Gibraltar’s government provided new details about its plan to regulate initial coin offerings in a white paper published on Tuesday.

Notably, the paper states that most tokens are not considered securities under either Gibraltar or EU law. The classification of tokens and ICOs has troubled regulators and government watchdogs, leading some countries – most notably China – to ban the blockchain use case entirely.

Indeed, the paper notes that “in many cases, [tokens] represent the advance sale of products that entitle holders to access future networks or consume future services.” In other words, tokens are commercial products, not securities, the document argues.

The white paper also outlined an authorized sponsors regime, which would require every ICO issuer selling or distributing tokens in Gibraltar to appoint an individual to supervise the sale and ensure that it complies with regulations.

The Problems Defined in White Paper:

Lack of regulation

Unless structured as a security (e.g. with an equity interest or right to distributions of, say, profits or in the event of winding up) or as a debt instrument, tokens do not constitute any form of regulated financial instrument, either in Gibraltar or, generally, elsewhere in the EU. Consequently, they (and their sale) are unregulated. Tokens have proved popular as a means of participating in early-stage ventures and projects. There are risks to the general public and to inexperienced investors, in particular, in subscribing for unregulated crowd financing instruments. Such risks are heightened where underlying products and services have yet to be built, tested and deployed, or market demand established.

Definition of security

Most often, tokens do not qualify as securities under Gibraltar or EU legislation. In many cases, they represent the advance sale of products that entitle holders to access future networks or consume future services. They are akin to mobile phone companies pre-selling airtime in networks they plan to build using the proceeds of those airtime sales. As such, these tokens represent commercial products (albeit reliant on future availability and utility) and are not caught by existing securities regulation in Gibraltar. Tokens are sometimes created with the characteristics of a virtual currency, serving principally as a medium of exchange within an ecosystem (or marketplace) of consumers and service providers. In some cases (e.g. where a centralised virtual currency is involved), the organiser of the DLT system may fall within scope of the DLT Regulations2 but the token sale, secondary market conduct and investment services relating to tokens remain unregulated. The driver for purchasing tokens in an ICO is typically the expectation of making a return by selling them at a profit once the project is successfully completed and its products or services become popular and in demand. This is similar to early acquisition and holding of commodities with a view to trading them later at a higher price.

Tokens: distinct from underlying object

Tokens are digital representations of something else, whether tangible or intangible. As such, they are distinct from any underlying object. Much like derivatives, trading tokens is not necessarily the same activity as trading its underlying asset (where one exists). So, for example, sale of a token representing a physical asset is not the same as selling that physical asset.

The release comes amid a long-running process of establishing regulatory boundaries for the use of blockchain tech within the U.K. crown dependency.

Officials from the Gibraltar Finance Centre and the Gibraltar Financial Services Commission told in February that the implementation of the sponsorship regime was part of their market-driven approach to ICO regulation, an attempt to avoid a one-size-fits-all approach. The regime would mean the market, not regulators, could determine what a “good” token sale looks like, according to the document.

Legislators in Gibraltar passed a blockchain-focused bill in December, and previously laid the groundwork for an ICO bill when it published an advisory back in September.

The white paper also states that the Gibraltar Financial Services Commission (GFSC) will “authorise and supervise secondary token market operators” and will establish “a public register of such operators.” Additionally, the government will regulate token-related investment advice, including “generic advice,” “product-related advice” and “personal recommendations.”

According to the white paper, Gibraltar intends to wrap up its blockchain-related regulatory push by the end of this year.

“A draft Bill is expected to be ready by the end of March 2018. Draft Regulations for the promotion, sale and distribution of tokens should be ready in May 2018. The last of the three Regulations should be completed by the end of October 2018,” the paper says.