Gibraltar’s minister for digital and financial services spoke to Cointelegraph about regulating market manipulation in the blockchain sector.
The British Overseas Territory of Gibraltar, a pioneer of blockchain-friendly regulations, will introduce a new regulatory principle for the DLT sector addressing market manipulation risks in the coming months.
In an interview with Cointelegraph, Albert Isola, Gibraltar’s minister for digital and financial services, discussed his jurisdiction’s regulatory position regarding blockchain in detail and shared how the government applied many of the policies it developed in pioneering a robust legislative apparatus for gaming at a time when no other countries wanted to touch the industry. The minister also revealed that Gibraltar’s government is exploring applications for blockchain technology.
Cointelegraph: What informed the government’s decision to introduce a 10th regulatory principle regarding blockchain that addresses market manipulation?
Albert Isola: There has been a lot of material written over the past 18 months about the ability of certain players to be able to influence the market, and that seems to become more prevalent as time goes on — not less prevalent. In the same way as in financial services, steps had to be taken later in terms of market manipulation, particularly with stock exchanges.
“We thought the time was right to begin to move, so we are now engaging with certain individuals and regulators to see how we can adopt that tenth core principle to ensure that we have the technology and the infrastructure at a regulatory level to police and identify any evidence of market manipulation amongst any of our firms.”
In the absence of international standards, we’ve got to make them. We will come up with our own methodology as to how we can best tackle, identify, police, identify and stamp out market manipulation. If you look at the Financial Action Task Force rules last year, many of the areas that they identify — we already have covered with our own DLT framework. The travel rule wasn’t covered, so we are going to apply it.
It’s the same with market manipulation. Standards will come through one of the large international intermediary organizations, but by then, we will already have our own. If the international standard is higher than ours, we will adopt it — if not, we will keep our own.
That’s how we think we can best serve our stakeholders, our firms, by staying ahead of the pack.
CT: Can you give an overview of the regulatory process that firms undergo in Gibraltar?
AI: There are 15 firms that are licensed. There are a series of around 10 that are in process. We have a process where you apply to the regulator. They call you in for a face-to-face to discuss everything with you. They tell you what they’re worried about, they tell you what they like and what they don’t like. And then you go away and you prepare your full application, which is then submitted.
After a period of regulatory scrutiny, if you’re successful, there is then an in-principle license granted with conditions attached. When you then comply with those conditions, your license is granted.
CT: How long did it take for Gibraltar to develop and implement its regulatory framework for blockchain?
AI: We started this around 2014, and we spent three or four years thinking about this before we took the decision to move. It was a request to the government — if we would be prepared to join a working group. We said, “Fine, set one up,” and agreed to put onto it a senior executive from Gibraltar Finance and the government’s financial services team, Paul Astengo, and also a gentleman called David Parody, who was the former deputy CEO of the Financial Service Commission.
They were both extremely negative and averse to the blockchain space, and Bitcoin in particular, they thought that this was the kind of business that we didn’t want to be involved with, so we were very negative. They started off and we put together three consultation documents with the private sector over that period of time.
As each consultation document progressed, the tone of the working group got more and more positive. That wasn’t just because they were seeing the nature of the work, but also because of the quality of the people getting involved in the space. Over that period of time — it took us a couple of years — it was getting more serious, more professional and more attractive.
That working group produced a document on how we should regulate the sector, and also asked the question of whether we should use a traditional regulator like the Financial Services Commission, or create a brand new regulator for the space.
And the conclusion was that we should use the financial services regulator because much of the style of what we wanted to do was actually drawn from financial services. We then developed what we call the nine core principles of the DLT providers’ regime.
“That was published in October of 2017, it became law on the 1st of January 2018, and we started working with it in 2018.”
If I can use gaming as an example, we started online gaming 25 years ago, at a time when nobody wanted to touch it. We thought, “If we get good quality firms and we regulate them properly, there’s no reason why this won’t be a good business.” Today, we have 15 B2C firms, among them are the largest in the world. 75% to 80% of every bet placed in the United Kingdom is written from Gibraltar.
CT: What are the core requirements of blockchain firms looking to operate from Gibraltar?
AI: There are three core principles — you’ve got to have your management in Gibraltar, you’ve got to be regulated, licensed and supervised, and you’ve got to be entirely compliant with a regulated regime.
As a jurisdiction, we are in the EU today — we won’t be at the end of the year. We comply with every single piece of EU legislation on Anti-Money Laundering and Know Your Customer compliance as well as exchange of information, and we have a public register of beneficial ownership in companies.
“When we had the initial group, it took us about a year to get the first batch licensed because it was new for us too so the regulator was quite slow. We’re now down to about seven months — so it’s still a long process, but a very comprehensive process.”
We’re not embarrassed to say that we are going to scrutinize you A-to-Z. We go through the whole caboodle and we go into your business plans in a huge amount of detail. The security, the technology — we want to know everything about you. We do take time, but we do things properly.
CT: Has the number of new applicants been fairly steady over time?
AI: When we started, we saw a rush of interest. That is good, and it’s bad, because we’re a very small jurisdiction and we’re interested in good quality firms that want to do things properly. That’s why we want to license them and we want to regulate.
We give them certainty in terms of legal validity regarding what they are trying to do. We give them a reputational bag, which is the jurisdiction’s badge. But we demand from them that they comply fully with our approach and our legislation.
We always knew that when we had the immediate rush, there would be many that wouldn’t meet the bar that we set in terms of the standards required. So that very quickly washes a significant number of them out, and then we left with the ones that we really want.
CT: Is Gibraltar exploring any applications for DLT within a government context?
AI: I can tell you that the government itself is looking at the adoption of blockchain in certain areas on a trial basis.
If it works well for us in the way that I think it will with one of the firms that is huge for Gibraltar, then I can see us adopting it more and more as we go through the traditional uses that you will be familiar with in terms of governments using blockchain.
CT: What advantages does Gibraltar offer over other crypto-friendly jurisdictions?
AI: I can tell you that every single firm that has licensing in Gibraltar, I’ve met them. I’ve talked to them and I’ve asked them what it is they want to do, and I tell them what we want to do. I tell them that my door is always open to them to have a discussion about ways in which we could improve or we can make the jurisdiction better.
We started courses at the university on blockchain — I’ve actually attended one of them, partially, as before it finished, I had to stop because of COVID-19. It’s that level of interaction — the university, the private sector, the public sector, the regulator all sitting around the table and talking through the challenges the sector faces and how we can stay ahead of the curve.
CT: What have been some of the flow-on effects from embracing blockchain in Gibraltar?
AI: What has happened since these firms started coming in is our professionals have gotten better — they understand it better, they are now far more knowledgeable in terms of the blockchain and the crypto space. That includes law firms, accounting firms, that includes other forms of intermediaries, insurance as well.
One of the reasons why gaming fans got to Gibraltar today is they know there is a huge amount of knowledge about gaming already in Gibraltar, especially about online gaming. We want to replicate that with blockchain. We are early days, two years in, but we have made significant progress.
This interview has been edited and condensed for clarity.
