the European Union, or you see a kite mark in Britain or whatever. You know then that you can trust that they've been made or designed or function in a certain way to a certain standard, and you might then choose to buy or invest in one and not another because you know that it complies with that standard.

And maybe in time there will be forms of certification. So you'll be able to submit your great ICO idea that you claim has been designed to meet this particular international standard. And there will be bodies who will examine it and give you a certificate and say, yes, you do actually. comply with that. And that will give trust and confidence to investors and to customers. Yeah, I like that idea. So before we wrap up, coming back to the proposal, can you just walk us through sort of the roadmap from where the situation stands now with this DLT framework proposal into taking it to being enacted in? into law. Okay, so the stage that it's at today, so we're recording this at the end of May,

it's been open for consultation for around three weeks now, so it has another week or so to run. I'm quickly trying to see if I can find the date that the consultation closes. The input, so feedback has already been coming into the Gibraltar government, and it will consider that feedback in relation to the proposals, decide on the basis of that feedback, a sort of final go, no go, and what changes, if any, might be made to the proposals. And then it will proceed into legislation through the summer of this year, 2017.

And the idea is that guidance to help prospective... Licensees will become available, be published in the last quarter of this year, with the view to applications being accepted from the 1st of January 2018. There will be, under these proposals, a transitional period. So businesses that base themselves in Gibraltar and then make an application. to be licensed under this regime. They can, certainly for the first three months, so at least that's the proposal. So if this becomes law on the 1st of January,

that'll take them up to the end of March. So long as they get an application in, in that first three months, they can continue to operate until their application has been determined. So they won't be doing anything illegal operating whilst their application is being considered and they won't have to wait until they get their license before they start their business so it's that's the timeline and and really as

these things go this is pretty fast that's one great thing about Gibraltar is that being small and having a relatively small regulator they're also very agile and very nimble. And I would say that they have an absolutely fantastic team. We've all heard about how the FCA in the UK has its project innovate. And there's some great bunch of people, but because that's such a large regulator, there isn't a very quick, if you like, cross-fertilization of ideas

between the innovation people who operate, for example, things like the sandbox and the people whose everyday job is authorizing and supervising and enforcing licensed businesses. In Gibraltar they have a great what they call their innovate and create a create team and most of the members of that team have other day jobs as it were within the regulator so they're all from the various departments and so those ideas are cross-fertilising. What they've asked is that if you have a business idea and you think that it might be licensable under this regime,

give them a call, arrange a meeting, or if you're abroad from Gibraltar, they'll set up a conference call. And you can discuss your idea, if you like, without obligation before you make any application. and they will consider your business model and give you feedback on what they believe will be the appropriate and proportionate rules, if you like, that you would need to follow. Because it's always the lawyers hate this.

There isn't a hard and fast rule book. It's a hard and fast piece is around the principles. How you apply the principles varies from business. to business from business model product technology. And they have a great team who actually understand this stuff and will listen to what you have to explain about your business idea and then tell you how they think that the principles can be met so that you can have that in your mind before you put the application in. And so they'll work with you rather than in a kind of adversarial or gatekeeper role

they will help you develop your ideas for your application, your license application, so that you've got a chance of getting it rather than not getting it. Cool. Well, Sean, thanks so much for coming on. Thanks so much for the work you're doing there. I think it's a fantastic work and it's very important work. And yeah, I'm sure this is a topic. We'll continue to come back to it for many years.

And yeah, so thanks so much for. for coming on, of course, we're going to have links to Sean's website, maybe some of our previous episodes with her, also the framework, which is a really nice, a nice document, very readable. We need to put the link in the show notes to where folks can read this consultation paper. Yes, they can find it. Exactly. We'll do exactly that. So hopefully, you know, people are interested, go a bit deeper, can check that out. or maybe, you know, get in touch with the authorities in Gibraltar or of Sean to set something up there.

So, yeah, thanks so much. And thank you both. It's lovely, as always, to do this show with you. You two are the great broadcasters of this industry. I mean, you've been, the epicenter is at the center, still at the center, and you guys keep on going. Well done to you all. Yeah, thanks so much. we just passed a million downloads about a month ago or something I wanted to do some sort

of announcement about it but we're all too busy but yeah so uh we have we have seen some of that same i guess exponential growth that is going into prices although of course not not quite as dramatic can i get in that percent a coin where do i get them from so yeah thanks so much for our listeners for you know once again tuning in if you want to support the show you can do that by leaving uh review for us, iTunes or one of the other platforms you listen to that helps new people find the show and it makes us happy. Or you can leave us a tip. We have a tip addresses for Bitcoin and Ether in the show notes. So thanks so much and we look forward to being back next week.