Gibraltar Financial Services Commission Launches Blockchain Licenses in January

Lindsay AyersCryptocurrency, Market Rules & Responsibilities

using bitcoin technology

Regulation of cryptocurrencies and other financial technology innovations varies greatly across jurisdictions. While some countries take a hands-off approach to encourage growth of new industries, others seek to control markets to protect investors or for political reasons. Predictably, as countries compete to land FinTech companies, many new businesses gravitate toward the less onerous compliance regimes, limited only by investors’ doubts about some jurisdictions. One player making waves in that competition is the British territory of Gibraltar, where new blockchain regulations take effect this month.

A Range of Regulations for Using Blockchain Technology

Currently, much of the buzz in the blockchain and cryptocurrency world focuses on countries with relatively lax regulation. Switzerland, often referred to as the “hub” for all things cryptocurrency, has lenient and flexible laws. Its laissez-faire approach to regulation has created opportunities for lucrative endeavors. The Swiss’s decision to go the low-regulation route resembles the choice of Singapore. Singapore’s approach is to not implement any new regulations but rather watch closely to avoid egregious illegal and unethical transactions like money laundering or terrorist efforts. 

At the opposite extreme, China has banned Initial Coin Offerings, restricted the trading of cryptocurrencies and begun to discourage mining of bitcoin. South Korea has proposed restrictions that would prohibit the use of anonymous trading accounts and give South Korean authorities the power to close down exchanges.

Somewhere in the middle lies the United States. The relative complexity of US regulation, with the country’s federal system and division of authority among multiple agencies, provides companies, even those founded by US persons, with incentive to seek domiciles elsewhere. Still, the size of the US market and the amount of investment capital located here persuade many companies to deal with these regulations in order to avail themselves of the US market.

Federal and State Regulations in the US

On the federal side, cryptocurrency regulation is spread across the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and the Financial Crimes Enforcement Network (FinCEN). The SEC recently declared that ICO tokens could qualify as securities and therefore be subject to corresponding regulation. Then the SEC reaffirmed its decision in a cease-and-desist order regarding Munchee Inc.’s planned ICO. The CFTC has also indicated that it will regulate cryptocurrency futures just as it does traditional commodity futures. And FinCEN, which regulates money service businesses, has not shied away from including businesses issuing cryptocurrencies in its net when they maintain insufficient Anti-Money-Laundering or Know-Your-Client programs (AML/KYC).

On top of this federal regulation, various US states maintain their own cryptocurrency regulations. For instance, New York has created a framework through agency rulemaking to regulate companies that buy, sell, issue, administer, or transmit virtual currencies, and cryptocurrency exchanges and custodians. That regulation involves an application process requiring in-depth information on everyone involved, as well as a filing fee. These New York bitlicenses are awarded rarely, and the process is costly and challenging. Florida has also begun the process of regulating virtual currencies with the passing of House BIll 1379 in May of 2017. The state proceeded to define virtual currencies and prohibit their use in money laundering schemes. The aim was to prevent those who are using virtual currencies to engage in criminal activity from escaping liability because of outdated laws.

Gibraltar Makes New Blockchain Regulations

It is in this environment that Gibraltar’s new regulations arrive, as the territory looks to solidify its place as a leader in the cryptocurrency space. Gibraltar’s new regulatory scheme takes effect in January 2018. Through these rules, the Gibraltar Financial Services Commission (GFSC) plans to regulate “the use of distributed ledger technology (DLT) for storing or transmitting value belonging to others.”  

Gibraltar appears to intend to regulate only the financial aspects of such systems and not the technologies or the currencies themselves. However, those using blockchain technology to store or manage assets belonging to other entities, including virtual currencies, would fall under the regulated activity. Firms transmitting money or assets using blockchain technology or DLT would need a DLT license in order to comply with the new regulation. 

The Gibraltar regulations will not cover individual users of virtual currencies. A consultation paper provided by the GFSC mentioned mortgage applications as well as land registry as potential use cases for regulation, but real estate as an asset is not mentioned. Overall, these regulations appear to be relatively lax compared to the strict bans that have been proposed and/or enacted in China and South Korea. Gibraltar’s regulations are in place to encourage honest and integrity driven transactions rather than eliminate them all together. Of all the countries previously discussed, Gibraltar most resembles Switzerland with its welcoming and friendly approach to the cryptocurrency space.

The Creation of Safe Spaces for FinTech Innovation

Overall, Gibraltar’s goal with this regulation is to promote safe operations for companies while creating new opportunities for currencies that positively impact the economy. The GFSC will be responsible for the authorization and supervision of DLT firms. The regulations are based on 9 pillars: honesty and integrity, customer care, financial resources, risk management, protection of client assets, corporate governance, cyber security, financial crime prevention, and resilience. Companies will want to strictly adhere to these principles to stay in good standing with the GFSC and maintain licenses. Gibraltar is working to create a safe environment for innovation in the financial technology space as technologies and their applications continue to evolve.

Lindsay Ayers

Lindsay Ayers

Lindsay Ayers is a former Ziliak Law attorney.
Lindsay Ayers