Balancing benefits and risks for supporting crypto currencies

With security, regulation and taxation issues to be considered, Gibraltar’s government is debating whether it should provide a home for rapidly growing virtual currencies, like Bitcoin.

After UK Chancellor of the Exchequer, George Osborne, last summer prompted a Treasury investigation into the positive impact digital currencies could have on monetary policy and economic development, Gibraltar similarly is now being urged to suggest a licensing regime that would help legitimise the sector and create a business opportunity for the jurisdiction.

Described by some as “this year’s sexy subject”, electronic currencies offer the possibility of reducing payment processing costs and improving eGaming player experience, according to KPMG Gibraltar managing director, Micky Swindale.

At a December ‘Decrypting the Myths’ seminar that KPMG organised at the Sunborn Hotel, she revealed: “Over the past year, we have been surprised on many occasions by the suspicion and sometimes fear we encountered when we raised the subject of digital currencies with our fellow professionals.”

Tony Provasoli, senior Partner at local law firm Hassans, the event’s lead sponsor, declared: “This industry could very easily become the ‘next eGaming’. It is of extreme importance to us as a jurisdiction that we stay abreast of the technology’s development – as well as the tax, regulation, and security issues surrounding this opportunity so that we can be prepared – in order to ensure Gibraltar does not miss out on this global trend.”

To find out more about crypto currencies and how they operate, Gibraltar’s Financial Services Minister Albert Isola, visited in September a similar KPMG seminar in the Isle of Man attended by over 200 entrepreneurs building and funding new businesses in the digital currency space.

The term “Crypto” or digital currency is used to cover all forms of electronic currency that does not have legal tender, including the digital representation of value that can be traded: it functions as a medium of exchange, store of value or unit of account, but does not have legal tender status.

Of the 500+ virtual currencies that exist, the 21m Bitcoins account for around 93% and they are the most widely used.

Miles Paschini, Group president, of Gibraltar-based Wave Crest (WC), which provides a payment solution that bridges traditional currencies with alternative ones, told delegates: “Bitcoin is an innovation with early adopters and early usage, but by 2030 there will be a Bitcoin credit card.” Bitcoin is only the first application of this new technology.

In the meantime, it was necessary to make Bitcoin easier to buy and sell and to see that it is accepted by merchants and banks everywhere, which is where the WC technical platform could assist.

He said: “There are existing miners [currency creators] and some 100,000 merchants now using the electronic currency, while the buyers and sellers of crypto currencies are traders, investors and there are some financial transactions, as well as use by some private individuals; but to succeed the system needs to expand.”

Bitcoin is not issued by any jurisdiction and operates through recognition by the community of users – willing buyers and sellers of a ‘coin’ whose value is determined by demand. Formed in 2009, Bitcoin first gained an initial exchange rate of US$0.0008:0.08btc, but the first real-world transaction was in the US in mid 2010 for a pizza! By late 2013, Bitcoin reached US$1250:1btc and there is high price volatility.

Mainstream by 2030

Crypto currencies use cryptography to control its creation and management on line; holders are usually anonymous. As Eric Benz, Operations Director Europe, Middle East and Africa for GoCoin, an exchange for crypto currencies, noted: “There has been exponential growth and interest in crypto currencies generally since the summer.

Bitcoin will be mainstream by 2030 when consumers and businesses will be accessing crypto currencies, in a similar way to that experienced with the internet today.” However, he also noted that the success of virtual currencies depended on transparency and trust.

Benz, who is a founding member of United Kingdom Digital Currencies (UKDC), explained how Bitcoin is a decentralised currency – no banks or clearing houses (the account cannot be frozen) and it can be exchanged for various different existing currencies like Sterling, Euro and US Dollar, for example. And he maintained: “It is already having an impact on financial markets, particularly in developing regions, in real estate, on-line gaming, the travel sector and charities where the coins are accepted.”

Gaming to benefit

In 1993 people were urged to develop internet strategies he argued, but “by 1994 we needed to wise up and see how the technology could be leveraged and add to business”.

As with other presenters, Benz felt eGaming – where Gibraltar is the leading jurisdiction worldwide – was likely to benefit most quickly from the growth of crypto currencies, which provided payment certainty, instantly. Virtual currency payments are not reversible. “In five years more than half of all gaming will be in Bitcoin – or perhaps even in three years”, he speculated.

But will sufficient new business come to Gibraltar if it embraces the concept of crypto currencies with legislation to regulate activities – and what about the potential effect on the jurisdictions financial services reputation if things go wrong?

