The 2018 cryptocurrency crash has not halted growth

The 2018 cryptocurrency crash has not halted growth


A spectacular crash in cryptocurrency prices at the end of last year, had a subsequent roller coaster effect and a decline in digital business crowd funding (ICOs), but the digital financial services sector is still going strong, Ray Spencer reports


Gibraltar launched the world’s first blockchain / Distributed Ledger Technology (DLT) regulation in January 2018, and is now gradually increasing its licensing activity. The jurisdiction is poised again to trail blaze with the launch of token sector regulation, albeit a year later than anticipated.

In 2018 Q1, 30 DLT license applications reportedly were received. By mid-April this year only seven firms had been approved and almost all were cryptocurrency exchange-related, including some of the world’s largest such enterprises!

Nicky Gomez, Gibraltar Financial Services Commission (GFSC) head of risk & innovation, said some were aimed at start-up businesses and others at established operations that had “decided to run its [sic] virtual asset business in a regulated environment”.

He explained that businesses using DLT to store or transmit value belonging to others and operating from Gibraltar before January last year, were given three months to submit an application if they wished to continue trading under transitional arrangements. A robust assessment to ensure applicants comply with the nine regulatory principles is required before a DLT Provider licence can be issued.

“In a principles based regulatory regime, an open dialogue and collaboration between the regulator, applicants and their advisors is necessary in order to ensure applicants have adequate controls to meet the nine regulatory principles and outcomes that will deliver protection to customers, Gibraltar’s reputation and reduce the potential for financial crime”, Gomez asserted.

Regulation new to techies

GFSC technical specialist, Nathan Catania, pointed out: “In particular, some applicants are from tech-based businesses and are not used to dealing with regulatory requirements in their operations, which makes the need for transparency, dialogue and clear communication of our expectations even greater.”

There were a further nine applications with in principle decisions pending a full DLT license “and there are [still] more in train”, Gomez noted. However, he revealed: “To date, a few firms, have for different reasons, decided to withdraw their application at different stages of the authorisation process”.

LMAX Digital, an electronic exchange formed in May 2018 dealing in foreign exchange (FX) and crypto currencies for institutional clients, revealed in March that it was awaiting DLT license approval. Parent company, LMAX Exchange Group, has traded over US$12trillion at multiple FX trading venues worldwide. Others, such as TokenMarket and, have also received in-principle decisions from GFSC.

The earliest applications took over six months to gain approval, double the time originally expected. According to Paul Astengo, the government-supported Gibraltar Finance senior executive with responsibility for innovation and technology initiatives: “A lot depends on the quality of the applications the complexity of the proposed activity and how well-presented the cases are; they’re being processed more quickly and generally it now takes closer to three months. It has been a learning curve for us all, including applicants, practitioners and the GFSC.”


DLT beyond finance

Recent DLT-license applications are challenging areas of blockchain activity other than being crypto-related. Astengo confirmed: “There are applications in course that are concerned with other areas of industry, not just financial services, run by advisory firms to aid, for example, detailed business planning that previously might have involved hiring a human management consult to consider.”

A year ago, Gnosis was attracted to set up headquarters in Gibraltar after its US$12.5m token sale, and established the Olympia prediction platform to “aggregate information about the expected outcome of a future event” from climate change, gauging the price of a piece of art before auction, or forecasting epidemics”.

Minister for commerce, Albert Isola, enthused: “There is a real vibrancy emanating from Gibraltar’s growing blockchain ecosystem.” He added: “We have set a high bar for prospective DLT providers. We are committed to upholding the highest standards in our expanding blockchain ecosystem, and remain deeply committed to our principles-based approach to DLT regulation.”


Fly in ointment

The fly in the ointment has been the sudden crash in digital currency prices last year. In November, for example, crypto currency valuations fell by a third in one week and have been volatile since.

In response to late-March questions, Nick Cowan, chief executive of Gibraltar Stock Exchange (GSX) Group, observed: “Having been a trader in the 1987 as well as the 2008 crash, I have seen the financial industry go through many significant bear and bull markets, such that 18 months ago Bitcoin, [the largest crypto currency by far] was at the same price it is today.

“What happened in between was a combination of greed (versus fear) and simple hype”, he opined adding that most major exchanges saw a drop in crypto business volume and prices down by 90% since the peak.

Cryptocurrencies form a major part of GSX Group activity, but since receiving its DLT license in November, business had grown, “particularly with our insurance cover for theft from our wallets”. He cautioned: “When markets suffer the type of falls seen, many people who entered the market seeking gains (without understanding the underlying technology, perhaps) naturally withdraw or move on.”

