Gibraltar: taking a lead as the leading European hub for the new crypto-economy
This article first appeared on Medium:
1. Developing the crypto-economy
Gibraltar has recently stepped up a gear in its e-commerce drive — earlier in 2017 the Government of Gibraltar announced, by consultation, that it would consider providing a financial services authorisation regime for certain Distributed Ledger Technology (DLT) operators.
The decision by HM Government of Gibraltar to consider and support this new regime was backed by interest in use of technologies by the Chief Minister Fabian Picardo and the significant support and backing given by the Hon Albert Isola MP as Minister for Commerce (below) to commit resources to explore this area in greater depth.
The Gibraltar Financial Services Commission Chief Executive (Samantha Barrass - below) was keen to develop and implement an attractive but serious regulatory regime in this innovative and challenging area of FinTech.
This wide-ranging support confirms the forward-looking, innovative and entrepreneurial nature of Gibraltar and is well timed given the wider chaotic political backdrop in Europe (including due to the 'Brexit' uncertainties).
In the meantime, we have already seen well respected crypto-businesses like Xapo set up in Gibraltar as an e-money institution in readiness for the new DLT regime. They have joined our other great e-payments businesses already established here (Payoneer, WaveCrest, Transact and IDT).
2. The DLT Regime
The proposed regime, for which draft legislation has now been published, will of course cover cryptocurrency exchanges and custodians. This group represents the most obvious beneficiaries of a balanced and carefully constructed financial services authorisation regime, given that they currently fall outside of scope for most financial services regulations but undertake activities that give rise to significant risks of capital loss for customers due to fraud and cybercrime.
In the proposed Gibraltar DLT regime consultation (Proposals for a DLT Regulatory Framework) the Government stated that the:
“HM Government of Gibraltar [has been considering proposals] for a new regulatory framework for firms engaging in activities that use Distributed Ledger Technology (DLT) for the transmission or storage of value belonging to others. The proposed framework will facilitate a progressive, well-regulated and safe environment for firms using DLT to grow, whilst also ensuring that this new regulatory environment protects both consumers and the good reputation of the jurisdiction. ..
The primary driver for the DLT framework is to encourage Gibraltar’s economic development while providing safeguards for consumers and protecting the jurisdiction’s reputation and integrity. The DLT framework is designed to be both good for Gibraltar and safely so. It recognises Gibraltar’s status within the EU while considering the likely impact of Brexit and related outcome scenarios…”
Cryptocurrency exchanges and custodians want to be able to benefit from access to payment and banking services and having a financial services authorisation in a respected jurisdiction will assist with that. The DLT regime goes wider than this and will, in principle, cover any operators that are:
“Carrying on by way of business, in or from Gibraltar, the use of distributed ledger technology for storing or transmitting value belonging to others”.
We expect to see FinTech businesses wishing to use blockchain solutions for various sectors (e.g. property ownership and management, payments, savings, insurance, brokering, healthcare, energy, derivatives, investments and RegTech) look at the suitability and attractiveness of the regime for elements of their operations - particularly those that currently fall outside of existing financial services regulatory environments but that would benefit from independent oversight and higher standards to increase customer demand.
The Gibraltar Stock Exchange has recently announced plans to launch a new blockchain exchange and we already have TokenMarket (one of the major new unregulated token creation platforms) based here and planning to launch a regulated token exchange.
The GFSC Approach — a spirit of collaboration
The GFSC approach is collaborative and focuses on attracting high quality suitable applicants - where the exact requirements for each will be decided using a risk based approach that looks at the nature of the activities of the operator and the financial, criminal and technological risks inherent in each business model.
The GFSC has also set up an Innovate and Create team led by Nicky Gomez (above) to encourage new technologies and business models by supporting those businesses looking to develop and introduce innovative ideas for financial products or services into the market. Siân Jones (below) is the lead independent technical and regulatory advisor on the proposed new regime.
The DLT regime is focusing on scalable and carefully-considered financial technology opportunities and working through the requirements that will be applicable to DLT operators once the new regime is in force from January 2018.
“The significant benefits in brand value, counterparty credibility and customer confidence of having a regulated financial services entity (subject to independent oversight) should not be under-estimated and will allow the best operators to stand out from the crowd. For good operators positive regulatory regimes provide stability, confidence and a competitive moat, especially in this new area of e-commerce.” (Peter Howitt)
The 9 DLT Principles
The new regime is still in development and is intended to evolve from the ground up, whereby the applicable requirements for DLT operators will be based on a review of their ability to conform with nine key DLT principles:
A DLT Provider must conduct its business with honesty and integrity.
A DLT Provider must pay due regard to the interests and needs of each and all its customers and must communicate with them in a way that is fair, clear and not misleading.
A DLT Provider must maintain adequate financial and non-financial resources.
A DLT Provider must manage and control its business effectively, and conduct its business with due skill, care and diligence; including having proper regard to risks to its business and customers.
A DLT Provider must have effective arrangements in place for the protection of customer assets and money when it is responsible for them.
A DLT Provider must have effective corporate governance arrangements.
A DLT Provider must ensure that all of its systems and security access protocols are maintained to appropriate high standards.
A DLT Provider must have systems in place to prevent, detect and disclose financial crime risks such as money laundering and terrorist financing.
A DLT Provider must be resilient and have contingency arrangements for the orderly and solvent wind down of its business.
The regime can therefore develop and start to codify over time based on an objectives and risk based approach to practical problem solving in the DLT sector. This is necessary to avoid creating a regime that stifles innovation and does not take account of the particular risks and benefits associated with specific blockchain based businesses.
In addition, the regime will not permit/require DLT authorisation for activities that are already subject to existing financial services authorisation requirements.
What is in and out of scope?
