Sun, sea, sand ….and token sales. Why the Caribbean may be a testing ground

TechBeach panel on Initial Coin Offerings

I recently attended TechBeach Retreat, the premiere gathering of global technology experts, startups and investors in the Caribbean. This year’s conference main attraction was the fireside chat with Jack Dorsey, the CEO of Twitter & Square; however most of the audience was primarily interested in the panels focusing on blockchain and token sales. These panels included a diverse mix of founders, investors and venture capitalists who have participated in token sales in one form or another. It was particularly interesting to hear the panel agree with Gabriel Abed, founder of Bitt who mentioned the massive opportunity to develop ‘regulatory sandboxes’ for the development of blockchain solutions from both government and commercial sectors. This could position the Caribbean as an innovation hub for blockchain technology — particularly with regards to regulation of token sales.

Why is a Regulatory Sandbox Necessary?

Token sales (more popularly known as Initial Coin Offerings or ICOs) have quickly become a controversial form of fundraising for startups such as Golem and Blockchain Capital who have raised millions with such a pace and frenzy that many are questioning whether the ICO trend may usurp interest in traditional Venture Capital fundraising as implied by the charts shown below:

However, during the latter half of 2017, regulators have been quick to point out that many of these token sales were in fact in breach of existing securities regulations. As a result, several startups are risking severe repercussions if they are found to be in breach of regulatory requirements. We recently learnt that the SEC shut down the Munchee ICO which was promoted as a utility token however its dividend structure indicated otherwise to the SEC. This is a trend that is expected to continue which may place potentially millions of funds at risk of being seized. We previously gave some advice on whether or not your token sale may in fact be a security so why are token sales still failing to comply when the SEC is communicating frequently on their approach to ICOs?

Essentially, many of these token sales may have been either planned or initiated prior to the development of compliance guidance templates such as the SAFT (Simple Agreement for Future Tokens) which was created with the expectation that regulators will eventually investigate token sales. The SAFT was inspired by the SAFE Agreement and aims to simplify the complexities of complying with regulatory requirements for securities. However, not even the SAFT is fool-proof and may actually introduce additional legal challenges for startups. Ultimately, most token sales may be subject to securities regulation moving forward as they seek to incentivize investors with potential dividends.

Therefore, in order for token sales to succeed as a disruptive fundraising mechanism, a legal framework is required to facilitate launching token sales such that it effectively forms a simplified step-wise process for launching token sales in compliance with requirements from regulators and governments. This will be much more practical than previous approaches taken by token sales such as Gnosis which has operated from Gibraltar where ICOs were previously unregulated. Recently Gibraltar Financial Services Commission announced they will offering additional guidance for how cryptocurrency and blockchain startups should operate and adhere to its legislation. On the other hand, other “ICO safe havens” such as Isle Of Man have emerged to provide more guidance with regards to regulation and legislation for cryptocurrency startups.

Why set up a sandbox in the Caribbean?

With each passing week, there are several announcements of new regulatory guidelines and oversight committees investigating ICOs which make it difficult to navigate for startups with limited resources to determine how to actually run their token sale without facing future legal and financial challenges. Most startups are therefore using pre-sale funding from Venture Capital in order to prepare for the actual token sale but that’s a bit of a step backwards from the “new fundraising” paradigm that token sales initially aimed to create. Fortunately, the vision to create a regulatory sandbox is already well underway within the Caribbean. In fact, several Caribbean islands already have programs which are set to provide some much-needed support and guidance for startups which are uncertain of how best to run their token sales. We’ll look at a few below:

Anguilla AUTO Framework

Anguilla, a small Caribbean island with a population of approximately 15,000 persons, may have shocked the world when it launched the Anguilla Utility Token Offering (AUTO) regulatory framework for non-security tokens. Recognizing an opportunity to fill a gap within the ICO regulatory space, Anguillan officials and partnering private sector entities have developed the ‘AUTO’ framework in order to attract foreign investment to register & incorporate Anguillan entities which will benefit from a safe and effective regulatory framework for registering and issuing utility tokens.

Barbados double taxation agreements

Barbados is already well-positioned as a regional player in ICO regulation by leveraging its several double taxation agreements which currently benefit International Business Corporations (IBCs) with a 2.5% corporation tax. Additionally, Barbados is also becoming widely known as the first nation to launch a digitized FIAT currency and plans to play a role in developing a regional settlement network. With its global appeal, affinity to cryptocurrencies and blooming international financial services sector, several blockchain startups are actively exploring methods to bring these pieces together to form a safe launchpad for cryptocurrency projects from the Caribbean to the world.

Jamaica & Veritasseum

Along the same lines as plans in Barbados Veritasseum, a smart contracts-based peer-to-peer wallet, has partnered with the Jamaica Stock Exchange in a deal that will launch a digital asset exchange most likely in order to revitalize trading on its national stock markets. It is unclear whether this deal will facilitate securities exchange or focus primarily on utility tokens but it is yet another example of government regulation that is pro-innovation within the Caribbean.

For a comparison of how some of these available options currently stack up you may be interested in this chart comparing “ICO safe havens” such as Barbados, Isle of Man and Gilbratar shown below: