Crypto regulation in Gibraltar

Gibraltar is an example of a jurisdiction that has introduced rules aimed at attracting blockchain and crypto companies. Gibraltar’s approach was named “progressive”, and as a result the country became the preferred jurisdiction for many cryptocurrency companies.

DLT Regulatory Framework

Gibraltar developed special legislation known as the DLT Regulation System (Distributed Ledger Technology) which came into force on 1 January 2018 and applies to DLT firms, that is, which is, is not subject to any regulations or other legal framework,  which uses distributed register (DLT) technology to transfer or store valuables belonging to other persons. Activities that require DLT licenses include crypto exchanges, crypto-currency purse and asset storage service providers, crypto-currency purse providers, and DLT-based trading platforms that facilitate the purchase and sale of goods and services. Firms and activities subject to other regulatory frameworks will continue to be regulated within this framework. Distributors, including cryptocurrency exchanges and depositories, must be authorized and licensed by the Gibraltar Financial Services Commission (GFSC) as DLT suppliers.

DLT REQUIREMENTS

The Gibraltar Regulator’s approach to the DLT requires DLT suppliers to follow nine principles developed to ensure that the desired regulatory outcomes are achieved, including investor protection. The Gibraltar Regulatory Authority must meet the following nine basic requirements:

1. The HFC must ensure that the applicant and persons associated with the applicant are able to carry out the relevant activities of the DLT. The main elements identified by HFCs are: (i)integrity; (ii) skills, competence, diligence and experience; and (iii)financial status;
2. Pay due attention to the interests and needs of your clients and communicate with them honestly, clearly and not by mutual consent. The DLT provider should, inter alia, make every effort to reduce the risks associated with the use of DLT and apply best practices in its operations;
3. Maintaining sufficient financial and non-financial resources – DLT must ensure that it has sufficient financial resources and capital levels that are controlled and sufficient to support commercial purposes;
4. Effectively manage, control and conduct business with due diligence, including proper risk management for their businesses and customers, which includes adopting appropriate forward-looking risk management practices;
5. Have effective mechanisms to protect clients’ assets and money when they are responsible for them – DLT suppliers should take the necessary precautions to protect clients’ assets, and stored assets should be separated from the seller’s own assets;
6. There are effective corporate governance mechanisms – DLT suppliers must apply strict corporate governance procedures that include (a) board structure, including composition, to ensure a proper balance and combination of skills and experience to complement the business; (b) adequate application of the four eyes principle (separation of different functions, cross check, double signature, dual control of assets, etc.) and (c) Application of Gibraltar’s common sense and instructions;
7. Ensure that all secure access systems and protocols meet high standards;
8. Financial Crime Prevention – DLT providers should have systems in place to prevent, detect and disclose the risks of financial crimes such as money laundering and combating the financing of terrorism (AML/CFT).  DLT providers should adopt and implement appropriate preventive measures against money laundering and terrorist financing commensurate with their risks, and DLT suppliers should also report suspicious transactions where applicable; and
9. Be sustainable and develop contingency plans for orderly and solvent liquidation of their business.

These requirements and conditions will also apply to the licensing of cryptocurrency exchanges that trade only in virtual assets. The advantage is that there are no restrictions on the provision of services only to professional investors.

Gibraltar ranks third in terms of cryptocurrency hedge fund managers (after the US and the UK, and Hong Kong fourth). Gibraltar is also the fourth most popular home for crypto hedge funds. A positive development was the establishment of the Gibraltar New Technologies Association (GANT), which included Gibraltar’s leading law firms, accountants and technology companies. GANT has the task not only to accelerate the development of blockchain and DLT, but also to increase the prestige of «new technologies».

Crypto regulation in Gibgaltar overview

POD/FT regulation

In 2018, Gibraltar’s Proceeds of Crime Act 2015 was amended to extend the obligations under POC/FT to businesses that earn income from any form of sale of tokenized digital assets, whether on its own behalf or on behalf of another person. Licensed DLT suppliers are also required to comply with the Proceeds of Crime Act and relevant instructions issued by the Gibraltar Financial Services Commission.

