If the complex regulations of the crypto hub fail, it could cause damage to Territory’s financial industry and diplomatic sanctions
The Gibraltar Stock Exchange is quietly preparing to take over the former naval garrison.
A proposal to Valereum, a blockchain company, to purchase the Gibraltar exchange is being reviewed by the peninsula’s regulators. This would mean that the British overseas territory could host the first integrated bourse in the world, where both traditional bonds and major cryptocurrencies like bitcoin and dogecoin.
This is a bold move in a small territory of 33,000 inhabitants, where the financial industry, which accounts for approximately a third of Gibraltar’s £2.4bn economy, is managed by a regulator with 82 employees. The enclave could be a global hub for cryptocurrency if everything goes according to plan. However, if the control mechanisms set by the small group of regulators fail, it could cause reputational damage and eventually diplomatic sanctions that could threaten its economic health.
While many countries, including China and the UK, have banned or openly warned against investing in crypto assets, Gibraltar has defied the trend. It has committed to formalizing the regulation of cryptocurrencies to help ensure the territory’s future status as a financial center.
This comes as Gibraltar is trying to get rid of its reputation as a tax haven. The government has sued a Spanish newspaper to try to restore its global standing.
Albert Isola is Gibraltar’s minister of digital, financial services, and public utilities. He says that although Gibraltar was once a tax haven, it has since overhauled its tax- and information sharing policies. He says that crypto regulation has similar results: it is helping to root out bad actors and giving investors assurance.
Isola states, “If you want to do naughty crypto things, you wouldn’t be in Gibraltar because the firms there are licensed and regulated and they don’t exist anywhere else in the globe.”
Gibraltar’s regulator approved 14 blockchain and cryptocurrency firms for its licensing program. This attracted Richard Poulden (ex-chairman of Sirius Minerals), who chose Gibraltar to host Valereum’s crypto-exchange project. He claims that Valereum is trying to harness a crypto sector worth approximately $3.5tn (£2.6tn), which is roughly equal to the total value of all listed companies on the London Stock Exchange.
Poulden is the chairman and CEO of Valereum. It is based in Gibraltar. The company focuses on technology that can link mainstream currencies like the dollar and the pound with crypto assets.
Reorganizing an exchange with only three employees will prove difficult. It will also require a change to Gibraltar’s regulations regarding how crypto will be traded on the GSX. Poulden claims that his company is relying more on technology than people to eliminate bad actors.
He said that running anti-money laundering checks for cryptocurrencies is not much different than running them on any currency. It can be much easier to track back funds through blockchains than it is to locate them in banks.
The attention of other countries will be paid. Neil Williams, London-based deputy chief of complex crime at Reeds Solicitors, says: “If it succeeds, you would certainly expect that other jurisdictions will follow because it is an ever-increasing valuable commodity.”
Experts warn that Gibraltar could be subject to sanctions from countries like the US if it gives legal approval to crypto companies that – even accidentally – allow money laundering, black-market criminals, or kleptocrats who want the anonymity of crypto assets.
This comes amid concerns at major global financial regulators like the Bank of England over the rapid growth of crypto-assets and potential consequences for investor protection, market integrity and money laundering, as well as the financing of terrorist groups.
Charlie Steele, a partner in Forensic Risk Alliance, a forensic accounting company and consultancy, says that money laundering, sanctions evasion and terrorist financing could be enabled or facilitated by it. He is also a former US justice secretary official.
“Regulators around the world, almost all of them really,” said one.
One month prior to Valereum’s October bid for the GSX, Gary Gensler, the head of US Securities and Exchange Commission declared that crypto as an asset was ” more similar to the wild west…rife in fraud, scams and abuse in some applications”, raising concerns about criminal funds entering the mainstream financial system.
Insufficient anti-money laundering controls have led to jurisdictions like Malta being grey-listed by the FATF, the world’s money-laundering watchdog. This could have serious consequences for Malta’s economy and is a warning to other countries and territories that might be tempted not to follow regulations.
Singapore had to reverse its approval of Bitget, a standalone crypto-exchange. It suspended Bitget’s standalone crypto exchange earlier in the month due to its promotion of a digital currency that was involved in a high-profile branding dispute. The exchange had used an unauthorised image from K-pop group BTS to maximize its profits.
Steele warns that if it looks like everyone is running to Gibraltar for real regulators, it will not work out well for them.
If sanctions or anti-money laundering rules are broken or evaded they can do a lot of things, including lead international through the FATF to make it hard on Gibraltar. He adds that you’ll be able to see that the FATF has all sorts of measures that will force its members to limit business with this country.
Gibraltar insists it has been welcoming crypto firms with open eyes. It has consulted on the sector’s regulation for four years, before introducing it in 2018. This helped it secure its reputation as “Blockchain Rock”. They filter through and license firms to eliminate bad actors, according to Isola.
“I don’t see how Gibraltar can have an increased risk. You can run the exact same business in any other European country without supervision, licensing, or regulation. How can regulation make us more vulnerable? Isola says the exact opposite.
He points out that only 14 applications have been approved by the country’s regulator in the past three years. This is a figure that he says speaks to the strictness of the licensing system. He says, “It’s not a gold rush.”
“When it comes to blockchain-based innovation, the knee-jerk reaction for any commentator – especially when it involves small jurisdictions like Gibraltar, is ‘Oh My God, risk, alarm and every other thing,'” Tom Keatinge, director at RUSI’s Centre for Financial Crime and Security Studies, says. “I think it’s important to understand the capability of the jurisdiction before you jerk knees. Gibraltar is the small jurisdiction that has spent the most effort and time in understanding the potential of blockchain.
The Gibraltar Financial Services Commission did not comment on the Valereum transaction.
