Gibraltar funds sector growth.

Credit to the Gibraltar Chronicle for this article on Money Matters.

Although it has lingered in the doldrums over the past 18 months, Gibraltar’s funds industry has escaped the worst of the recent global ups and downs of the market, and now seems set to benefit from investor’ appetite – or greed – for opportunities in the Cyberspace explosion and its integral parts. And it’s an appetite which has hardly been dented by the Markets in Financial Instruments Directive II (MiFID II) or the new Data Protection Regulations – the two moves towards greater transparency in the global market place that for a while took on an aspect of threatening bogeymen.

As the world’s first jurisdiction to regulate Direct Ledger Technologies and blockchain, and plans on the drawing board to regulate token sales and ICOs*, Gibraltar is also seen as a potential base for cypto-currency funds (The new regulation is to include a system of ‘authorized sponsors’ who will be responsible for compliance issues – taking some of the weight of policing the regulation off the FSC’s shoulders). The enthusiasm with which the Government, and particularly Albert Isola, grasped the opportunities of FinTech and the better aspects of the new disruptive technologies has sparked ‘serious interest’ in the Rock as a home to cryptocurrency funds, according to James Lasry vice-chairman of GIFA and the Hassans partner who established the Rock’s first fund as well as pioneering the successful Experienced Investor Fund (EIF) regime. “Although so far it’s mostly been inquiries, some have reached a late stage of preparedness,” he tells me. The funds would be mainly in fiat currencies such as dollars and sterling, but ‘investors can even invest in Ethereum or bitcoin. Interest in Gibraltar funds has been sparked in other areas as well, and traditional securities funds and algorithm funds are also being established. “The recent surge in interest in Gibraltar as a result of the DLT legislation and the upcoming ICO regulations is having a positive effect on Gibraltar’s funds industry,” Lasry says. “Gibraltar is now considered the ‘go-to’ place for anything involving crypto currency or blockchain technology. “Indeed, it is one of the few jurisdictions in the world where it is possible to open a bank account for such activities. It is therefore natural that entrepreneurs wishing to establish funds for investing into crypto currencies would consider Gibraltar as a jurisdiction in which to domicile their funds.”

But those taking the first steps into the unexplored territories of crypto-funds face new challenges not the least of which is the volatility of the crypto currencies themselves. “Investors are as likely to lose fortunes as they are to make them by investing in this asset class,” says Lasry. “However, there is a demand amongst investor communities to have exposure to this new asset class to be placed amongst the riskier end their asset allocation.”

The Gibraltar Funds and Investment Association (GFIA) has created a crypto fund committee to deal with many of these issues and is arguing for the industry to use EIFs as the regulatory regime for crypto funds. “In recent years some service providers have used the private funds regime as a means of cutting costs. The Association wants to ensure that this is not done in the realm of crypto funds – other than in the very limited cases where the fund includes only the money of one person and that is of the promoter.” And it argues, rightly, that investors in crypto funds should be given the same regulatory infrastructure and protections that the EIFs regulations offer. They should also benefit from the support of experienced EIF directors, fund administrators and auditors, ‘many of whom are notable absent in the establishment of some private funds’. Already many private crypto fund projects have been either upgraded to EIFs or discarded entirely. “This is a good example of the maturity and conscientiousness of Gibraltar’s funds industry.” The crypto committee is also to extend the GIFA Code of Conduct to include elements that should borne in mind when establishing crypto funds. Among other topics, the code will deal with custody of crypto assets, valuation, corporate governance and security. “Inevitably some funds will decrease in value as a result of fluctuations in the underlying crypto currencies, but GIFA wants investors in Gibraltar crypto funds to be protected – in as much as they reasonably can be – from hackers, and from ‘risks associated with sub-effective corporate governance.”

Although the current Code of Conduct was issued in conjunction with the Gibraltar Financial Services Commission several years ago, it covers most of the principles relating to protection of investors in crypto funds. However, the new code would serve to help practitioners apply these principles to crypto asserts. Lasry explains. “A notable example is that crypto currencies should be kept in digital wallets that have multisignatory capability. It should never be acceptable that one person be able to transfer funds without the benefit of a second approval.” GFIA argues that some of these principles also should be enshrined in crypto fund regulations. as well. The Code of Conduct, sets a principle of ‘comply or explain’, recognizing that there may be instances where the principles are not applicable to a specific situation. In such a situation, an explanation should be given of why the principles of the code are not adhered to.

*The proposed regulatory regime for initial coin offerings (ICOs) is a logical progression to Gibraltar’s introduction at the beginning of the year of a license for companies working with distributed ledger technology and its timing will keep the Rock abreast of developments in the blockchain and cryptocurrency industry. In the same way that has made the Rock attractive for DLT start-ups, ICO legislation should attract good quality companies. “We want to welcome operators that are as concerned for their reputation as we are for ours,” says Paul Astengo, senior finance executive at the Gibraltar Finance Centre . “And we want to make sure that all of the different elements for this regulatory framework will be enough to support what they’re trying to achieve for their firms.”