The EU Fifth Anti-Money Laundering Directive (5AMLD) applies to Gibraltar and has been transposed to Gibraltar’s laws under the provisions of the Proceeds of Crime Act 2015 (Amendment) 2020. 5AMLD has included service providers who exchange between virtual currencies and fiat currencies, as well as custodial purse providers in AML / CTF Regulation. In 2017, however, Gibraltar had already regulated that activity. Under the laws of Gibraltar, anyone who uses DLT to store or transfer property belonging to another person is already subject to the Fourth Anti-Money Laundering Directive. Gibraltar did not include the 5AMLD provisions for cryptocurrency service providers and cryptocurrency wallet providers, as these service providers already have obligations under the GPO and FT as DLT providers.

ICO regulation

DLT rules do not specifically regulate ICOs, although they may be subject to existing securities rules. Gibraltar issued proposals to regulate the ICO in March 2018. The proposed rules would cover the promotion and sale of cryptographic tokens, secondary market platforms and token-related investment services and would regulate some cryptography-related activities,  carried out in or outside Gibraltar. The proposed regime would cover virtual assets beyond DLT and Gibraltar’s financial services and securities legislation.

It is important to note that GFSC stated that they do not want and do not see for themselves as a regulator the ability to prescribe what looks «good» when selling tokens. The GFSC would rather allow the market of authorized sponsors to offer different options on how well the ICO looks.

There are no individual management plans in Hong Kong. Instead, regulators have adopted a pragmatic approach whereby the SFC determines the status of ICO regulation on a case-by-case basis, depending on whether it has the features of traditional protection. If tokens are considered «securities», any party dealing with or advising on tokens must have a license or registration with the SFC. This, of course, is clearly inconsistent with the regulatory position in mainland China, but it is far from as progressive and proactive as the efforts in Gibraltar, where Hong Kong is the centre of regulatory approaches.

Activities to be regulated under the proposals (if carried out in or from Gibraltar) include:

1. Promotion, sale and distribution of tokens;
2. Secondary market trading platforms; and
3. Provision of symbolic investments and related services.

The offers will also introduce a requirement for the «authorized sponsor» of all publicly offered ICOs and will regulate the behavior and impose obligations on authorized sponsors, secondary market token operators.

However, offers will not regulate issuer or promoter markers, or the underlying technology. Instead, regulation will be carried out by requiring authorized sponsors, crypto exchanges, and service providers to comply with the new rules.

The objective of the proposed governance regime would be to reduce the risks associated with those activities. In the case of symbolic crowdfunding, this will require full and accurate disclosure, while the secondary platform market will be subject to rules that ensure orderly and appropriate behavior. Competency requirements will apply to investment service providers. The HCFC would be the appropriate regulator for the POD/FT, and the provisions of the DLT rules would apply to firms subject to the new marker rules.

Promotion, sale and distribution of tokens

The first part of the proposed rules would govern promotion in the primary market,  Sale and distribution of tokens that are not securities (which are already subject to existing securities legislation, as in the case of Hong Kong)direct gifts or donations using the rules. covers activities

1. which imply or imply that they are made of Gibraltar;
2. designed to attract the attention or access of any person in Gibraltar;
3. carried out by foreign affiliates of organizations registered in Gibraltar (in such cases the person of Gibraltar would be liable); or
4. carried out by foreign agents and trustees acting on behalf of organizations registered in Gibraltar or on behalf of natural persons habitually resident in Gibraltar (in such cases the person responsible is the person of Gibraltar).

Under the proposals, these tokens are generally referred to as services or access tokens,  which offer commercial products or services (which may not exist at the time the tokens are sold). Tokens that function solely as a decentralized virtual currency (such as Bitcoin) or as a digital currency,  issued by the central bank (CBDC) will be excluded from this part of the rules. However, hybrid tokens (which have a basic economic function that is both virtual currency and something else) will be caught.

Unless further details are included in the proposed legislation or guide, the current proposals provide little clarity as to which tokens will be subject to the new legislation and existing securities laws, which will remain unregulated. Thus, the regulation of ICO proposals will still require an analysis of the nature of the rights attached to the markers and their intended use. From a European perspective, the closest equivalent of the US concept of security is probably a unit in a collective investment scheme. At present, there is no indication as to how this concept is applied to ICO. It is not clear from Gibraltar’s proposals whether they will cover all «service tokens» regardless of whether they can be sold on the secondary market.

Disclosure rules

The proposed rules for the promotion, sale and distribution of tokens will require adequate, accurate and balanced disclosure, so that anyone considering buying tokens in the primary market can make an informed decision. The Rules may prescribe that, at a minimum, disclosure is appropriate and in what form (for example, in a key factual document of no more than 2 pages). Gibraltar’s IDPs may from time to time publish instructions on disclosure rules.

