Race to the bottom or race to reality?
The rise of initial coin offering (ICOs) – as controversial as they may be – is a signpost that the age of Industrial Era capital formation is giving way to a new paradigm of decentralized and democratized investment and customer-driven business models that expand far beyond the borders of any one country.
In this arena, entrepreneurs and companies will naturally gravitate toward the jurisdictions that allow them to raise funds from investors and serve customers around the world in a fast, safe and effective manner and with minimal friction.
Recognizing that this shift to a new Decentralized Era is underway, numerous countries are positioning themselves at the forefront of this transition so as to reap the economic, financial and geopolitical benefits that come with being the go-to jurisdiction for global capital formation.
Unfortunately, the United States is not yet among these countries, as it has instead taken a short-sighted and enforcement-heavy approach that fails to expand beyond Industrial Era thinking.
While U.S. regulators have publicly offered platitudes about being friendly to innovation and facilitating domestic entrepreneurship in the crypto space, the proof is always in the pudding.
In this case, the “pudding” is that serious cryptocurrency projects are faced with two unappealing choices: either issue tokens through outmoded and ill-fitting means that restrict a token’s customer base and resale ability – like registering as a security or claiming a Regulation D exemption – or leave the U.S. altogether.
Race to value
As highlighted by CoinDesk, the natural and predictable consequence is that innovators are leaving the U.S. in search of friendlier jurisdictions.
To meet this demand, places like Gibraltar, Switzerland, Liechtenstein, Malta and, most recently, Bermuda have been rolling out the welcome mat for token sales and structuring local regulations to balance the goals of industry development and consumer protection.
Some might eye the questionable reputations of some crypto-friendly countries and immediately conclude that there is a “race to the bottom” occurring whereby regulators, in search of revenue and headlines, green-light even the most fantastical token ideas without asking any questions.
In our observation, this is not happening.
In seeking to responsibly sell tokens to customers, my company, Sweetbridge, has spent a substantial amount of time in discussions with regulators from around the world — including representatives of many G20 countries. And we’ve been encouraged by the thoughtful approaches and due diligence that has been demonstrated.
While there will surely be instances of this type of jurisdictional arbitrage employed by fringe actors, no serious crypto project wants to domicile in a country where anything goes.
Instead of a race to the bottom, we see a race to quality where serious projects flock to the places that offer the best overall value proposition: the best legal expertise, the best balance of regulatory controls with innovatory freedom, the best technologists and the best branding – even if cheaper (and possibly seedier) services can be acquired elsewhere.
For example, Switzerland’s appeal is not just the regulatory aspect but also the talent and support ecosystems that it has developed concomitantly. Other jurisdictions like Gibraltar are going one step further by establishing not only guidelines and requirements for companies launching ICOs, but launching a fully-regulated exchange providing listing and liquidity for projects launching there.
Follow the leader
Countries large and small are beginning to heed this message.
While still grappling with the best way to tackle this new business model, many are rethinking outmoded approaches to capital formation – particularly the idea that token issuances are necessarily investment contracts.
They see an opportunity to inject fresh life into their local economies and potentially shake up the global balance of financial power.
To put it simply: they aren’t stupid.
Should they wake up to see billions of dollars of real economic value being created in places Liechtenstein and Gibraltar while the U.S. chases its own tail deciding whether or not ether is a security, they’re going to find a way to get in on the act – and with haste.
In Sweetbridge’s view, the sleeping giant in this conversation is the United Kingdom.
The Brits have long been eager to wrestle the title of world’s premier financial center away from the U.S. and recrown the City of London, and there is a growing sense within governmental ranks that blockchain and financial technology may be the ticket to doing just that.
While the U.S. lacks impetus for change, Britain is looking for relevance in a post-Brexit world. Thus, its traditionally conservative financial culture has expressed an introspective openness to new ideas.
For instance, the Fintech Regulatory Sandbox recently launched by the Financial Conduct Authority, Britain’s top financial regulator, gives challengers and innovators a way to launch without prohibitive compliance costs.
The Brits also understand the consequences of failing to capitalize on paradigm-shifting economic transitions.
Despite birthing the Industrial Revolution, they grew too comfortable in their colonial Agrarian Era societal structure and ultimately forfeited dominance of the Industrial Era to the U.S. because they were unable to adapt quickly enough.
Additionally, the legal structure of the British Commonwealth is relatively amenable to new means of capital formation. It is predisposed to a “buyer beware” approach toward these types of products, as opposed to the paternalistic mentality of the U.S. that ensures only rich people get access to the good investment deals (unless that “deal” happens to be offered by a state-sponsored lottery).
Certainly, not all innovative crypto projects will abandon the U.S., but it has become disappointingly clear in recent months that there is too much inertia built up around its regulatory infrastructure for it to play top dog in the coming era of decentralized business models and global capital formation.