The brave new world of Bitcoin
Given the convenience of established currency and payment systems, what is driving the ever-growing interest in Bitcoin and other virtual currencies?
Bitcoin was developed to some extent as a response to the global financial crisis when the risks of relying on trusted financial counterparties and intermediaries became apparent. The original white paper by Satoshi Nakamoto is a good starting point to understand some of the potential attractions of virtual currencies (“Bitcoin: A Peer-to-Peer Electronic Cash System”).
Many support the fact that virtual currencies are not controlled by the government or banks. The global financial crisis, and perhaps even more so the response to it (including bailouts of private companies using public funds and the significant inflation of many assets, since that does not benefit all) has led to a counter-cultural drive to disassociate from central government and traditional financial institution means of control. Consequently, trust in public institutions is at a multi-generational low.
Virtual currency is an asset held largely outside of the existing financial system. In the event of fiat currency crashes or hyperinflation, many holders perceive it to be a safer store of value.
The use of virtual currencies is attractive for sending and receiving money internationally can be done quickly, with ease and minimal cost in transaction fees and exchange rate costs.
Virtual currencies can be used by the unbanked and the underbanked to exchange value.
The phenomenal rise in price of Bitcoin, Ether and other virtual currencies has given rise to speculative interest that attracts new people to the currencies and underlying technologies.
One of the initial attractions of virtual currencies was the perceived anonymity in respect of the value held and transferred. However, criminal and terrorist organisations are beginning to realise that an immutable public ledger showing all transactions between participants is not the best means of avoiding detection (even if the wallets are not directly linked to their personal data).
More recently, there has been a large amount of interest in the use of virtual currencies as a form of largely unregulated crowdfunding (often referred to as Initial Coin Offerings), whereby blockchain-based tokens are issued in exchange for cryptocurrencies (often Ethereum) to develop new products, platforms, currencies and technologies.
Has your jurisdiction taken steps to regulate virtual currencies? What is their current status?
There is no legislation that directly regulates virtual currencies in Gibraltar and the issue does not fit neatly into the existing financial regulatory regimes, such as those regarding financial instruments, securities, payment services, electronic money and anti-money laundering.
However, Gibraltar has recently announced that it intends to pioneer a regulatory regime to ensure certain Distributed Ledger Technology (DLT) operators regulated by the Gibraltar Financial Services Commission (GFSC).
Gibraltar is taking a lead in cryptocurrency and sees the crypto economy (which is much wider than virtual currency-related activities) as an area where it can be competitive as a small jurisdiction with a strong track-record in regulated e-commerce (ie, e-gaming, e-money and payments, and other electronically supplied financial services) and a reputation for attracting quality operators over quantity.
The GFSC has set up an Innovate and Create team to encourage innovation by supporting those businesses looking to develop and introduce innovative ideas for financial products or services into the market.
It is focusing on scalable and carefully-considered financial technology opportunities and working through the requirements that will be applicable to DLT operators from January 2018.
In the proposed Gibraltar DLT regime consultation (Proposals for a DLT Regulatory Framework) the government stated that the:
“HM Government of Gibraltar [has been considering proposals] for a new regulatory framework for firms engaging in activities that use Distributed Ledger Technology (DLT) for the transmission or storage of value belonging to others. The proposed framework will facilitate a progressive, well-regulated and safe environment for firms using DLT to grow, whilst also ensuring that this new regulatory environment protects both consumers and the good reputation of the jurisdiction. ..” (Ministry of Commerce.)
“The primary driver for the DLT framework is to encourage Gibraltar's economic development while providing safeguards for consumers and protecting the jurisdiction's reputation and integrity. The DLT framework is designed to be both good for Gibraltar and safely so. It recognises Gibraltar's status within the EU while considering the likely impact of Brexit and related outcome scenarios…”
The new regime is still in development and is intended to evolve from the ground up, whereby the applicable requirements for DLT operators will be based on a review of their ability to conform with the nine key DLT principles. The regime can therefore develop and solidify based on an objectives-based approach to practical problem solving in the DLT sector. In addition, the regime is not intended to require authorisation for activities that are already subject to existing financial services authorisation requirements. There is likely to be a number of important distinctions, such as whether DLT is being used only for an enterprise’s own purposes (eg, the issuance of a proprietary form of cryptocurrency to clients) or if the enterprise is storing or transmitting other cryptocurrencies or DLT related value (whether mainstream cryptocurrencies or proprietary blockchain based tokens issued by third parties). However, as this is a new regime the boundaries and practical requirements are yet to be determined, it is crucial to engage with the GFSC on a case by case basis.
As with most countries, Gibraltar does not have a specific regulatory regime applicable to the sale of tokens as a form of crowdfunding. However, it is building up a body of knowledge and experience in this new area and is already a European leader with Switzerland. Whether by regulation or cross-party industry agreement on a self-regulatory basis, it is expected that Gibraltar will take a lead in managing the risks and setting the standards that should be applied in this fast-growing sector. Most jurisdictions (including the United States) expect a detailed case by case assessment of whether any such crowdfunding may constitute the offer of securities (including whether they constitute a form of investment fund).
Gibraltar will apply anti-money laundering regulations to virtual currency exchanges and custodians and other authorised DLT operators. This is also in line with the proposed changes to the EU Fourth Anti-money Laundering Directive.
Further, Gibraltar is a participant of the various international frameworks for financial data sharing (i.e., the Foreign Account Tax Compliance Act, Common Reporting Standards and Tax Information Exchange agreements) and for crime prevention (ie, EU Fourth Anti-money Laundering Directive, MONEYVAL and the Organisation for Economic Cooperation and Development White List). This means that Gibraltar is not an attractive place for criminals seeking to avoid detection and relying on the use of cryptocurrencies and technologies. Gibraltar is also a very small and close-knit community which makes it difficult to misuse the jurisdiction for criminal purposes.
Gibraltar financial institutions largely support the crypto economy drive. However, there remains a dependence on UK banks for sterling settlement, which represents a strategic risk given the existing approach of major UK banks in this sector.