Staying ahead of the curve: Gibraltar’s pioneering crypto regulation

Jurisdictions around the world are racing to capitalize on the innovation of blockchain, and Gibraltar is leading the way.

The British outpost embraced blockchain with the world’s first purpose-built regulatory framework in early 2018, and since then has welcomed top-tier cryptocurrency companies including multi-currency wallet Xapo, exchanges Huobi and LMAX, and the fourth highest number of domiciled crypto hedge funds worldwide.

eToroX was one of the first exchanges to be awarded Gibraltar’s pioneering DLT License. This offers “a flexible, adaptive approach” to regulatory oversight for “firms conducting the use of distributed ledger technology (DLT).”

The license is underpinned by a principle-based regulatory ethos that both nurtures innovation and provides confidence to traders in this fledgling industry.

Upholding shared principles

To be awarded the DLT license, applicants must pass a rigorous process involving background checks, face-to-face meetings, and responding to feedback from regulators at the Gibraltar Financial Services Commission (GFSC).

Each blockchain business is measured against compliance with nine regulatory principles:

  1. Honesty and integrity must be prioritised to prevent DLT providers from posing a “risk to the public or to the reputation of Gibraltar.”
  2. Customer care must be considered at all times with “ethical advertising”, “adequate complaint policies”, and full disclosure of any potential conflicts of interest.
  3. Ample financial resources must be maintained by the DLT provider at all times, including insurance and capital provisions.
  4. Forward-looking risk management practices must be applied, including the consideration of “risks to the reputation of Gibraltar in addition to risks to its own business.”
  5. Client assets must be secured with data protection and proper record keeping.
  6. Good corporate governance arrangements must be put in place, along with “a corporate culture consistent with the secure and confident delivery of the Regulatory Principles.”
  7. Cybersecurity policies and protocols must be maintained to the industry standard to safeguard the integrity of client data and assets.
  8. Financial crime must be guarded against with Know-Your-Customer (KYC) checks “to prevent, detect and disclose financial crime risks such as money laundering and terrorist financing.”
  9. Resilience must be ensured with contingency plans that consider extenuating circumstances, including the “orderly and solvent wind down” of business.

Adherence to these nine principles is ensured by the same supervisory regime that applies to traditional financial services firms, which includes on-site inspections.

eToroX traders have the comfort of knowing that the exchange is operating to the highest professional standards in a regulated environment, and that their interests will continue to be protected by the GFSC as the cryptocurrency ecosystem evolves.

Staying ahead of the curve

A strong sense of community helps Gibraltar to move with the tide of technological development and stay abreast of changes in the dynamic DLT sector.

Blockchain businesses on the Rock have established a network of partnerships and are supported by initiatives including Start-up Grind and New Technologies in Education (NTiE). Ongoing discussions between members of these groups and close collaboration with the GFSC provides a feedback mechanism on changes to regulation, and lets the community engage with new challenges together.

This community spirit has led to the recent introduction of an additional 10th regulatory principle that addresses the risk of market manipulation on DLT platforms, and the issuance of a warning to the broader cryptocurrency community about a collection of websites fraudulently displaying fake Gibraltar DLT Licenses.

When the Financial Action Task Force (FATF) introduced new guidelines on preventing financial crime in June 2019, cryptocurrency exchanges in jurisdictions around the world were asked to comply with the controversial “Travel Rule”. This aims to monitor cross-border financial activities by requiring exchanges to share information about the identities of customers transacting amounts over a certain threshold.

While the news caused panic in some circles, Gibraltar used its expertise to respond appropriately. As minister for digital and financial services Albert Isola told The Banker, the GFSC began to adapt to the new regulations by “developing a technology solution to ensure our firms can collect client information when they are transferring money, as in traditional banking environments.”

Under the regulatory purview of the GFSC, eToroX has the best possible chance of adapting to the guidelines and regulations that international bodies are now rolling out to govern this new asset class.

eToroX traders can rest in the knowledge that all services meet the highest professional standards, and still have confidence that staying safe won’t keep them from missing out on the latest innovation.