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The Gibraltar Financial Services Commission (GFSC) exists to promote good business, protect consumers and enhance Gibraltar’s reputation as a quality financial services centre. It does this through the regulation of firms who wish to do business in or from Gibraltar, not only at the point of application, but on an ongoing basis. 

Back in 2017, and as an outcome of a specialist working group, the Government of Gibraltar developed the DLT Provider Framework with the aim to provide regulatory certainty to firms operating in this space and adequate safeguards for consumers. The Framework came into force on 1 January 2018 and using “DLT for the storage and transmission of value belonging to others” became a regulated activity. met with William Gracia (pictured), the GFSC’s Innovations Manager to find out more about how they have evolved to regulate this new technology and find out what they predict for the space in 2020. 

What is the role of the GFSC?

“The GFSC supervises a broad range of firms including auditors, banks, company managers, e-money institutions, professional trustees, payment services providers, funds and fund service providers, insurance companies, managers and intermediaries, investment firms, and insolvency practitioners. Firms that wish to do business in or from within Gibraltar must meet our standards and criteria both at application stage and on an on-going basis. Our supervisory work focuses primarily on the way firms are operated and governed and the identification of risks to consumers and the reputation of the jurisdiction more generally.

Our aim is to protect consumers, enhance the reputation of Gibraltar as a quality financial services centre and promote good business.”

How has the GFSC got involved with the regulation of the DLT space?

“During 2015, Her Majesty’s Government of Gibraltar set up a Cryptocurrency Working Group (CWG) with the aim of identifying the risks and opportunities associated with cryptocurrencies. The CWG published a report and recommended the GFSC become involved in the process. Consequently, the DLT Working Group was established consisting of members of HMGoG, GFSC, and industry experts.

The DLT Working Group (DLT WG) acknowledged DLT, the underlying technology, to be the predominant transformational innovation, of which cryptocurrencies was only one example of the applications of the technology.

In May 2017 the DLT Provider Framework, a principles-based, outcomes-focused regime, went out to consultation. This legal and regulatory framework provided, not only regulatory certainty to firms operating in this space, but ensured that appropriate and adequate safeguards for consumers are adopted and financial crime risks are mitigated. The regime came into force on 1 January 2018 and using “DLT for the storage and transmission of value belonging to others” became a regulated activity.”

Has it been hard to find the talent needed to regulate this new industry?

“It was clear that in order to, first develop a regulatory framework and secondly, effectively supervise firms, we needed to recruit the talent and develop existing regulatory expertise. 

In early 2018 we started a recruitment drive and scouted local talent with a passion for the technology. This resulted in a number of hires ranging from recent university graduates to people working within the regulated sector, to qualified professionals. 

The DLT Team attend courses in-house, locally and internationally on DLT/Blockchain and participate, attend and contribute to working groups at the international level.”

Were there any risks to the credibility/reputation of Gibraltar as a centre for financial services for getting involved in this space?

“The credibility and reputation of Gibraltar would have been more at risk if we just sat idly by and waited, for example, for an ICO scam to have occurred or for international standards to be developed in this area.  

By creating a legal and regulatory framework, we have attracted firms who want that regulatory certainty, can adhere to the standards and expectations required, and ultimately want to be regulated.”

What have been some of the challenges involved?

“The influx of applications in the first quarter of 2018 was a challenge! However, we anticipated this and were able to deal with this due to the support we had during 2018.

Another challenge for some could be the principles-based regime. In order to effectively regulate and supervise firms that are based on rapidly evolving technology, it is essential to establish fundamental regulatory principles that achieve regulatory outcomes and remain applicable and relevant throughout the licensing cycle. A principles-based, outcomes-focused approach has the benefit of being flexible, adaptive and proportionate.

It has been a learning curve for all involved (applicants, advisors, including us) but one that is proving it’s success. We are now in the process of consulting with the industry and updating the Guidance Notes which seeks to address instances where firms require more clarity or further guidance on the standards and expectations required.”

Have you seen a slowdown in the number of firms applying for DLT licences in Gibraltar over the last year compared to the previous year?  

“2017 and early 2018 marked the end of the hype around Initial Coin Offerings (ICOs), Public Token Offerings (PTOs), or even more recently Initial Exchange Offerings (IEOs). This coincided with the introduction of the regime on 1 January 2018 and as a consequence, saw a lot of interest. Whilst the level of enquiries may have fallen from the big influx that was experienced in first couple of months of 2018, the types of business models, products and services we are seeing coming through are more mature and committed to the DLT Provider regulations.” 

Do you predict this will pick up in 2020? 

“We have a number of firms who have reached the in-principle stage of the authorisations process – this means that subject to certain conditions being met, they will be licensed. We are also in the process of assessing a number of applications that are at various different stages of the authorisations process. We also continue to meet with potential applicants. When you are a small jurisdiction and regulator it is not about the quantity of firms but quality.

“I believe in 2020 we will start to see different applications of DLT across other sectors, including but not limited to, the insurance, payments and possibly banking space.”

How does the GFSC ensure that companies who have a Gibraltar DLT licence adhere to best practice?

“We encourage a transparent and collaborative approach. This includes weekly calls with a designated contact, monthly returns and in some cases weekly updates on statistics. The GFSC also aims to meets with the firm’s board or senior management team monthly to monitor a firm’s progress against our supervisory roadmap or their own development plans.

As part of our supervision, we also conduct regular onsite visits. This gives a firm the opportunity to demonstrate ongoing compliance with the regulatory principles and best practices.”

Gibraltar is a relatively new jurisdiction for those companies looking to becoming regulated, how do we compare to other DLT regulatory centres?

“Gibraltar was the first jurisdiction to adopt a purpose built legal and regulatory framework for firms wishing to use DLT for the storage and transmission of value. This was trailblazing at the time; other jurisdictions decided to adopt a similar approach by developing similar frameworks, with some focusing only on cryptocurrencies, whilst others have tried to shoe-horn these types of businesses into existing regulatory frameworks.

Recently we have formed part of the Global Financial Innovation Network (GFIN) which is a network of financial regulators and organisations committed to supporting financial innovation in the interests of consumers. We hope to share our recent learnings within the DLT space and collaborate to develop a structured, developed and international approach to the regulation of DLT-based financial businesses.”