A working party of industry experts in conjunction with the Gibraltar government has prepared a report that has been shared with interested parties for comment during the first quarter of this year.

The reputational risks presented by virtual currencies are our greatest concern, which is why we are taking a cautious approach rather than rushing in to embrace this business”, Minister for Financial Services, Albert Isola, told Gibraltar International.

Traditionally, we have had quite a negative outlook on this sector, but the quality of people now getting involved and also the potential link with eGaming caused us to take a fresh look at the potential benefits”, he added.

Protecting consumers

However, he believes there is not yet sufficient clarity on the subject for firm decisions to be made, “but the indications are that if we do get involved it would be in a limited way and with the aim of protecting consumers”.

The UK was “trying to create more excitement around virtual currencies whilst the entities involved want regulation to gain greater credibility”, Isola suggested. Take up by the eGaming sector may not be as strong as has been suggested, and Isola emphasised that “above all we do not want to be involved with anything that will cause reputational damage to the jurisdiction’s financial community.”

Sian Jones, who jointly leads the UK Digital Currency Association regulation working group, explained: “The approach to regulation presently varies from outright bans – Russia, where legislation is proposed against use of ‘unofficial currencies’, and Bolivia – to technology-specific licenses, payment regulation, and to no regulation at all, and sometimes with positive encouragement.”

China had no formal regulation, but restricted the crypto currency to business (rather than personal) use, she said, whilst the US had a diverse approach with some States requiring regulation and others, like Texas, with no regulation other than for money transmission, and New York with technology-specific Bitcoin licensing.

There is no EU-wide regulation, although there has been some discussion on this, but the UK has adopted a favourable tax position [for digital currency transactions] to treat like VAT and encouragement and support from the Chancellor and the Treasury is looking for benefits – however, they are not rushing to regulate”, Jones admitted.

The Isle of Man government required licensing of virtual currencies, but not prudential or business conduct regulation, however the sector will be included in the Financial Services Commission anti-money laundering oversight, she said.

Paschini’s Wave Crest, which also has offices in India, US and UK, is already licenced as an eMoney issuer by Gibraltar’s Financial Services Commission and WC is a founder member of the Gibraltar Electronic Money Association (GEMA), an industry body acting in dealings with regulators and international organisations.

Currently, for digital currency to gain greater acceptability there is a need for bridging stations – a link for eMoney accounts, payment services for virtual currency ‘wallets’ and exchanges for transfer of Fiat [not paper money] between parties, whilst performing Anti-money laundering (AML) and Know Your Customer (KYC) checks.

Having experienced firsthand the complexity of international payments whilst chief operating officer for Gibraltar-based PartyGaming (now, Bhagwan D. Goel, founded Wave Crest in 2009.

The company aims to “help transfer money from traditional bank accounts to eMoney accounts and to then buy crypto currency, and back again, which will not be a problem in 2030; but until then there is a need for a process”, Paschini explained.

Jobs opportunity

Ben Robinson, Europe, Middle East and Africa sales and marketing director for GoCoin, a US-based international payments platform for Bitcoin, told delegates: “As with eGaming, high risk industries tend to innovate more quickly and attract entrepreneurs. However, banks first need a brand for people to join before getting involved, and things will need to be regulated.

For Gibraltar, there are opportunities in job creation and new innovation businesses,” he said. It was a point picked up by Jon Matonis, founding board director of the Washington-based Bitcoin Foundation who said: “Gibraltar can become a jurisdiction leader in Crypto currency deals. It’s not black arts, but it will enhance our credibility; possibly even formation of a Bitcoin Bank in Gibraltar!”

Gibraltar’s eMoney association is small – it has four member-firms currently, but “we are seeing increasing interest from other firms looking to come to Gibraltar from the USA and elsewhere”, said lawyer Peter Howitt, who is GEMA’s secretary.

Given his work experience in regulated online gambling and ePayments, and representational role for the local sector, Howitt noted how the Bitcoin community is “looking for a supportive regulatory environment to add regulatory credibility and consumer confidence to the use of crypto currencies”.

And he declared: “Clearly this new technology can be quite challenging to the existing financial services framework and central banks and so it will be very important to get the regulatory balance right if Gibraltar does wish to provide a supportive, business friendly and safe regulatory environment for this new sector.

Digital currency is a very big opportunity for Gibraltar, if the balance can be struck between supporting innovation and protecting the existing regulated sectors and finding a suitable regulatory structure for Bitcoin, etc”, Howitt confirmed.