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ICOs, whether you love them or hate them, revolutionized not only the crypto world but they also helped shape modern crowdfunding as a whole. They seemingly appeared alongside smart contracts and as the bandwagon grew larger, so did the number of scams and fraudulent projects. According to a study published at Boston University, over 50% of all ICOs stopped operating within four months after launch. Many countries are trying to create regulations to govern the ICO industry, but could it simply be time to move onto a new, more secure version of raising capital?
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In this article we’ll compare and contrast security token offerings (STO) with ICOs, explain why (and how) Malta is the global industry leader in STO regulations, and finally discuss the easiest ways to launch an STO in Malta before the market becomes too saturated.
Malta aka Blockchain Island
There is certainly plenty of hype around Malta lately, but that hype is heavily based on the way the Maltese government views cryptocurrencies and the surrounding blockchain industry. For instance, Maltese Prime Minister Joseph Muscat said, “I understand that the regulators are wary of this technology but the fact is that it’s coming. We must be on the frontline in embracing this crucial innovation, and we cannot just wait for others to take action and copy them. We must be the ones that others copy.” This type of forward thinking by the country’s highest ranking official is quite the contrast when compared to countries like China, who outright banned all future ICOs last year.
We all know ICOs can be dangerous and hard to regulate as there are so many variables that don’t fit in perfectly with the existing ways of thinking. Because of this, most countries take the simple route and try to rule on ICOs as if they were IPOs, or something similar, and use existing rules and regulations to govern this new concept. This is where Malta decided to be proactive in their thinking and, instead of trying to force ICOs into an existing box, decided to create an entirely new structure to support this up-and-coming technology.
https://icorating.com/report/ico-market-research-q2-2018/
These new structures primarily come in the form of three different bills, all of which were passed unanimously by Malta’s Parliament:
1. Malta Digital Innovation Authority Act (MDIA)
This act allowed for the establishment of the Malta Digital Innovation Authority, whose various purposes include promoting blockchain tech in Malta and certifying and governing over DLT platform software. The purpose of certification is to provide legal, technical, and tokenomic definitions to users on Malta-based DLT platforms. The CEO of MDIA, Stephen McCarthy, is tasked with guaranteeing that technology service providers are operating in a transparent and fair manner.
The full bill can be found here.
2. Innovative Technological Arrangement and Services Act (ITAS Act)
The ITAS Act is designed to give more definition and regulations where they previously did not exist. This established clear criteria and registration guidelines for innovative technology arrangements (ITA), innovative technology services (ITS), and persons/companies providing those services (ITS providers). All of these will fall under the authority of MDIA.
In addition, the ITAS Act outlines the guidelines for auditing and certifying software and architectures whose purpose is to design and provide DLT, smart contracts, DAOs, token exchanges, as well as similar tech which may be designated in the future by the Minister after recommendation by the MDIA. This essentially means that blockchain-esque technology is accepted and given a definition, which makes it easier to clarify how it will be treated by future laws.
The full bill can be found here.
3. Virtual Financial Asset Act (VFA Act)
The VFA Act creates a framework under which regulations can be applied to entities that work directly or indirectly with Virtual Financial Assets, including but not limited to: ICOs, wallet providers, nominee service providers, brokerages, portfolio managers, investment advisors, and token exchanges. In addition to this, the VFA Act also lays down the guidelines outlining that ICO and STO (security token offering) white papers are to be delivered to the MFSA. Finally, the VFA Act demands that a token issuer (ICO, STO) has to appoint an MFSA-approved VFA agent to monitor and report on the token offering.
The full bill can be found here.
When comparing these three bills to the regulations of other jurisdictions it becomes clear why Malta is ahead of the curve with their “Technology First” approach. Other major jurisdictions (USA, Switzerland, Gibraltar, etc.) approach the regulation process by altering their existing IPO and stock market laws — this doesn’t take into account that DLT and blockchains are a far different technology. These jurisdictions typically just look at white papers for concept ideas, enforce KYC/AML protocols, and rule based on the type of token the ICO claims to have.
