Gibraltars prominence as a crypto funds industry is really the product of the work that began over a quarter of a century ago.
Gibraltar is a major player in the online gaming industry. This is because, around 25 years ago, Gibraltar took the view that it needed to be regulated to ensure it runs in the best way possible. We can see that this view was successful given that almost all of the top gaming companies in the world are domiciled in Gibraltar, with over 2000 workers employed in those companies. It is a vibrant industry that has created its own ecosystem in Gibraltar.
Eight years ago, it was decided that the same progress could be made with blockchain. In 2014 there was a consultation offered by the Government of Gibraltar to begin working on legislation to deal with Blockchain/DLT, and to create a relevant framework. Several consultants became involved, both at government and regulatory level, and the draft DLT regulations were greatly received, and even imitated in a few other jurisdictions.
At first there was concern that individuals may be put off by the “restrictions” of operating in a regulated jurisdiction, as opposed to the relative freedom they would perceive to have in a non-regulated one. In fact, the opposite proved true. As a lot of the companies providing digital wallets and other types of digital value are made by clients who are trusting firms with their wealth, they feel more comfortable knowing that there is a regulator supervising the establishment of their business and the ongoing management of the business. They know that the systems have been tested by a regulator, and that if something goes wrong there is someone there who has powers to assist.
Following a four-year consultation, The DLT Regulations came into force in 2018. The idea was to regulate the service providers who use blockchain to store or transmit value on behalf of third parties, creating a framework for those people and firms which is similar in scope to a MiFID license. Once the regulations started, so began a whole ecosystem of service providers in Gibraltar. The regulator issued a number of licences for big players such as eTorro and Xapo who are now – in the crypto space at least – household names.
In 2018 and even to this day, crypto is still viewed by many banks as a questionable business as it is difficult to open bank accounts anywhere in the world for crypto based businesses. In fact, although this is much better now, there were cases in the past when banks would ask customers to close any existing accounts they may have had because of their dealings with crypto. This has been one of the biggest challenges in the crypto space, but this is becoming better and more mainstream with some banks in Gibraltar now willing to take on this type of business.
There were also challenges at a later stage when ICOs gained traction. There was no formal regulation for issuing digital assets. The question was always whether those assets should be seen as securities or not, and if so then securities law could apply. There was a world perception that there should be more regulation, at least on the anti-money laundering side. As a result of the 5th Anti-Money Laundering Directive, and to ensure processes were in line with both this and international standards, the Gibraltar Proceeds of Crime Act was amended in 2021 to include the issuance of digital assets. This ensures that virtual asset service providers (VASPs) are registered with the GFSC. Such providers now need to show that they have a very robust framework for anti-money laundering so that whenever they onboard a client, there is stringent process in place to obtain KYC on the client.
The funds industry became very active in crypto funds as the ecosystem in Gibraltar has always been receptive to this. Firstly, there was an effort by the industry to study the subject matter, and as early as 2018 the Gibraltar Funds and Investments Association issued a Code of Conduct for Crypto Funds which identifies the areas that fund managers need to be aware of when they are dealing with this type of fund. Then, in 2021, PwC issued a report listing Gibraltar as the third place in the world for crypto funds. This was great for Gibraltar which up until that point was not as well-known as many other jurisdictions in this space. The PwC report made it very clear to the world that Gibraltar’s fund regime not only works well, but also extremely well in the context of crypto. It is a very compelling regime and the only real regime this side of the Atlantic that allows you to establish a fund and launch it before you even tell the regulator. There is no regulatory licensing delay. Some jurisdictions have RAIF (Registered Alternative Investment Funds) products registered which also do not require regulatory permission to launch, but for those products you need to have an AIFM manager and depository as extra service providers.
A number of crypto funds have now been established in Gibraltar. One of the reasons why the funds regime works so well here is because there are service providers – particularly banks – who are willing to take this work on. This includes auditors, directors and fund administrators who a few years ago may not have been comfortable dealing with crypto. As a result of the GFIA Code, the DLT Regulations and the involvement of these entities and the government, the crypto space is well known and understood in Gibraltar. A strong and experienced ecosystem exists in this very new area. This can be seen in new projects including Valereum Plc which is in the process of acquiring the Gibraltar Stock Exchange. Their intention is to create a blockchain exchange in which you can use crypto to buy Apple shares. This is both huge and exciting. When it happens, it is likely to be the first stock exchange in the world to have this capacity. It should bring a lot of additional business and renown to the already powerful Gibraltar crypto landscape.