The publication by the Government of Gibraltar of the Distributed Ledger Technology (“DLT”) regulatory framework on 12th October 2017 is a markedly progressive milestone for the jurisdiction. The development of the framework demonstrates Gibraltar’s desire to continue to lead the way in establishing a responsible but business-friendly environment. It seeks to protect consumers as well as the jurisdiction’s economy and excellent reputation, whilst concurrently providing the required flexibility to encourage established businesses and start-ups alike in progressing their DLT business ventures. The result is a principles based and outcomes-focused set of regulations that perfectly strike this balance. 

The DLT regulations set out the desire to pursue a “more flexible, adaptive approach ... in the case of novel business activities, products, and business models” to achieve regulatory outcomes which “are better achieved through the application
of principles rather than rigid rules” particularly where in “rapidly-evolving technology, such hard and fast rules can quickly become outdated and unfit for purpose.”

Who do the DLT Regulations apply to?
The DLT regulations apply to any business (a “DLT Provider”) which uses Distributed Ledger Technology (whether this is blockchain technology or otherwise) in or from Gibraltar for storing or transmitting value belonging to others.

The Nine Core Principles
The DLT regulations establish nine fundamental principles for which the Gibraltar Financial Services Commission has responsibility to ensure compliance with by adopting a discretionary approach applied on a case-by-case basis. As such, a DLT Provider must:

- Conduct its business with honesty and integrity.

- Manage and control its business effectively, and conduct its business with due skill, care and diligence; including having proper regard to risks to the business and customers.

- Ensure that all of its systems and security access protocols are maintained to appropriate high
standards.

- Pay due regard to the interests and needs of all its customers and, communicate in a way that is fair, clear and not misleading.

- Have effective arrangements in place for the protection of customer assets and money when it is
responsible for them.

- Have systems in place to prevent, detect and disclose financial crime risks such as money laundering and terrorist financing.

- Maintain adequate financial and nonfinancial resources.

- Have effective corporate governance arrangements.

- Be resilient and have contingency arrangements for the orderly and solvent wind down of its business.

The Application Process
The DLT regulatory regime becomes effective as of 1st January 2018. DLT Providers will need to submit an application to the Gibraltar Financial Services Commission within the first 3 months after 1st January 2018 to comply with the DLT regulations. The DLT regulations have left open the possibility for DLT Providers to submit their applications to the Gibraltar Financial Services
Commission prior to 1st January 2018 once the Gibraltar Financial Services Commission has published its guidance notes and clarified the application process. The licence application fees will be between £10,000 and £30,000, depending on the complexity of the DLT business proposal.

Initial Coin Offerings
In addition, the Gibraltar Financial Services Commission has advised that whilst ICOs will not currently fall within the scope of the above new DLT framework, they will continue to monitor the use of tokens as a means of raising finance and may look to introduce complementary regulation covering the promotion and sale of tokens, aligned with the new DLT regulatory framework.

In the meantime, the Gibraltar Financial Services Commission has indicated that it expects Gibraltar’s
professional services providers to advise their clients that the following matters (which are not intended to comprise an exhaustive list) ought to be addressed in any ICO:
• the accuracy and completeness of the information disclosed in any whitepaper and website;
• the disclosure of risks to consumers;
• the governance arrangements that are in place;
• the fitness and propriety of the founders/promoters of the ICO company;
• the clear strategy that will be followed after a successful token launch;
• the financial crime risks and KYC procedures being adopted; and
• any reputational risks.

Concluding remarks

The introduction of the DLT regulatory framework evidences Gibraltar’s agility as a jurisdiction and its ability to anticipate and quickly adapt to accommodate global market trends. Gibraltar continues to position itself as a leading reputable jurisdiction from which FinTech and other technological businesses may operate. The online gaming industry, for which Gibraltar is recognised as the world’s premier jurisdiction, exemplifies the case in point. The local industry and professional expertise in FinTech and technological advancements provides an exceptional resource for Distributed Ledger Technology businesses to utilise. In addition, the legal, fiscal and regulatory environment are embracing and conducive to encouraging further growth in the application of blockchain technology to ever more real world use cases. Gibraltar and Hassans remain poised to continue playing their part in the advancement of this globally transformative technology and being your partners in this extraordinary journey.