Gibraltar’s regulatory standards are second to none which, in the fast-paced world of financial services and blockchain technology, has never been more important. Here, Jonathan Garcia, partner at ISOLAS LLP, and associate Jake Collado, explore how Gibraltar’s regulation has evolved to cultivate, rather than curb, the evolving industry.
Gibraltar has long been a hub of financial innovation. It is currently the only jurisdiction in the world that has issued specific standards in the structure of crypto funds, corporate governance, risk management, valuation, custody, safekeeping and security, and a host of other important touchpoints. This has been achieved through a specific addendum to the Corporate Governance Code for Collective Investment Schemes which has been in place since 2013 and was originally issued by the Gibraltar Funds & Investments Association (GFIA) to formalise and codify the existing best practices for collective investment schemes and their directors.
However, this is not only a case of Gibraltar being ahead of the curve in terms of regulation. We have put our fundamental values of investor protection and strong corporate governance at the heart of our industry. In the words of Chief Minister Fabian Picardo, Gibraltar is “not a place of light-touch regulation” but “a place of right touch regulation”.
It is this ‘right touch’ regulation that has, for a long time, attracted funds to Gibraltar, who seek to benefit from a dynamic and completive environment, supported by a strong and principled regulatory environment. This has strengthened the jurisdiction’s place in the industry, positioning Gibraltar as a natural place that cultivates innovation, evidenced by the cutting-edge crypto fund standards.
And our innovation is not limited to funds. The Distributed Ledger Technology (DLT) regulatory framework, introduced in 2017, is another example of Gibraltar adapting its regulatory structure to stay ahead of market demands.
The DLT regulatory framework was the world’s first purpose-built regulatory framework for businesses using blockchain or DLT. By operating on a risk-based nine principle approach rather than rigid rules, it ensures that the framework can evolve at the same speed and time as this fast-moving industry, and further enables firms to use innovative solutions, provided that they can satisfy the GFSC that they meet the regulatory obligations.
One of the regulatory principles requires DLT providers to comply with the same AML/CTF obligations as traditional financial service providers, something that has only recently been introduced at a European level under AMLD5, and further aligned with the Financial Action Task Force’s (FATF) recommendations issued in 2019 relating to virtual asset service providers.
Gibraltar is now synonymous as a financial incubator, showcasing how adaptable “right touch” regulation can be. By setting certain expectations around key areas, such as structure and corporate governance, an environment of confidence is reinforced, benefiting both the fund managers who choose Gibraltar because it fits their regulatory needs, as well as the end customer, knowing that their investment is tied to a foundation of strong corporate governance.
However, there can also be times when a specific piece of legislation may stifle innovation. This is why the principle of the Code to ‘comply or explain’ is crucial. This example of ‘right touch’ regulation ensures innovations are mindful and documented. The Code states, “is not there to say how something must be done. The code is there to encourage the licensee to consider certain issues and, where the licensee feels that those issues are better dealt with in a different fashion, to document their thought process.”
The Code recognises that funds are a dynamic area where specific requirements may not be suitable to every business case and that what may be relevant today may not be relevant tomorrow.
Ultimately, Gibraltar strives to achieve investor protection in a way which allows innovation to flourish. And, in the words of Minister for Digital and Financial Services, Albert Isola “Gibraltar has always strived to actively support the development of new markets and activities, promoting innovation that is well considered, and imperatively, safe for consumers and the jurisdiction”.
Both the DLT regulatory framework and crypto fund standards serve as examples to demonstrate Gibraltar’s commitment to setting the pace in the global regulatory landscape in a sensible and secure way, and we’re excited to see what lies ahead.