Gibraltar’s New Crypto Funds Roadmap

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. Gibraltar is now considered the ‘go-to’ location 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.

There is a whole new set of challenges when establishing crypto funds, 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. There is, however, 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 therefore created a special crypto fund committee specifically for addressing these issues.

The first resolution of the committee was to encourage the industry of Gibraltar to use Experienced Investor Funds (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. GIFA wishes to ensure that these practices are 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. The industry feels that investors in crypto funds should be afforded the regulatory infrastructure and the protections that the EIFs regulations offer, along with the support of experienced EIF directors, fund administrators and auditors, many of whom are notable absent in the establishment of some private funds. To date there has been remarkable consensus from the industry and 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 working on an extension of the GIFA Code of Conduct to include elements that should be considered by practitioners when they are establishing crypto funds. Among other topics, the code will deal with custody of crypto assets, valuation, corporate governance and, of course, security.

While it may be inevitable that some funds decrease in value as a result of fluctuations in the underlining crypto currencies, GIFA wishes to ensure that investors in Gibraltar crypto funds will be protected, in as much as they reasonably can be, from cyber-security threats and from risks associated with sub-effective corporate governance.

Although most of the principles that relate to the protection of investors in crypto funds can be gleaned from the current Code of Conduct, which was issued in conjunction with the Gibraltar Financial Services Commission several years ago, the new code will serve to help practitioners apply these principles to crypto assets. A notable example is the provision that crypto currencies should be kept in digital wallets with multi-signatory capability. It should never be acceptable that one person be able to transfer funds without the benefit of a second approval.

GFIA believes that some of these principles should be enshrined in crypto fund regulations as well. The principle with the Code of Conduct, as it is with many such codes, most notably the Irish Funds and Investments Association Code of Conduct, is ‘comply or explain’. In other words, the code recognises that there may be instances in which the principles that it sets out are not applicable to a specific situation and so, in that situation, an explanation should be provided as to why the principles of the code are not adhered to.

The interest in Gibraltar funds has been sparked in other areas as well. Traditional securities funds and algorithm funds are also being established. The funds industry is poised to take advantage of this growing interest, particularly since funds professionals often have the best skills to deal with ICO and DLT work. In short, the Government of Gibraltar should be congratulated for laying the regulatory infrastructure for this important new area.