This new defined activity of being a DLT Provider is cast very wide and so the exact demarcation line between regulated and unregulated use of DLT and the blockchain will be determined over time by the GFSC. It is expected that this will be done on consultation, working closely with experts and the various sectors, bearing in mind the overriding positive objectives the regime is seeking to achieve and the public harms that it seeks to avoid.
There is likely to be a number of important distinctions, such as whether DLT is being used only for an enterprise’s own purposes (eg, the issuance of own branded cryptocurrency tokens to clients) or if the enterprise is storing or transmitting other cryptocurrencies or DLT related value (whether mainstream cryptocurrencies or proprietary blockchain based tokens issued by third parties).
The GFSC guidance suggests examples of activities that are likely to be out of scope including:
- Decentralised VC schemes (e.g. Bitcoin)
- DLT software developers
- Technical services providers not controlling value belonging to others
- Users purchasing goods and services with VC
- Merchants selling goods and services with VC
- Employees receiving VC as payment of wages and salaries
- Firms paying their employees’ salaries and wages in VC
- Users investing in VC for their own private purposes
- Central bank-issued digital currencies.
It remains to be seen whether a key determinant, for considering whether one is providing authorised DLT Provider services, will be whether the activity would likely require financial services authorisation if it involved fiat currency or regulated financial instruments (an equivalence test).
If the boundary for requiring DLT Provider authorisation is set too expansively, this may prove to be counter-productive to attracting or encouraging the local creation of a wide range of advanced technology businesses that wish to move services and solutions to the blockchain. With this in mind, it is comforting that the GFSC appears to be mindful of the need to proceed cautiously and in a spirit of collaboration and consultation on the boundary issues that must arise.
Gibraltar will also apply suitable anti-money laundering requirements to those authorised DLT Providers that require it (e.g. crypto currency exchanges and custodians). This is also in line, and ahead of, some of the proposed changes to the EU’s Fourth Anti-Money Laundering Directive.
Making an application
As this is a new regime the boundaries and practical requirements are yet to be determined, so it is crucial to engage with your FinTech regulatory advisors and the GFSC as early as possible. The initial application assessment fee by the GFSC is £2,000 and any operators that submit full applications following initial assessment shall pay full application fees to the GFSC of between £8,000 and £28,000 — depending upon the complexity of the application (determined by the related initial application assessment). Annual authorisation fees shall be between £10,000-£30,000.
Applicants will be invited to attend a meeting in person and present their business plans and demonstrate that they have suitable technology expertise and an understanding of the risks related to their DLT operations. Detailed compliance documentation will be necessary for the final application stage and our in-depth experience in electronic payments and AML means that we are able to support you with these requirements.
It is important for readers to note that the Gibraltar approach and our regulatory regime requires you to have a real presence in Gibraltar with an office and registered employees. The jurisdiction wants the value of knowledgeable and highly experienced people to continue to grow our e-commerce hub.
Operators that are within scope of the DLT regime and already operating in Gibraltar by the end of December 2017 will be able to continue to operate pending review of their application in 2018. Other operators that are interested in coming to Gibraltar and becoming authorised in Gibraltar will not be able to operate DLT Provider services from here until they have a DLT authorisation.
3. Gibraltar’s competitive advantage in e-commerce
As an English law and language jurisdiction within Europe, Gibraltar is a very attractive place to do business for international investors.
The Silicon Valley story in the United States is much admired and often imitated. The success of Silicon Valley is due to a wide range of factors including economic, social and cultural dynamics (including immigration). Of course the availability of skilled technologists and capital has been crucial.
All of these factors can only create great success when you have an environment that embraces and rewards entrepreneurial drive. You also need a regulatory and political environment to support innovation — as innovators usually challenge existing business models and push the limits of what is currently possible.
Gibraltar is now taking a lead in this new area of e-commerce innovation and sees the crypto-economy (which is much wider than cryptocurrency related activities) as an area where it can be globally competitive as a small jurisdiction.
Gibraltar's strong track-record in regulated e-commerce (particularly e-gaming, e-money and payments, and other electronically supplied financial services) and a reputation for attracting quality operators over quantity puts it in a good position to make this work. In addition, we have local banks including the Gibraltar International Bank and Turicum that have answered the call to get involved in this sector and that will support good operators.
Gibraltar’s naturally cosmopolitan culture and history coupled with its existing success in e-commerce already makes it an attractive hub for investors and entrepreneurs. It is also politically and economically stable (despite the Brexit referendum). We also have an attractive tax regime for individuals and businesses.
Over the last 15 years we have developed a large pool of incredibly talented people in areas of advanced online technologies, and cross-border finance and marketing. This has also led to a large number of highly e-commerce experienced professional services providers.
E-commerce, and particularly cross-border financial services and e-gaming, has become a significant part of the economy and employs many thousands of people (in a population of only 35,000) and is estimated to constitute over 20% of the GDP.
In the current international climate all these factors give Gibraltar a very significant advantage for the next generation of innovation in use of distributed ledger technologies.
4. Come and join our community — be part of the Gibraltar story
Success in business is not a result of good theoretical modelling but is based on people working hard and working smart together. E-commerce hubs require a range of diverse people, skills and access to capital to move an economy forward and political support for businesses to be able to challenge the status quo.
We believe Gibraltar has what it takes to be the international leader in this space, if you feel the same about your project then you should come join us and be part of the next stage of Gibraltar’s fascinating multi-cultural community and modern day economic success story.
We are a finance and technology legal and compliance boutique. Our team in Gibraltar consists of a range of professionals with significant in-house and private practice experience in finance, financial services, e-commerce, e-payments and online gambling sectors. We also offer lower cost retainer packages for SME’s that require regular ongoing support for their legal, compliance, corporate, company administration and accounting and tax issues.