Jonathan Garcia, partner at law firm ISOLAS, explores Gibraltar’s rise as a leading hub for virtual asset service providers (VASPs) by striking a unique balance between regulatory diligence and operational flexibility.
Garcia has a wealth of experience across the financial services, corporate advisory, regulatory and DLT practice area.
Located at the southern tip of the Iberian Peninsula, Gibraltar, a British Overseas Territory, has swiftly established itself as a leading hub for Virtual Asset Service Providers (VASPs) seeking a balance between regulatory diligence and operational flexibility.
Renowned for its groundbreaking approach to overseeing Distributed Ledger Technology (DLT) and cryptocurrencies, Gibraltar presents an enticing blend of adaptability and resilience. In this piece, we uncover the legal nuances, operational ease, and the intricate navigational path within Gibraltar’s DLT regulatory terrain, all underpinned by its principles-based framework designed to nurture growth and ensure unwavering compliance.
Gibraltar’s ascendancy as a VASP haven traces back to January 2018 when it unveiled the DLT Regulatory Framework, a comprehensive set of regulations meticulously designed to embrace technological innovation while erecting steadfast bulwarks against financial malfeasance and consumer vulnerability. Distinguishing itself from the conventional ‘one-size-fits-all’ regulatory moulds, Gibraltar’s framework rests on a bedrock of principles. This approach provides VASPs with the autonomy to sculpt their operations while staying firmly anchored to overarching guiding principles.
Gibraltar’s regulatory framework requires VASPs to obtain a permission to operate. The Gibraltar Financial Services Commission (GFSC), the vanguard of regulatory oversight, shoulders the responsibility of bestowing these permissions.
Though the process might initially appear intricate, it is orchestrated to ensure that VASPs meet exacting standards spanning market integrity, security, compliance, and corporate governance, among others. The GFSC maintains a proactive stance by conducting regular oversight and compliance assessments. This approach not only promotes accountability but also helps VASPs identify and rectify potential issues promptly.
The ‘fit and proper’ appraisal
Central to Gibraltar’s regulatory framework is the rigorous ‘fit and proper’ appraisal of VASPs’ leadership and key personnel. This rigorous assessment guarantees that only individuals with an unblemished track record of competence and ethical probity helm these entities, safeguarding the sector’s reputation and customer trust.
In Gibraltar’s ecosystem, VASPs are called upon to exhibit financial robustness. Beyond operational necessities, they must demonstrate a capability to weather operational and cybersecurity risks. This dual-pronged mandate bolsters not just consumer protection but also reinforces the overall resilience of the ever-expanding crypto landscape.
Following the introduction of the DLT Regulatory Framework, Gibraltar introduced principles in the context of market integrity signifying a commitment to ensuring a secure and trustworthy environment for financial activities.
These principles centre on maintaining the credibility and trustworthiness of the DLT sector. They emphasise transparency, accurate disclosures and the prevention of market abuse, amongst others. By incorporating these principles, Gibraltar ensures a secure and ethical environment for DLT activities, deterring fraud and fostering a credible market ecosystem.
Gibraltar’s principles-based approach tailors regulation to the specific risks associated with each VASP. This ensures that regulation remains proportional to the scale and nature of the activities, preventing stifling overregulation.
Gibraltar’s adherence to international anti-money laundering (AML) and countering the financing of terrorism (CFT) standards ensures that VASPs play a crucial role in preventing financial crime. This commitment enhances Gibraltar’s reputation as a responsible financial jurisdiction.
Strengthening Gibraltar’s regulatory landscape
To complement the DLT Regulatory Framework and bring Gibraltar’s regulatory approach in alignment with FATF standards for virtual assets, the Government of Gibraltar in 2021 introduced a separate VASP registration regime capturing those proposing to undertake the following activities:
(a) undertakings that receive, whether on their own account or on behalf of another person, proceeds in any form from the sale of tokenised digital assets involving the use of DLT or a similar means of recording a digital representation of an asset; or
(b) persons that, by way of business, exchange, or arrange or make arrangements with a view to the exchange of:
i) virtual assets for money;
ii) money for virtual assets; or
iii) one virtual asset for another.
The supervision of these activities is solely aimed at countering the risks of money laundering, terrorist financing and proliferation financing, and ultimately the enhancement and protection of Gibraltar’s reputation as a leading finance centre.
The intention of the regime is therefore to capture for AML/CFT/CPF supervision purposes firms undertaking VASP activities that do not fall within scope of the DLT Regulatory Framework. Given the fact that the DLT Regulatory Framework requires firms to meet (and exceed) the requirements set out in the FATF Guidance, firms that fall within scope of the DLT Regulatory Framework, and are regulated as such, are not required to also register under this regime.
Similarly, entities holding existing permissions under the GFSC’s supervision are not required to register under this on the basis that they are already subject to AML/CFT/CPF requirements that meet or exceed those set out in the FATF Guidance. Such entities are required, however, to notify the GFSC prior to engaging in the provision of any activities that fall within scope of the regime.
Streamlined business setup processes
Gibraltar’s prowess extends beyond its regulatory framework. The Government of Gibraltar has implemented clear and transparent procedures, reducing bureaucratic complexities. This enables businesses to swiftly navigate through registration, licensing, and other essential requirements.
Gibraltar’s strategic geographical location also plays a significant role in facilitating business setup as, amongst other things, it provides easy access to global markets. This strategic advantage not only enhances trade opportunities but also fosters international connectivity, crucial for businesses in today’s interconnected world.
Furthermore, Gibraltar’s commitment to maintaining a robust financial sector ensures a stable and secure business environment. The jurisdiction’s adherence to international regulatory standards provides businesses with a sense of confidence and reliability. Additionally, the presence of experienced financial professionals and legal experts simplifies the process of compliance and regulatory adherence.
The availability of skilled talent is another advantage for businesses considering Gibraltar. The local workforce is well-educated, multilingual, and adaptable, providing businesses with the human resources needed to thrive in various industries.
Gibraltar’s government actively supports businesses by offering a range of incentives, including tax benefits and grants. This support bolsters VASPs’ growth prospects and incentivizes innovation.
Gibraltar’s success in positioning itself as a flexible yet robust jurisdiction for VASPs is attributed to its ability to strike a delicate balance between protecting customers and allowing innovation to flourish. By embracing innovation while implementing comprehensive safeguards, Gibraltar has created an ecosystem where VASPs can thrive without compromising on security or compliance.
Gibraltar’s journey towards becoming a haven for VASPs is a testament to its forward-thinking approach to regulatory frameworks. The DLT Regulatory Framework’s principles-based approach, coupled with the territory’s favourable business environment, positions Gibraltar as an exemplary jurisdiction for VASPs seeking to operate in a secure, compliant, and growth-oriented ecosystem.
As the crypto landscape continues to evolve, Gibraltar’s commitment to fostering innovation while maintaining regulatory integrity shines as a beacon of success.