Coinfloor trades Bitcoin for institutional and ‘sophisticated investors’, and in 2013 became the UK’s first crypto exchange, and in October 2018 it gained a Gibraltar DLT licence.

In January, the firm reportedly was “scaling back activities for now”, a move described by industry pundits as “sensible” and “responsible to protect the long-term future of the business”. Coinfloor expects to return to its previous level of activity by the year-end.

Set up in the US in 2007 “to reduce dependency on traditional financial institutions” eToro is now a market-leading internet trading platform and gained its Gibraltar DLT licence in December, along with Huobi Technology (Gibraltar), which is part of a leading Singaporian blockchain group boasting over US$1trillion turnover from users in 130+ countries. Huobi said: “It’s no secret that we think that well-designed regulatory applications, from liquidity to safe storage with military grade security layers”.

“Among other benefits, our [Gibraltar] DLT license will allow us to open doors to more institutional investors who were previously unable or unwilling to get involved in an unregulated sphere,” Li stated.

First Digital Assets Group, operating as Eppur Group, gained its DLT license in March to “create building blocks for blockchain applications, from liquidity to safe storage with military grade security layers”.

Coinsilium Group, a blockchain investment and advisory firm, in March moved its core operations from London to reduce operating costs and put more resources into investment activity and advisory services. Executive chairman Malcolm Palle, relocated to Gibraltar to recruit staff before summer, and declared: “It’s not just regulation that is attractive – it is also because banking is better and the jurisdiction is ahead of the curve”.

Palle said Gibraltar’s private Turicum Bank “has a good understanding of how DLT and crypto companies work and is more open-minded to the sector, whereas many other banks have a blind spot with regard to blockchain”.   Firms involved with cryptocurrencies have experienced widespread difficulty in obtaining bank accounts in main financial jurisdictions, sometimes instead choosing eastern European jurisdictions and Euro bank accounts.

“It’s about the banks being comfortable on where the money has come from to satisfy their know-your-customer (KYC) and anti-money laundering (AML) obligations. With money into businesses arising from cryptocurrency activity, the banks need comfort on the source of funds,” Palle observed.

While State-owned Gibraltar International Bank (GIB) is accepting of crypto businesses, its reciprocal British bank, [the Royal Bank of Scotland], is not and reportedly refused last year to process orders from locally based crypto firms.

GIB chief executive, Lawrence Podesta, told Gibraltar International: “It is still very difficult to engage with institutions [that] are willing to entertain payment channels, in and out, for any monies related to FinTech business.” He disclosed: “A number of meetings with some institutions were arranged in April. I am optimistic and hopeful that we can revive this area of activity within the next few months.”

The Gibraltar Blockchain Exchange (GBX), which runs an initial coins-offering marketplace as a subsidiary of Gibraltar Stock Exchange (GSX), gained its DLT license last November reportedly after 180 days of preparation. GSX Group now employs 100 people – 70 at its Gibraltar headquarters, and the rest in London, Hong Kong and Singapore.


Blockchain transformational

Bitcoin is not legal tender in Gibraltar. It will not regulate the currencies, but will license firms that have business in or from Gibraltar, for the use of DLT for storing or transmitting value belonging to others. The jurisdiction’s consistent view is that the underlying blockchain technology is what is transformational.

Nick Cowan, GSX Group chief executive, declared: “Gibraltar has found the right blend of sensible and supportive regulation, which has helped position the jurisdiction as a lodestar for the global crypto currency space” and suggested: “Crucially, here in Gibraltar there has been a realization that the pursuit of innovation should never come at the expense of sustainability and long-term development.”

There is continuing interest from operators in becoming a licensed DLT provider, insisted Peter Howitt, director of Gibraltar’s Ramparts Law, “though the bear market for crypto has made it tougher for many operators to afford the licensing and set up costs given the drop in revenue and also asset value for those holding their own assets in crypto!”

There is no harmonised approach at EU level to the regulation of virtual currencies or the use of blockchain technologies in areas that overlap with more traditional financial services.

Gibraltar’s planned Tokens regulation, including initial coin offerings (ICOs) – used across the world to crowdfund multi-millions of pounds for new and established businesses – was expected in mid-2018, but the slump in crypto market activity of all types contributed to make the launch less urgent.

A Tokens Bill was eventually published in February and after industry consultation it is now expected to take effect in May 2019. Tokens offerings will need to be made through licensed ‘authorised sponsors’, who will be required to ensure compliance to the regulator’s principles and adherence to authorised codes of practice for each issue.

Research from Atlantic NeoTechnologies (ANT), a specialist service company for digital currencies, tokens and ICO projects, suggests ICO funds raised through Gibraltar rose from around US$40m in Q3 2017 to US$340m by end-2018.

