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Fintech
Businesses using new technology showing ‘extraordinary interest’ in new controls
Gibraltar’s aim to be the first financial services jurisdiction to regulate use of the blockchain technology that amongst other things gives life to myriad crypto currencies and crowdfunding ‘tokens’, is on course to be delivered at the year-end
business use cases of a financial nature.” Bitcoin, the virtual currency established in 2009, was the first major user of blockchain, a type of distributed ledger of unchangeable, worldwide digitally recorded data, such as the value of goods or services, in packagescalledblocks,butasyetitsuseisnot controlled in any way, including for anti- money laundering (AML), and consumers potentially are unprotected if things go wrong. “Under the new regime we will be regu- lating those firms, including for AML; we will be raising the bar”, Jones asserted, given that
Bitcoin does not have legal tender status.
Fully traceable
Although ransom software temporarily paralysed much of the NHS and companies worldwide and demanded payment in Bitcoin, Jones bridled: “Bitcoin is incredibly traceable – you can follow the money considerably more easily than you can with traditional payment systems - it’s open to view in real time. You can be damn sure that there are a lot of people watching that Bitcoin address and consequently the criminals have not been able to take advantage of, or make use of, the proceeds of their crime.” (See Cybercrime article, p16)
Pondering how to regulate “something that arguably doesn’t exist today”, Gomez’s solution was to make the framework “outcomes focused and principles based – we have identified nine key regulatory outcomes that we want to achieve in all cases and how they are achieved will be dealt with on a case-by-case basis, very much bearing in mind the specific of the business being proposed to us.”
Paul Astengo, a Gibraltar Finance senior executive, led a team that included Provasoli and David Parody, a regulatory consultant and former GFSC deputy chief executive to develop the DLT proposals.
Banks have generally been unwilling to fund crypto currency projects and wary of virtual currencies in part, it is alleged, because they see it as competing with their own business, as well as presenting ‘know your customer (KYC)’ challenges.
Jon Matonis, founding director at the Bitcoin Foundation, told attendees from New York, Brussels, London and Gibraltar: “In the
Continued overleaf
It’ll take time to catchup to changes, Adam Vaziri of Diacle (right) tells GFSC’s Nicky Gomez & Sian̂ Jones
After three years and repeated consultation on the proposed regulatory framework, there is already “extraordinary” interest from firms wanting to set up on The Rock. The proposed regulations for this fast-developing distributive ledger technology (DLT) cover businesses that hold, store or transmit other peoples’ value to a third party and are designed to “stand the test of time and to be flexible”.
As Gibraltar Financial Services Commission (GFSC) head of risk and innovation, Nicky Gomez, explained: “The key to our approach is to allow versatility, so that it can be adapted to whatever risk each potential business case might pose. A key requirement is collaboration, to ensure that, we are working together as a jurisdiction with advisors and potential applicants to ensure we understand the product and services they want to offer to customers.
“We can together then make an assessment of what the potential risks are to consumers, the potential risks to the reputation of Gibraltar and what controls can be put in place by the firm to manage or miti- gate that risk to a level that falls within our risk appetite.”
At least 15 firms have approached the GFSC about establishing DLT-based operations, most new to the territory.
“The interest has been nothing short of remarkable, mostly from people or firms outside of Gibraltar, who are considering launching or relocating an operation here”,
lawyer Anthony Provasoli, a partner at Hassans, told Gibraltar International.
It was “exciting to see how Gibraltar’s interest in crypto-currencies and blockchain has escalated over the last couple of months” including from local businesses that are keen to get involved in the sector, he said, and “the business models presented have been varied” with people “prepared to relocate themselves and a team of people to Gibraltar if necessary.”
The primary driver for the DLT framework is to encourage Gibraltar’s economic development. Firms and activities that are subject to another regulatory frame- work will continue to be regulated under that framework, but for newcomers falling within the scope of the DLT framework, it “provides regulatory certainty while meeting the challenge of regulating firms using nascent technology that is rapidly and continually evolving”.
The aim is to foster a fintech [financial technology] - and broader technology – start- up culture and encouraging its development as a centre of DLT excellence.
Among possible use cases are insurance claims management, inter-firm accounting reconciliation, mortgage loan applications and securities custody; those not covered by the proposed regulation include DLT software developers, technical services providers not controlling value belonging to others and investment advice about virtual currencies, (but that is likely to form part of an upcoming legislative reform programme).
The GFSC submits: “If successful, it is intended the framework could be expanded and applied to other new technologies with financial applications as well as to other innovative financial products, services and business models.” The government will appoint a specialist advisory panel, comprising technology and regulation experts in the field of DLT and virtual currencies.
Sian̂Jones,anexpertadvisortothe GFSC, emphasised: “We don’t intend to regulate the technology, it is the particular
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Gibraltar International
www.gibraltarinternational.com