Blockchain company Valereum is on the verge – subject to regulatory approval – of purchasing a 90% stake in the Gibraltar Stock Exchange (GSX). The move proposes to create the world’s first integrated bourse where conventional bonds can be traded alongside cryptoassets and currencies. This development brings into sharp focus Gibraltar’s blossoming reputation as a pioneering jurisdiction in the Distributed Ledger Technology (DLT) space.
Elliot Phillips, Partner; and Paul Grant, Associate, Signature Litigation LLP share their thoughts on how Gibraltar is pioneering cryptocurrency regulation
The Valereum Bid for GSX
Valereum’s stated aim is to provide technology for linking mainstream conventional currencies with crypto assets. The takeover is currently subject to review and approval by the Gibraltar Financial Services Commission (GFSC). The company has also signed a purchase agreement with the Juno Group, a Gibraltar-based trust management company, for the provision of custody services for the cryptocurrency assets acquired in the exchange. This too requires ratification by the GFSC.
Is Gibraltar ready for this?
Whilst other countries have adopted a cautious approach to crypto assets, either by banning or warning against investing in them, Gibraltar has sought to cultivate a buoyant environment for its licenced blockchain firms predicated upon regulatory certainty and transparency, the stated purpose of which is the protection of consumers and the weeding out of bad actors. The figures do not lie – just fourteen firms have thus far been approved for its licensing scheme.
At a regulatory level, the GFSC has developed its experience in bringing the activity of crypto businesses and funds within the scope of prudential supervision and not simply subject to registration requirements. Following the establishment of a working group in 2014 comprising leading finance centre experts, a consultation paper was commissioned by the Gibraltar Government in 2017 which laid foundations for the regulatory framework which came into effect on 1 January 2018. The Rock has done the hard yards, so to speak.
Valereum’s proposed overhaul of GSX speaks to Gibraltar’s evolution into a thriving and respectable player in the global crypto space. Minister for digital and financial services, Albert Isola, has heralded the efforts made to shed archaic views of the Rock as a tax haven. Amongst other steps, the jurisdiction has overhauled its policies on tax and information sharing (not least through the signing of numerous Tax Information Exchange Agreements). The focus upon regulation follows the same vein of regulatory openness.
Gibraltar’s record of compliance with the Financial Action Task Force (FATF) anti-money laundering (AML) requirements has also been praised. Per the most recent FATF assessment in 2019, the Rock had no record of terrorist financing whether through e-money or otherwise. It has mostly implemented FATF recommendations with respect to Virtual Assets and Virtual Asset Service Providers – in sharp contrast to many other jurisdictions. The focus is firmly on preventing, rather than enabling criminal behaviour.
What are the risks?
The view beyond Gibraltar is less certain. Some experts have highlighted the risk of international sanction and/or reputational damage should Gibraltar fall prey to money launderers using approved crypto firms as vehicles for criminality. This continues to be a concern for global financial regulators. Malta, for example, provides a cautionary tale of a jurisdiction grey-listed by FATF for lacking financial crime safeguards; the consequences of which may yet be felt by the Maltese economy more widely.
Others view Gibraltar’s regulatory regime as so rigorous as to prohibit entry to the marketplace and deter potential investors. . The more cavalier view is that jurisdiction of Gibraltar’s size might – as an agile and robust economy – be forgiven for preferring a riskier approach to DLT.
But that is not the image Gibraltar wishes to project. Even at the height of the initial coin offering boom in 2018, Gibraltar brought companies offering tokens within the ambit of its Proceeds of Crime and AML regime. The decision was heralded at the time by many technologists and economists as both savvy and sensible. Gibraltar has also implemented further FATF recommendations and, unlike many jurisdictions, also requires regulatory registration with the GFSC for token sales in Gibraltar. Tempting as it may have been to ride the wave, the Rock opted instead to persist with its belt and braces approach. The onus remains on facilitating fewer but higher calibre crypto firms.
The view of many on the ground is that the Valereum takeover of GSX represents another possible milestone for Gibraltar as a gateway to global business in the burgeoning crypto marketplace and further endorsement of its ‘right tough, not light touch’ regulatory environment. Minister Isola has some cautionary words for naysayers and would-be bad actors: “If you wanted to do naughty things in crypto, you wouldn’t be in Gibraltar, because the firms are licensed and regulated, and they aren’t anywhere else in the world”.