Blockchain and the Flight to Quality
By Marcus Killick – CEO ISOLAS LLP, Chairman Gibraltar Stock Exchange
There is something surreal about the current flood of Initial Coin Offerings (ICO) coming onto the market. I recently spoke at the World Blockchain Forum in London where the side exhibition rooms were packed with firms pitching their own ideas for a blockchain. Some were ingenious, some ideas seemed a bit optimistic and some were downright scary. One pitch being made to investors was for the blockchain technology of an ICO that intended to create a mass of Artificial Intelligence (AI) nodes, all of which were going to talk to and learn from each other and possibly spawn new nodes. For those of you who remember the Terminator movies and the switching on of Skynet, the concept was eerily familiar. AI talking to other AI, sharing ideas, learning, making plans, and spawning (a word never used in a positive way in science fiction) – all happening without any human intervention.
In books and on film, all such science fiction apocalyptic movies have an evil genius, a mad scientist or a multinational corporation as the villain. Maybe, in reality the end of mankind will begin with someone stood in a hall in a dingy part of Bethnal Green, trying to persuade investors to buy tokens for his great new blockchain idea. We live in interesting times.
The financial revolution currently occurring in cyber space is only just being recognised. However, an increasing number of individuals and institutions have seen its advantages and threats. Countries are deeply split with some, such as China and South Korea, banning ICOs whilst others, such as Gibraltar, the Isle of Man, Switzerland and Singapore, embracing its potential. Still more are in a state of uncertainty, unsure of which direction to go.
So, what is actually clear on each side of this debate? In respect of Blockchain itself, this is an irreversible evolutionary leap. The growth of distributed ledger technology (DLT), which Blockchain has become shorthand for, will change the way individuals and corporations transact, allowing a direct interface without the need for intermediaries. In the case of stock exchanges, clearing and settlement firms will become historic relics as DLT will replace them, massively reducing transaction costs. Smart contracts, which automatically complete on the occurrence of certain predetermined events, will add certainty to transactions, including the transfer of legal title. The use of DLT, like the internet itself, will only be limited by the imagination of its users.
The extent to which crypto currencies will supplant existing fiat is less clear. Whilst Bitcoin and Ether have blossomed and made their original purchasers much wealthier (at least on paper), the sheer number of new crypto currencies being launched makes the success of all of them impossible. Similarly, many of the new ICOs launched to raise money for blockchain development now issue tokens, valuable only if the blockchain to which they are linked is both created and finds a demand for its use. They are magic beans dependent on the emergence of the bean stalk to have long term value.
The detractors point to these risks, together with the lack of regulation and resultant possibility of fraud as well as money laundering, as a cause for caution or avoidance. Some opponents are driven by genuine concern, others by self-interest. Without doubt crypto currencies, immune to national borders and their supply not subject to control by central banks, represent a potential massive disruption to the way governments can exercise monetary control over their country. What use are exchange controls when your currency is simply being bypassed? The new challenges will require new tools for managing economies. No wonder there is nervousness.
Yet, the genie is out of the lamp. However, one of the most interesting features in this new world is the growth of self-regulation and the desire, from the sector, for effective supervision. In respect of self-regulation, news and ICO rating sites, along with chat rooms and a plethora of other social media tools help review and warn investors against scams. Currently, they are primitive but these are early days.
Furthermore, some ICOs choose to produce more detailed White Papers, providing potential participants with far more comprehensive information on which to base their decision.
A number of countries, such as Gibraltar, are well advanced in the introduction of a suitable regulatory regime. In Gibraltar a partnership of government, industry and regulator has focused on the prevention of fraud, theft and money laundering by bringing in a principles based regime the regulations for which were published in early October and which is due to go live in January 2018.   
By focusing on certain activities in the DLT eco system rather than the currencies etc themselves (despite some recent misguided commentary to the contrary) and providing the regulator with flexibility in its approach,, the approach is relevant, realistic and fit for purpose.
The reason for why so many firms are choosing suitably regulated jurisdictions is clear. As happened with the Gaming community in Gibraltar, (80 per cent of all online bets in the UK use a Gibraltar licensed gaming company), many firms come to jurisdictions which provide a demonstrable level of consumer protection – legal and regulatory certainty being vital in this current setting of global uncertainty.
In Gibraltar the stock exchange has been one of the leaders in DLT development, recently announcing the creation of a ‘Blockchain Innovation Centre’ specifically set up as part of its new eco system – ultimately to help ICOs become IPOs. It is also a market leader being an existing approved stock exchange by itself looking to enter into the Blockchain environment.
As well as the inevitability of DLT as a significant, and mainly positive, disrupter of current business methodology, there will be other stages in its growth. The current flood of ICOs and new cryptocurrencies will be checked by a market correction. Its scale and timing is unclear but it will happen, probably in months, rather than years away. This correction will remove some players and cause consolidation amongst others. Some tokens will prove to be worthless. Some crypto currencies will see significant falls in value, possibly never to fully recover. The “Walter Mitty” white papers will vanish. This is simply part of a natural cycle. The resulting industry will be stronger and better structured. 
There will also be fraud (including Ponzi schemes), some of it on a significant scale. The methods of deterrence and detection are currently too nascent to stop this. Money laundering does and will occur, as it does in everything, but preventative tools will be found to restrict it.
For those choosing to participate at this time there is therefore a level of risk that some may find too high for their appetite. Others may choose to participate and ride the storm, believing that some of their choices will produce a level of return that will significantly exceed any losses. If nothing else it will be an exciting journey.
The current DLT revolution is upon us. It will probably result in the biggest change in the way we operate our businesses and possibly our personal lives since the internet. Just as Google, Facebook, Amazon, PayPal and EBay (and some would say, Uber) have changed our lives and made fortunes for some, so the new, as yet unknown, DLTs will do the same. It is the free market at its purest. Welcome it, but remember, for every Google there is an Ask Jeeves, for every Facebook there is a Bebo. Time will tell if you have participated in VHS or Betamax.
(This is a redacted and updated version of an article by the same author in the IFC Economic Report)