What was supposed to be a short-term position in 2011-12 has grown into much more for Gibraltar Blockchain Exchange (GBX) CEO Nick Cowan. Seven years after agreeing to assist with the formation of the Gibraltar Stock Exchange (GSX) Mr. Cowan has the entity branching out to form the GBX, whose goal is to be a world-leading institutional-grade token sale platform and digital asset exchange that is a subsidiary of a European Union (EU) regulated stock exchange. The GBX will have both a token sales platform and cryptocurrency exchange.
After spending two years obtaining licenses and institutional funding the GSX opened for business late in 2014, Mr. Cowan said. Things went well, and in 2017 management was thinking about next steps and preparing for the fallout of the Brexit vote.
Gibraltar joined the European Union (EU), but when the Brexit votes were tallied, 95 per cent of people in Gibraltar voted to remain. That forced the region as a whole and the GSX in particular to think about survival, as one drawing card was their passporting of companies looking to conduct business across the entire EU.
“If we chose to remain open we had to think smartly about what came next,” Mr. Cowan said.
With his background in risk management Mr. Cowan knew we have to clearly look at facts and be prepared to quickly act. With Gibraltar wanting to establish itself as a fintech hub that opened up some possibilities. Cryptocurrencies were exploding in popularity and ICOs were gaining in frequency and in that climate Mr. Cowan saw an opportunity for a rules-based platform for token issuers that was licensed and regulated.
But he had to convince his board and Mr. Cowan said he was fortunate they were supportive from the beginning. Many members had a solid knowledge of cryptocurrencies and the blockchain, so they gave him one year to see what he could do. He started with drafting rules before meeting with companies and other exchanges. GBX was taking shape.
With a growing number of ICO-related scams and questions about investor protections being raised around the world, Mr. Cowan knew establishing credibility was paramount. GBX introduced Sponsor Staking, a process where all token issuers must appoint a recognized sponsor firm (previously vetted by GBX) in order to list on GBX. Sponsoring companies need to have demonstrated blockchain capability and the ability to guide companies from inception to listing. These firms (more than 20 have stated their interest in becoming sponsors) conduct a preliminary review under GBX guidelines. Following that applications must have whitepapers meeting a high standard.
Sponsor firms submit to a token staking process where a supply of their Rock tokens (the native GBX token) are staked and placed in GBX escrow for a stipulated period. This ensures they keep acting in the best interests of their client, Mr. Cowan said.
With regulatory uncertainty still the norm in most jurisdictions, Mr. Cowan said GBX obtains legal opinions before seriously considering listing in a specific country. When it came to the United States GBX obtained three such opinions and still hasn’t listed,
“If there is any doubt whether a token is a security, then it’s not on the Gibraltar Blockchain Exchange,” Mr. Cowan said. “We want all of the boxes ticked before we say you can launch.”
GBX’s vetting doesn’t stop once a company is listed, Mr. Cowan added.
“We’re the first to conduct annual audits which scares off 97 per cent of ICO issuers and I say that’s okay.”
As the number of exchanges continues to grow I asked Mr. Cowan what will separate the winners from the losers once the inevitable attrition occurs. Regulation will be a key driver, he suggested. With many unlicensed and unregulated exchanges out there, they may not be as committed to vetting or undertaking proper AML and KYC procedures.
Institutional investors will be key players as the cryptocurrency industry matures, Mr. Cowan said. They will be looking for the safest options and wherever they bring their volume it bodes well for that particular exchange. The SEC will be increasingly active and those steps will indelibly shape the industry too.
Those large investors will help lower the volatility that is restricting the market’s potential, Mr. Cowan said. The current herd mentality has largely left the big players on the sidelines until things calm down. They are awaiting the signs of a mature environment, such as hedging ability and derivatives options common to evolved, liquid capital markets.
But those institutions are starting to make plans, and when they jump, be prepared to watch the smart money, which is usually on the other side of the freeway from the herd, Mr. Cowan said. Say, for example, a glowing company analysis from an investment bank is released and the related stock begins to rise. The smart money’s selling to the herd. When the price collapses then the smart money buys back in.
As we wait for the market to take shape, one thing is beyond dispute, and that is it’s an exciting time for blockchain, which is shaking up some fairly stodgy industries, Mr. Cowan said.
“It’s the first big development in trading in a long time. Blockchain can eliminate levels of middlemen.”