While crypto exchanges such as GBX [which itself attracted over US$27m in a seven day February 2018 token offering] accounted for a quarter of Gibraltar’s ICO activity, other areas showed “even more signs of acceleration and diversification” across 15 sectors, including commerce, healthcare, infrastructure and energy, according to Alain Chevee, chief executive of ANT, with offices in Geneva, Luxembourg and Gibraltar.

Chevee’s report on information website,, noted: “We see that Gibraltar is clearly a major player in terms of pro-ICO regulation, expertise and the number of ICOs in proportion to its size as a jurisdiction. The development of an ICO industry is undoubtedly an investment for the future of Gibraltar’s economy as the funds raised by ICOs will continue feeding and seeding projects, no matter how the crypto-currency industry evolves meanwhile.”


ICOs investment in future

But pointedly, Chevee stated: “The key relevant question now [is] whether Gibraltar will stay ahead of the curve in the future when bigger countries clarify their stance on ICO regulation and major banks and other actors enter into play!”

The test for Gibraltar’s DLT regime, and forthcoming tokens regulation – where it will be the first in the world – is the extent to which other jurisdictions accept those standards for Gibraltar licensed businesses operating in their countries. The UK does not regulate firms working with blockchain, or tokens offerings.

Ramparts in January told Lexology, an online news feed: “ Whether by regulation or cross-party industry agreement on a self- regulatory basis, it is expected that Gibraltar will take a lead in managing the risks and setting the standards that should be applied in this fast-growing [tokens] sector. Most jurisdictions (including the United States) expect a detailed case-by-case assessment of whether any such crowdfunding may constitute the offer of securities (including whether they constitute a form of investment fund).”

GSX believes that the future for capital markets rests with the tokenisation of securities, known as ‘smart securities’. “The efficiencies, cost reductions and instantaneous transferability can have seismic transformational effects as to how securities are traded, cleared and settled,” Cowan asserted.

To develop its own digital exchange, GSX Group established a joint venture subsidiary, Hashstacs Inc, last year in Singapore, with a team of 40+ developers to prepare its STACS Network to begin trading digital securities later this year.

Huobi revealed that now licensed, it is looking at “exciting possibilities for simplified and efficient fiat-to-crypto and crypto-to-fiat functionality” and also expects to roll out in the first half of this year “a concerted move into the regulated financial product space”.

Howitt noted that while “ICO’s have really died out… there is lots of focus on equity offerings with tokens (so called Security Token Offerings).” He advised: “Gibraltar can become a leader in the tokenised securities sector if we properly balance speed to market and reduced costs with necessary regulatory controls and supervision.”

Crypto funds are one area where tokenised assets are expected to make an impact and help revive Gibraltar’s traditional funds sector, which in recent years has not grown as expected.

In 2014, [the last year in which GFSC published statistics] there were some 180 funds strategies in operation, 88 being Experienced Investor Funds (EIFs), with roughly £2.5 billion of assets being managed, according to Gibraltar Funds & Investments Association (GFIA). Today there were around 75 EIF fund strategies (including cells in PCCs), plus a number of private funds, association chairman, James Lasry, estimated


Crypto funds activity

“The sector has been contracting, but finally we have seen a steadying of that and we are launching some new funds, which is very good”, he remarked in early April.

Lasry, a partner in Hassans law firm, pointed out: “We are the only jurisdiction in continental Europe that allows the pre-authorisation launch of funds for experienced investors, even when they are sub-AIFM threshold. This is because our funds include two experienced investor fund directors, who are preapproved by the GFSC to ensure proper corporate governance.”

Amended legislation late last year allows non-residents to be authorised as EIF Directors, “because firms who have large funds businesses may already have their own cadre of very well-qualified directors and they don’t necessarily want to use new directors who are unknown to them in order to set up in Gibraltar”, Lasry explained. “We encountered some objections to this when we were in Hong Kong on a number of seminars there, so this stumbling block has been removed.” The first applicant to benefit is understood to be a prominent compliance consultant with senior US and UK experience.

“Our regime is so flexible – there are no limitations on asset class unlike most other jurisdictions – so we have been able to set up crypto funds and we are looking at funds that invest in medicinal cannabis companies, provided of course, that those companies are lawful in the places where they are active”, GFIA’s chairman revealed.

Lasry’s firm had received a number of such enquiries, including three from one London law practice, and other GFIA members similarly had been approached. “We are also looking at exchange traded funds, which we feel can fit in with our legislation,” he added.

A GFIA Code of Conduct for crypto funds was established last year as the first of its kind worldwide and has received international acclaim, because although the principles of corporate governance are universal, there are scenarios that are specific to crypto funds that require specialist knowledge to set up.