Gibraltar Seeks to Expand Digital Asset Regulatory Principles

The digital asset industry rang in the new year by climbing to a $1 trillion market cap as financial institutions have become more proactive in the space. To smooth the maturity of the industry, Gibraltar will announce a ’10th Core Principle’ regulation for digital assets – specifically for digital asset exchanges – at the direction of a working group consisting of industry experts recently convened.

The working group behind the Gibraltar Market Integrity Study will be primarily responsible for setting appropriate market standards for exchanges operating in the digital asset space. Additionally, the working group shall decide if the nature of the asset/item traded (i.e. security, utility or exchange tokens) affects market integrity standards.

Pawel Kuskowski, CEO of Coinfirm, noted that “digital asset exchanges are a focal point in how the public views blockchain systems, for better or worse. New entry retail customers, investors and traders need to be better protected and it is high time that exchanges take care of all stakeholders in the ecosystem. However, the 10th Core Principle regulation should not stifle innovation.”

The DLT (distributed ledger technology) framework in Gibraltar currently incorporates 9 principles applying to businesses operating under the purview of the Gibraltar Financial Services Commission (GFSC), the territory’s financial regulator.

The goal of the group is to set global market integrity and regulatory standards for crypto exchanges and other marketplace platforms in the industry, whilst acknowledging the recently defined standards by other jurisdictions. Additionally, the framework looks to aid those who have the ability to create crucial foundational concepts for the work of other watchdog and/or regulatory bodies such as the Financial Action Task Force (FATF), European Commission and the International Organization of Securities Commissions (IOSCO). 

Joey Garcia, partner at international law firm ISOLAS LLP, board member of Xapo and IOV Labs (RSK) groups and a key member of the working group stated that “the creation of the Market Integrity working group is an important step for the jurisdiction as we continue to develop our DLT framework in line with an ever-evolving regulatory landscape, and also for the Global Blockchain Convergence. Gibraltar has long been a leader when it comes to fostering innovation and in the development of virtual asset service providers’ regulatory standards and we are confident the 10th Core Principle will aid us even further in our mission to achieve this, particularly as the integrity of these markets is such a key focus internationally. We already have some of the largest groups in the world regulated in Gibraltar and this should continue to place those groups at the forefront of standard setting in the industry.” 

In 2020, the IOSCO published standards for trading platforms and the European Union published proposed comprehensive regulations for the digital asset space in Markets in Crypto-Asset Regulations (MiCAR).

However, Gibraltar’s amended legislation will be the first set of legislated principles to ensure digital exchanges/operators protect customers/market integrity by looking to ensure guidance of efficiency, transparency and an orderly market. 

This comes at a time where digital assets have been criticized by the Financial Conduct Authority (FCA) in the UK as “cryptoassets may not be subject to regulation beyond anti-money laundering requirements” – meaning that there is little customer protection against exchanges’ malpractice beyond obvious criminality or gross negligence. Thus the 10th Core Principle of Gibraltar, once established, will lead the global regulatory guidance in this area. The territory is forward-thinking within the crypto industry, having introduced regulatory oversight to DLT with legislation since 2018.

The Market Integrity working group consists of;

• Lee Schneider – General Counsel at Block.one
• Joey Garcia – ISOLAS LLP, Gibraltar; Regulation & Policy advisor to Xapo group, Diem Association representative, IOV Labs (RSK)
• Emma Channing – General Counsel, Satis Group LLC; Former Representative of Consensys Digital Securities
• Joshua Klayman – Global Tech Sector Co-Leader, U.S. Head of FinTech and Head of Blockchain and Digital Assets, Senior Counsel, Linklaters LLP
• Pawel Kuskowski – Coinfirm Cofounder and CEO
• Sunavna Tuteja – Head of Digital Assets, TD Ameritrade
• Roman Beck – Head of European Blockchain Center (University of Copenhagen)
• Jannah Patchay – Regulatory and Market Structure Advisor, Markets Evolution; Director of London Blockchain Foundation
• Tongtong Gong – Amberdata Cofounder
• Nicholas Philpott – Banking Market Structure expert

The other 9 core principles DLT providers must adhere to in Gibraltar include;

1. A DLT Provider must conduct its business with honesty and integrity. 
2. A DLT Provider must pay due regard to the interests and needs of each and all its customers and must communicate with its customers in a way which is fair, clear and not misleading. 
3. A DLT Provider must maintain adequate financial and non-financial resources.
4. A DLT Provider must manage and control its business effectively, and conduct its business with due skill, care and diligence; including having proper regard to risks to its business and customers. 
5. A DLT Provider must have effective arrangements in place for the protection of client assets and money when it is responsible for them. 
6. A DLT Provider must have effective corporate governance arrangements. 
7. A DLT Provider must ensure that all systems and security access protocols are maintained to appropriate high standards.
8. A DLT Provider must have systems in place to prevent, detect and disclose financial crime risks such as money laundering and terrorist financing. 
9. A DLT Provider must be resilient and must develop contingency plans for the orderly and solvent wind down of its business. 

This follows a number of important updates to the jurisdiction’s bespoke regulatory framework governing ICOs, investments funds in digital assets, etc. The jurisdiction has set out clear licencing and regulatory legislation specifically for DLT providers since ’18 in the Financial Services (Distributed Ledger Technology Providers) Regulations 2017.

In addition, DLT providers in Gibraltar are regulated by the following; Financial Services Commission (Fees) Regulations 2016, Proceeds of Crime Act 2015, Financial Services (Information Gathering and Co-operation) Act 2013, Financial Services Commission (Supervisory Acts) Order 2012, Counter Terrorism Act (of 2010) and the Financial Services (Investment and Fiduciary Services) Act (of 1989).