As new regulation modernises the rules relating to limited partnerships and the opportunities presented by digital assets, Gibraltar is expecting new crypto companies to establish themselves in the jurisdiction.
By Jonathan Garcia – As new regulation modernises the rules relating to limited partnerships and the opportunities presented by digital assets, Gibraltar is expecting new crypto companies to establish themselves in the jurisdiction.
The territory has managed to attract some of the largest crypto businesses seeking to be regulated within a framework which was specifically designed for this purpose.
In hopes of replicating the success achieved in the gaming industry within the blockchain space, Gibraltar has chosen to step out of the regulatory “sandbox”, in the same way as it did back in the gaming days.
“Gibraltar is providing legal certainty and allowing businesses to operate within a purpose-built legislative framework,” outlines Jonathan Garcia, partner at ISOLAS, “In doing so, it considers that a flexible, adaptive approach is required in the case of novel business activities, products and business models. Further, while regulatory outcomes remain central, these are better achieved through the application of principles rather than rigid rules.”
This is because, for businesses based on rapidly evolving technology, like those in the digital assets space, such hard and fast rules can quickly become outdated and unfit for purpose, he adds.
Accordingly, Gibraltar’s principles-based framework is based on risk and proportionality and is outcome-focused yet robust.
A virtuous circle of growth
As the domicile continues to innovate to accommodate players in the crypto space, industry experts anticipate new market entrants looking for a base are likely to follow established players who have already selected Gibraltar as their jurisdiction of choice. Garcia outlines, “I expect we will see more of them come, it is like a virtuous circle of growth.
“The advantage we have is that we are a small jurisdiction that can adapt quickly to change. We have proven our ability to do so, and as a result, firms locate themselves here accordingly. Our favourable business environment and ‘right touch, not light touch’ stance on regulation are also key drivers of business. We look forward to these continuing for years to come.”
The innovative spirit in Gibraltar has arguably been further fuelled by growing competition in the digital assets and crypto space, which challenges incumbents to do new things. “Regulators in Gibraltar are always keen to learn from industry and other jurisdictions to ensure our landscape is the most attractive it can be. Due to our dynamic size, industry developments are quickly reflected in our legislation and regulation. We are seeing increased competition for the most business friendly regulations coming from across the world, and this is no bad thing,” highlights Garcia.
Strong institutional demand
The appetite for digitalisation had already been on the rise, pre-pandemic, However, this has now grown exponentially, partly accelerated by Covid-19 and partly due to continued evolution in the sector.
In particular, Crypto Hedge Funds have experienced a significant boost in popularity in Gibraltar. A report by PwC and Elwood Asset Management shows the jurisdiction secure its place as the third preferred jurisdiction for the domiciliation of hedge funds, behind the UK and the US and above the British Virgin Islands and Luxembourg. Garcia notes: “The growth of this area has been mirrored by strong institutional demand for crypto and digital assets, and as these institutions move in, as does more regulation, which creates a safer environment for all participants.”
The latest edition of this report shows Gibraltar has strengthened its position as a preferred domicile for crypto hedge funds. While the two leading jurisdictions for crypto hedge funds experienced an overall decline in their market share compared to the 2020 report (the US from 38% to 33% and the Cayman Islands from 42% to 34%), Gibraltar has maintained steady growth (from 6% to 9%).
Boosting digital innovation
This growth was strongly supported by the uniquely receptive and progressive attitude shown by the Government of Gibraltar in relation to cryptocurrency and wider blockchain and distributed ledger technology related sector.
Garcia details how financial regulators and policy makers in Gibraltar understood the need for regulation in this sector, responding rapidly to this demand as far back as 2014, through the creation of the Cryptocurrency Working Group. “This private sector initiative led to the development of the Distributed Ledger Technology Framework (“DLT Framework”), which became effective on 1st January 2018. This made Gibraltar the first jurisdiction in the world to deliver a framework of this kind; one which regulates businesses using DLT for the defined purposes relating to a “storage” or “transfer” of “value”, which is a wider concept that pure virtual assets,” he says.
This DLT Framework is based on the application of principles rather than rigid rules. This, as outlined earlier, is better suited to businesses based on rapidly evolving technology. This approach has enabled Gibraltar to position itself as a leading jurisdiction for fintech businesses to set up in early on. Garcia stresses: “Gibraltar maintains a strong presence in all areas of fintech business. While many other jurisdictions playing catch-up, Gibraltar has a well-established DLT sector which is designed to attract the largest and most reputable global crypto platforms.”
Some of the more notable successes include a USD250 million fundraise in a Series C round of funding by Bitso. The company, a leading Gibraltar authorised DLT Provider and the largest cryptocurrency platform in Latin America, has been valued at a USD2.2 billion.
DeFi Derivatives Protocol Vega also announced it has closed a USD5 million funding round with contributions from a number of venture capital and trading firms such as Arrington capital and Coinbase Ventures.
Though highly supportive of the innovation and growth in the digital assets and crypto arena, the Government of Gibraltar recognises that this is a nascent industry. “While Gibraltar has shown leadership in this space, development is clearly an ongoing process and Gibraltar is aware of the importance, as a jurisdiction, for it to invest in supporting the development of knowledge and skills, in tandem with generating economic results as Gibraltar continues to strive for excellence,” concludes Garcia.
Jonathan Garcia, Partner, ISOLAS LLP
Jonathan is a funds specialist, with a wealth of experience across the financial services, regulatory, and DLT sectors. He serves on the Gibraltar Funds & Investment Association’s (GFIA) executive committee and has worked with numerous high-profile clients. Recently, in his capacity as Head of the Technical Committee at GFIA, Jonathan worked with HM Government of Gibraltar to develop the new Limited Partnerships Act and Protected Cell Limited Partnerships Act. He has authored several articles and chapters in respected industry publications, such as for the U.S. Chamber of Digital Commerce.