Financial crimes regulation

Businesses that receive any form of token income into their own account or from another person have been included in the Proceeds of Crime Act 2015 (POCA) Amendment, which came into force in March 2018. Thus, issuers are already legally required to perform AML and CTF checks on token buyers.

Authorized sponsors

The proposed rules will establish a regime for the authorization and supervision of symbolic sponsors (authorized sponsors) who will be responsible for ensuring compliance with this part of the rules. An authorized sponsor should be appointed for each public offering of tokens advertised, sold or distributed in Gibraltar or from Gibraltar. Authorized sponsors may be appointed as propagandists of Gibraltar or propagandists of the proposal, wherever they may be.

Authorized sponsors should possess the knowledge and experience of ICO, as well as intelligence and administrative information on Gibraltar. They would be allowed to delegate some of their work to other parties, including offshore shipments, but would remain directly responsible to GFCs for the actions of their delegates.

Rulebook

Under the proposed regime, authorized authors would have to have one or more sets of rules for the proposals they support.  Authorized sponsors are considered best suited to identify best practices with respect to the proposals they support, and are free to apply different codes to different categories of tokens and offers. Codes of practice may cover issues such as the application and distribution of proceeds of sale.

The Code of Practice should be included in authorized sponsors’ agreements with their ICO clients. The submission of codes of practice will be part of the application process for a sponsorship licence. A preliminary report on changes to codes of practice is required and will be treated in the same way as other important business developments.

It is suggested that these rules define the principles governing the content of the rules. Authorized sponsors will have the right, subject to approval, to establish their own methodologies for the implementation of the principles.

Authorized sponsors’ registers, codes of practice, sponsors’ clients and tokens

GFSC will establish and maintain a public registry of authorized sponsors and their codes of conduct (past and present).

The GFSC will add to the public registry the following information on public offers made by authorized sponsors of public proposals in which they participate:

1. the client(s) for which they work;
2. tokens included in the offer;
3. The code of practice applicable to the proposal; and
4. Any interest that they and their partners have in the tokens offered.

New controlled activity and offense

A new supervised activity by an authorized sponsor is proposed, and advertising,  The sale or distribution of tokens in or from Gibraltar without complying with the following requirements shall be considered an offense:

1. Requirement for an authorized sponsor;
2. Requirement for a current record in the public registry;
3. Certain disclosure obligations; and
4. Relevant POCA provisions, where applicable.

The promotion, sale and distribution of the public offering of tokens can be done only once while the offer is in the registry.

Secondary market activity

Proposals include the regulation of secondary market platforms operating in or outside Gibraltar that are used for token trading and, to the extent not covered by other regulations, their derivatives. The rules seek to ensure that these markets operate in a fair, transparent and efficient manner and that organized trade takes place only on regulated platforms.

The proposed rules will set out requirements for:

1. Public disclosure of trade activities;
2. GFSC transaction disclosure; and
3. Specific supervision of tokens and token derivatives positions.

These rules will cover the secondary market for trading all tokenized digital assets, including virtual currencies, and will, as far as possible, model the market platform in accordance with MiFID 2 and the Financial Instruments Markets and Amendment Regulations (MiFIR).

Authorized secondary token markets

Proposals include the addition of new controlled activities to operate the secondary market platform used for trading tokens and their derivatives. The GFSC will allow and control the operators of the secondary token market, as well as maintain a public registry of such operators.

Token investments and support services

The proposed legislation would include new supervised activities for the provision of investments and additional services related to tokens in or from Gibraltar and, to the extent not provided for in other regulations, their derivatives.

This part of the rules is intended to provide advice on investment in tokens, virtual currencies and digital currencies issued by the central bank, including:

1. General recommendations (fair and neutral presentation of the facts regarding investments and services in token);
2. Product recommendations (selective and subjective representation of the advantages and disadvantages of specific investments and services in tokens);
3. and personal advice (taking into account the specific needs and circumstances of the particular investor).

Our highly qualified and reliable lawyers will be happy to provide you with individual support in registering with the Virtual Currency Registry and in obtaining a crypto license in Gibraltar. We closely follow local regulations and are therefore well-prepared to effectively guide our customers at every stage of the registration process.