Malta, on the other hand, has created agencies with these three bills whose purpose is to look at the technology behind the ICO/STO to ensure that it is viable. Of course, they enforce KYC/AML procedures as well, but as Silvio Schembri, Malta’s Junior Minister for Financial Services, explained during an interview with Forbes, “It is the technology behind the white paper that matters the most and tends to be overlooked. If the technology is flawed, the product won’t deliver what is started in the white paper. We are looking heavily at the technology behind these blockchain-focused companies.”
STO is the future of fundraising and Malta already has legislation in place to support it
Ignore all the glitz and glamour, all you need to understand is that security token offerings are an upgraded, more secure version of ICOs that allow for a greater funding spectrum. Oftentimes, the hardest part of regulating ICOs is deciding what type of token they are offering (equity vs. security vs. utility) and ruling on them accordingly. As Evercity points out in their Medium article, ICOs suffer from a few key things:
- Token status — ICOs often have to make up a reason for their token, when in reality they don’t need a token at all. On the other hand, “Security tokens constitute financial instruments, backed by a particular asset (equity, debt, real estate, etc) and are fully compliant with all legal requirements.”
- Investor rights — Utility tokens offer no guarantees or investor rights, and projects are legally prevented from speculating on earnings. On the flip side, “Security tokens provide investors with clearly defined (and fully legal) rights — a share in a company, revenue distribution, voting rights — these parameters may vary.”
STOs open up funding to a greater crowd in a way that ICOs will never be able to — this, of course, is of particular interest to founders looking to increase their crowdfunding efforts. STOs allow for institutional capital to become involved (i.e. private equity groups) on an international scale since they fit easily into existing regulations in many jurisdictions. Because STOs are still crowdfunding in nature they allow for a lower barrier of entry for investors compared to traditional VC funding, while at the same time still flaunting the perk of having greater liquidity.
This is all important because, according to Bitcoin Magazine, “[Being] a member state in the European Union economic region may give Malta-based token offerings an advantage in the EU marketplace. Registering a security token offering in Malta does not circumvent the regulations of other jurisdictions. However, as an EU member state, what is a legal and regulated security offering in Malta is, by virtue of the single European market, considered legal in other EU member states.”
https://dribbble.com/shots/3827365-Set-password-Isometric-illustration
STOs are far more tricky than ICOs in a legal sense, and although Malta is leading the crowd in progressive regulations it is still recommended to use a service instead of trying to navigate the legal landscape yourself.
Seizing the Malta moment before it’s too late
With ICOs it was certainly possible to launch without having turnkey solutions, but with the increased legal complexity of STOs it is highly recommended to seek legal counsel. There are two paths to take here; one is seeking an international firm who happens to do business with Malta, and the other is to choose a Malta-based operation who works closely with the local government.
The first option would be a firm like IBC Group, who does business in over 30 countries and has a proven international track record. But the problem with choosing turnkey solutions that offer blanket global solutions is that you miss out on the personal touch. For instance, the IBC Group didn’t even take the time to proofread the Malta specific page of their website: “If you’re thinking of holding an ICO in COUNTRY and you’d like more information, contact us here.” The other option is to search out an agency specific to Malta, such as ICO Malta, which is featured on kintu.co’s list of “15 Crypto Companies in Malta You Should Get to Know” alongside Binance, OKEx, and Coinvest. Chris Osborne lists ICO Malta as a company that “bills itself as a ‘full-stack ICO platform’ that offers legal, technical, and financial support to help crypto founders turn their ICO idea into a reality.” They are able to do this by offering a full range of services, including: token creation (both ICO and STO), marketing, exchange listing, banking, KYC/AML solutions, and more.
Key points to takeaway
ICOs are fading in popularity and STOs are rising to take their place for a variety of reasons. Currently, the most likely country to lead the STO market is Malta. Not only do they have the most progressive legislation in place, but they are also a small enough country that they can shift and adapt as the market demands. However, because of the complexity of the regulations it is recommended to turn to an agency, or at the very least seek legal guidance from a local law firm to ensure you’re in the best legal position before moving forward.
About the author:
Kirill Shilov — Founder of Geekforge.io and Howtotoken.com. Interviewing the top 10,000 worldwide experts who reveal the biggest issues on the way to technological singularity. Join my #10kqachallenge: GeekForge Formula.