Gibraltar, a British overseas territory nestled on the southern coast of Spain right across from Morocco, is an offshore jurisdiction with more registered companies than households.²⁸⁶ Lately, Gibraltar has used the momentum to position itself as a crypto-friendly jurisdiction, leading to many issuers of ICOs considering to conduct their token sale there, rather than setting up in other, less lenient European jurisdictions.

With the Digital Ledger Technology (DLT) Regulatory Framework, Gibraltar has become the first jurisdiction to come up with a distinct legislature dealing explicitly and exclusively with blockchain technology in relation to financial services regulation.

In below report, the DLT Regulatory Frameworks will be assessed. Furthermore, regulator's statements will be analyzed and a comparative analysis will be undertaken, comparing Gibraltar's approach to ICOs to that of other jurisdictions.²⁸⁷

Regulatory framework

In this section, special attention is paid to the DLT Regulatory Framework and it is assessed whether, and if yes, to what extent it governs token sales conducted from Gibraltar. The Government of Gibraltar and the Gibraltar Financial Services Commission are currently working on developing a legal and regulatory framework which will be aligned to the DLT framework, for the sale, promotion or distribution of tokens. As this framework will govern initial coin offerings in the future, regular securities law, money regulations as well as consumer protection and commodities law will not be dealt with below.

Being a British overseas territory, Gibraltar has a legal system that is quite independent from the United Kingdom. That has allowed it to develop its own government policies and economic priorities. Gibraltar has attracted financial companies and online sports betting and gaming businesses in its jurisdiction with corporate tax incentives and relaxed regulations, unrivaled by others in the EU.²⁸⁸

In December the 17-member local parliament modernized the territory's financial services legislation with a newly adopted bill. It paved the way for a comprehensive set of rules addressing challenges presented by cryptocurrencies and governing operations of companies in the sector, the DLT Regulatory Framework.²⁸⁹

The DLT regulations that came into force 1 January 2018 allows DLT Providers based in or operate from Gibraltar to do business legally once authorised by the Gibraltar Financial Services Commission (GFSC). "DLT Provider" means a person licensed to carry on the controlled activity of providing distributed ledger technology services. Any firm carrying out by way of business — in or from within Gibraltar — the use of DLT for storing or transmitting value belonging to others, must be authorised by the GFSC as a DLT Provider.²⁹⁰

"Distributed ledger technology" or "DLT" means a database system in which (a) information is recorded and consensually shared and synchronised across a network of multiple nodes; and (b) all copies of the database are regarded as equally authentic.

"Value" includes assets, holdings and other forms of ownership, rights or interests, with or without related information, such as agreements or transactions for the transfer of value or its payment, clearing or settlement.²⁹¹

A person or group of persons who proposes to apply for a DLT Provider's licence, before doing so, must submit an initial application assessment request to the GFSC.²⁹²

The GFSC will then assess the nature and complexity of the requester's proposed business model and of the products and services which the requester proposes to offer and provide the requester with an initial assessment notice informing the requester of any steps which the requester must take before applying for a DLT Provider's licence.²⁹³

The GFSC will then issue the DLT Provider a licence, but only if the application conforms with the requirements of the notice and is satisfied that the applicant will at all times comply with the regulatory principles.²⁹⁴

The GFSC is committed to a three month period for the assessment of an application for a DLT Provider and the end-to-end duration depends on many factors.²⁹⁵

The DLT Regulatory Framework sets out 9 regulatory principles which a DLT Provider will be assessed on and continuously must comply with. Furthermore, a DLT Provider must promptly inform the Commission of any event which the DLT Provider knows or reasonably suspects may affect its compliance with the regulatory principles. These principles are included in Schedule 2 of the Financial Services (Distributed ledger Technology) Regulations 2017. According to those principles, a DLT Provider must

• conduct its business with honesty and integrity,
• pay due regard to the interests and needs of each and all its customers and must communicate with them in a way that is fair, clear and not misleading,
• maintain adequate financial and non-financial resources,
• 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,
• have effective arrangements in place for the protection of customer assets and money when it is responsible for them,
• have effective corporate governance arrangements,
• ensure that all of its systems and security access protocols are maintained to appropriate high standards,
• have systems in place to prevent, detect and disclose financial crime risks such as money laundering and terrorism financing,
• be resilient and have contingency arrangements for the orderly and solvent wind down of its business.²⁹⁶

Regarding the question, whether ICOs or token sales are comprised by the DLT framework, the GFSC's FAQs can be referenced which state: "generally, ICOs or token sales will not be caught under the DLT framework. However, there may be instances where, depending on what the token will be used for and how the token issue is structured, the token may fall within existing financial services legislation (for example, could be deemed as a Collective Investment Scheme, Alternative Investment Fund, etc.). We would recommend that you seek independent legal advice to determine whether your ICO may be caught within existing financial services legislation. The Government of Gibraltar and the GFSC are working on developing a legal and regulatory framework which will be aligned to the DLT framework, for the sale, promotion or distribution of tokens."^{297 298}

Currently, as the DLT framework does not directly apply to the primary market issuance of tokens and the proposed legal framework governing token sales has not yet been drafted, token sales in Gibraltar are treated the following way:

"Tokens vary widely in design and purpose. In some cases, tokens represent securities, such as shares in a company, and their promotion and sale are regulated as such. More often, tokens serve some cryptocurrency or functional use that is unregulated, such as prepayment for access to a product or service that is to be developed using funds raised in the ICO."²⁹⁹

Critical thoughts and comparative analysis

Due to the abovementioned conflation of business and government, neither can be separated from each other, which is why it's apt to speak of Gibraltar as both the economic and business landscape as well as the government and its adherent administrative bodies.

The aforementioned GBX programmatically states on its website that "The Gibraltar Blockchain Exchange (GBX) aims to be a world-leading institutional-grade token sale platform and cryptocurrency exchange. Built upon principles of decentralisation and community consensus, we seek to create a new era of trust, openness and global acceptance for the crypto industry, one quality token listing at a time."³⁰⁵

Gibraltar has been a leading offshore financial center for quite a while. However, its move to position itself as a crypto-hub is not that new. Gibraltar has long been friendly to cryptocurrency and blockchain-based initiatives. The Gibraltar Stock Exchange hosted the launch of Europe's first regulated bitcoin product in mid-2016.³⁰⁶

While the push for attracting crypto-business to Gibraltar is undoubtedly well received by the blockchain community, it remains to be seen whether and how this development will be affected by Brexit, around which still a lot of uncertainties exist, especially regarding the future of Gibraltar, its access to the single market and the potential loss of passporting.

Benedikt Schuppli