Barbados is in the midst of a transformative renaissance and is set to harness the power of financial technology or “fintech” to become the comprehensive jurisdiction of choice in the Caribbean.
The BSE & Digital Assets
The Barbados Stock Exchange (BSE) is leading the charge. As part of our larger ‘go-global’ strategy, we view “digital assets” – a decentralized version of today’s traditional, dematerialized securities – as an innovative, scalable financial offering.
Digital assets utilize the blockchain, an immutable ecosystem that powers consensus. By recording data onto a list of blocks – blocks that are sequentially linked using cryptography – blockchains have the power to lower transaction costs, enhance security, increase trust, improve data coordination, and enable transparency.
In popular nomenclature, digital assets are usually described as either cryptocurrencies, tokens, or crypto-assets. The BSE has preferred the term ‘Digital Assets,’ and has defined that term in our recently devised Special Facility to include the full range of commercial assets which represent a cryptographically secured digital representation of a set of rights provided on a digital platform issued or created (or to be issued or created), for commercial exploitation or reward, and which are exchanged and traded or cleared on a network of inter-linked and secured decentralized digital records (blockchain).
The BSE views ‘security tokens,’ a particular type of digital asset, as both fit for purpose and vanguard in nature. They are analogous to securities, namely debt, equity and investment contracts.
To appreciate the potential of security tokens, an understanding of ‘cryptocurrencies’ – the foundational precursor to security tokens – is important.
Cryptocurrencies are virtual currencies and are an internet-based medium of exchange. Many of them rely on blockchain technology and can be issued independently from any controlling central authority,
In 2017 they achieved household recognition. Through a process known as “initial coin offerings” (or “ICOs” for short), startups were able to use cryptocurrency to raise capital (directly) from investors. The process would prove surprisingly simple: by claiming to build a platform (a platform ‘powered’ by a blockchain solution), a startup would sell their project’s generated cryptocurrency in exchange for investment capital.
ICOs became incredibly lucrative. So lucrative, in fact, that they’d attract everyone from entertainers and athletes to corporations and governments. Some $26 Billion+ USD was raised through ICO activity. ICOs, however, were unregulated – they would ultimately attract a host of bad actors with fraudulent schemes. As a consequence, many investors lost their money. With few startups incentivized to complete their projects – and fewer still bothering to attempt the process – ICOs became a ticking time-bomb and a market fueled by conjecture, hype and the severe effects of FOMO (fear of missing out).
Global regulators would be forced to respond and many consorted to ban the activity. A few nations would remain supportive. Ultimately, however, facilitating countries would exercise significant caution: they began to restrict either the level or type of investors that could participate in an ICO.
As a consequence of global ICO scrutiny, a disparate (yet familiar) form of raising capital would emerge.
Initial Exchange Offerings
Irrespective of their nomenclature, many jurisdictions view an ICO as an offering of securities.
Enter Initial Exchange Offerings or “IEOs.” An IEO is, as the name suggests, a direct listing facilitated by a crypto exchange. These exchanges serve as intermediaries, and can directly vet both issuers and investors for an offering. This has increased market quality, both for crypto companies looking to raise capital and for investors looking for credible investment opportunities.
IEOs are different from ICOs. Where participants in an ICO would send contributions (directly) to an issuer-administered smart contract, IEOs require investors to create a wallet account with the exchange. These wallets are then funded with cryptocurrency which can be used, thereafter, to buy the newly offered tokens of a fundraising company.
IEOs are raising tremendous capital, and in just the first quarter of 2019, several startup companies have raised millions through the sale of IEO tokens. Business has been great for exchanges too. Exchange remuneration is achieved through: a) fees levied for listing on the exchange, and b) an agreed percentage of the tokens sold during the IEO. The latter payment is an incentive for exchanges – not only to bring startups to market but to also assist these companies – thereafter – with their visibility via marketing and promotion.
The BSE Opportunity & Barbados
Crypto exchanges run the IEO market. IEOs however (like the ICOs that preceded them) are an unregulated activity.
Herein lies the BSE opportunity.
Institutional participation is largely absent. These players require a sophisticated market, one that is well-run, well-regulated and operates (preferably) on a well-recognised exchange. The BSE’s focus then on ‘security tokens’ means the Exchange is adequately positioned to pair both accredited and institutional investors with a growing number of technologically-innovative, high-quality and compliantly-registered investment prospects.
BSE views digital assets – and security tokens in particular – as a game-changing offering. Not only do they fit as part of our ‘go-global’ strategy – they can help to position Barbados as the leading fintech jurisdiction in the Caribbean.
The BSE is pleased to play our part. We have the vision. We have the talent. The BSE is thankful for its continued support and we look forward to working with all of our stakeholders in forging the next chapter of Barbados’ illustrious history.