Ellul & Co, the leading Gibraltar law firm with a heritage stretching back to 1973, has given its full support to the country’s new regulatory framework for Distributed Ledger Technology (DLT) business, such as the blockchain which supports many cryptocurrencies.
Gibraltar, the British territory, has made headline news in the cryptocurrency world after becoming the first to create a comprehensive regulation for DLT or blockchain businesses that is set to be developed further on the landmark regulation already created aiming within the next year to provide a gateway for Ethereum Initial Coin Offerings (ICO) which are banned in locations such as China and South Korea, and offering them a trustworthy destination.
Ellul & Co has laid out in detail how it expects the new regulations, which were unveiled on Thursday, October 12th, will benefit Gibraltar as it becomes the first jurisdiction to introduce laws to regulate all types of DLT business.
The laws will come into effect in January 2018, and the reputed legal experts – who specialize in corporate and commercial projects, admiralty and shipping, company management and yacht/ship registration – have highlighted the significance of Gibraltar introducing the comprehensive regulatory framework. While limited regulation of certain DLT use cases has been applied in a small number of locations, no set of laws such as those which will be implemented in Gibraltar have been seen up until now.
Gibraltar – both its government and financial regulator, the Gibraltar Financial Services Commission (GFSC) – has recognized that DLT is already providing innovative and transformational changes in the business world. DLT and the blockchain it enables are the backbone of Bitcoin and other cryptocurrencies which are currently making big waves in investment circles. Gibraltar and Ellul & Co are embracing DLT and believe that the framework can only be beneficial as the country seeks to create an environment which is both safe and well regulated for DLT-based businesses.
The new law provides for the regulation of any person or company: “Carrying on by way of business, in or from Gibraltar, the use of distributed ledger technology for storing or transmitting value belonging to others.”
It will allow a multitude of businesses to be regulated if they conduct their operations from Gibraltar, these types of companies can include:
- Centralised VS scheme administrators (e.g. loyalty points, in-game currency)
- Custodian VC wallet providers
- Non-custodian VC wallet service providers
- Clearing and settlement systems
- Trading platforms
- VC exchanges (between fiat & VC, and VC-to-VC)
- Peer-to-peer VC exchange platform operators
- Holding, as a business, VC for others
- Remittance service providers
- B2B payment network operators
- Payment service providers
- Escrow service providers
- Issuers of asset-backed tokens
- Issuers of income distribution tokens
- Custodian VC wallet providers
- Issuers of devices containing pre-loaded VC
- Issuers of VC vouchers and pre-loaded paper wallets
- Issuers of unregulated securities
- Peer-to-peer gaming platform operators
- Peer-to-peer insurance platforms
With one eye on the future, Ellul & Co has confirmed that the Gibraltar government and GFSC are in agreement that the framework should be flexible enough to adapt to new use cases of DLT, and able to respond to the change that will inevitably lie ahead. Ellul & Co believes that this is a key consideration when planning to accommodate the evolutionary nature of the DLT sector.
The Gibraltar government has announced nine regulatory principles which, under the new framework, DLT firms in Gibraltar must now adhere to:
1. Conduct their business with honesty and integrity.
2. Pay due regard to the interests and needs of each and all its customers and communicate with them in a way that is fair, clear and not misleading.
3. Maintain adequate financial and non-financial resources.
4. Manage and control their business effectively, and conduct its business with due skill, care and diligence; including having proper regard to risks to its business and customers.
5. Have effective arrangements in place for the protection of customer assets and money when they are responsible for them.
6. Have effective corporate governance arrangements.
7. Ensure that all of their systems and security access protocols are maintained to appropriate high standards.
8. Have systems in place to prevent, detect and disclose financial crime risks such as money laundering and terrorist financing.
9. Be resilient and have contingency arrangements for the orderly and solvent wind down of its business.
Recognising that the framework should be relative to the size of businesses, as well as their profile and model, the GFSC has stated that it will reserve the right to apply conditions proportionately.
The GFSC made the stipulation on conditions such as “those relating to use case, business model, market, geographical exposure, product, service, size of the firm, the scale of operation, management experience and track record, and financial and technical risk. Such conditions and restrictions may be applied to all DLT firms, to a single firm or to groups of firms, or by category of firm, use case, business model or risk profile, or by type of product and service provided.”
Ellul & Co is adamant that the case for regulation is compelling, especially in light of possible scenarios such as the money laundering which was reported to have been carried out by Bitcoin exchange BTC-e, highlighting the risks involved with DLT businesses.
It is expected that the new set of regulations will be a clear demonstration of Gibraltar’s understanding of DLT business, and an important signal that the country is taking an innovative approach which could see it develop into a fully regulated, global cryptocurrency hub. Other jurisdictions are working towards similar aims but the Gibraltar government and Ellul & Co are proud to have got there first.
Cryptocurrency Advisor Trent Challis commented:
“DLT Investors can now have confidence in the fact that if they select a Gibraltar-licensed DLT firm and are actively supervised and have regulatory principles attached. It sends the message that Gibraltar understands DLT business, embraces innovation and is willing and able to license good quality firms. Our DLT firms will have credibility and the confidence of their customers; central features of any successful business. Such firms will find a comfortable home in Gibraltar.”
– The Financial Services (Distributed Ledger Technology Providers) Regulations 2017 together with a Bill for an Act to amend the Financial Services (Investment and Fiduciary Services) Act.
– HM Government of Gibraltar, Ministry for Commerce, Gibraltar Finance, consultation paper on proposals for a DLT Regulatory Framework, May 2017.