Gibraltar’s role in the future of Crypto

By Jonathan Garcia, Partner, ISOLAS LLP

When FTX collapsed in November 2022 it shook the entire digital assets ecosystem; currency values plunged, and consumers, institutions, and regulators panicked. The entire industry was dominated by fear and shock. For one of the world’s largest cryptocurrency exchanges, trusted by over a million users to collapse, will go down as one of the darkest days in the industry’s evolution. In 2023, while immediate fears of a catastrophe have faded, the collapse has shaken the industry and businesses will have to work on winning back public and institutional trust. It won’t be easy, but by drawing on the industry’s strengths, it is possible.

Failure of internal corporate controls

Unlike many critics had predicted (or in some cases hoped for), the collapse was not a fault of the technology, which is proven and safe, but rather a complete failure of oversight, proving the need for increased scrutiny and due diligence. The FTX collapse represents a comprehensive failure of internal corporate controls and no risk management, to a large extent missed until it was too late. While it could be thought that the crash being caused by human error will make it difficult to rebuild customer trust, the reality is that embracing its technology-enabled decentralised heritage and ramping up investor protections will, in time, allow that trust to rebuild. Crypto was conceived as a way to democratise currencies, putting control of trades and ownership with users.

Robust regulation has shown itself as a useful tool in many asset classes as they develop – bringing a recognised rule book to industries that otherwise may seem unfamiliar. To rebuild trust in the sector, companies should begin work to expand their regulatory footprints. By embracing multi-jurisdictional regulation, companies voluntarily put themselves up for enhanced scrutiny, improving trust in the integrity of their processes. This multi-jurisdictional approach can also reduce the risk of missed warning signs, helping to protect a business, its investors and leadership, and customers – vital as cryptocurrency usage continues to rapidly increase.

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Gibraltar a robust and dynamic regulatory choice

The Rock is strategically placed to serve as a cornerstone jurisdiction for entities exploring regulatory approvals in different territories. The jurisdictions ‘right touch, not light touch’ regime, coupled with the 10 core principles, including corporate governance requirements, segregation of client assets and more recently setting the standards for market integrity, makes Gibraltar a robust and dynamic regulatory choice.

This pedigree is already well-proven. More than 15 regulated DLT Providers are operating in Gibraltar. The Gibraltar Financial Services Commission (GFSC) is responsible for regulating and supervising DLT activities in Gibraltar and monitoring compliance – a role in which they have proven themselves and won international plaudits. Adding to the landscape of scrutiny, are the Gibraltar Financial Intelligence Unit (GFIU) an entity responsible for facilitating the receipt, analysis, and transaction reports. This added layer of scrutiny allows regulators to keep tabs on financial dealings and serves to further build trust within the digital assets ecosystem.

Protection of client assets

On a practical level, a crucial principle Gibraltar has in place requires Distributed Technology Providers to have robust systems to ensure the protection of client assets and ensure strong corporate governance. These systems can also be used to prevent, detect, and disclose financial crime risks such as money laundering and terrorist financing. These principles protect customers and help prevent situations like FTX.

In 2018 Gibraltar became the first jurisdiction in the world to provide a purposebuilt regulatory framework for businesses that use Blockchain or Distributed Ledger Technology (DLT), allowing firms to operate in or from the Rock with confidence. Gibraltar is a leading jurisdiction for strong regulations in the cryptocurrency industry and continues to develop rules to protect consumers and encourage innovation.

This year serves as an opportunity for Gibraltar to step up to the mark once again and cement itself as a vital jurisdiction in the industry’s global development. As the industry evolves, I have already seen some of my clients look to pursue licenses in Gibraltar as well as the other territories in which they hold licenses, and it seems a welcome trend. Choosing a multi-jurisdictional regulatory footprint looks set to be a prudent approach. Drawing on our rich ecosystem of DLT companies and service providers, coupled with research, education, and good, dynamic governance, we here in Gibraltar are ready to play our part in continuing to serve the growing global industry as it works to rebuild consumer trust and step into a new era of adoption.