Why you should consider setting up your regulated crypto exchange in Gibraltar
Flag Theory Weekly Letter – Thursday, June 21st, 2018
About 20 years ago, Gibraltar, a tiny overseas British territory located on the Spanish southern coast with a population of fewer than 35,000 inhabitants, began to establish the foundations of what would be one of the largest online and offline gambling centers and a reputable offshore financial center.
Gibraltar introduced business-friendly policies, including one of the most effective and respected regulatory e-gaming regimes, balancing a strict but reasonable licensing process to safeguard reputation with a competitive offer, favorable taxation, and a banking infrastructure to support the sector.
This legal framework attracted renowned industry names to the country and made Gibraltar one of the largest e-gaming hubs in the world, accounting for more than a third of the whole online gaming business pie worldwide.
Now in 2018, it seems that Gibraltar wants to repeat this success story by boosting the newest disruptive sector – Blockchain and cryptocurrencies.
Gibraltar Distributed Ledger Technology Provider License
Gibraltar aims to maintain its thriving financial services industry by attracting fintech companies working with blockchain technology,
Last January, legislation came into force to create a favorable regulatory climate to attract blockchain and cryptocurrency companies: a financial services license for distributed ledger technology providers (DLT).
Issued by the Gibraltar Financial Services Commission (“GFSC”), Gibraltar’s financial services regulator, the DLT provider license provides a regulatory framework that allows companies conducting businesses using blockchain technology to do so in an authorized and regulated manner, including cryptocurrency exchanges.
Currently, it is possible to start a cryptocurrency exchange without a license elsewhere. Actually, some of the world’s largest crypto exchanges are not regulated.
Most that are regulated operate under an Electronic Money/Payment Institution License. These licenses allow fiat wallets to be enabled and therefore support fiat currencies in the exchange but their adequacy with respect to cryptocurrency activities is uncertain and it is to be expected that specific regulations adapted to this activity will be introduced sooner rather than later.
Instead of just alerting of risks and putting the brakes to companies innovating in the financial sector, Gibraltar has already taken the bull by its horns and has done its homework with the introduction of a specific regulatory framework for blockchain companies, including exchanges, that are settled in the Rock.
With a government that has publicly expressed its support and willingness to attract the blockchain and crypto industry and having enacted its correspondent legal framework and its pro-business environment, there may not be jurisdictions more attractive than Gibraltar for blockchain companies that are seeking to be regulated and are looking to do business in a sound and safe jurisdiction.
In addition to reducing regulatory uncertainty, Gibraltar’s regulated exchanges will enjoy three major benefits: legitimacy with consumers, access to financial services and reasonable taxation.
Gibraltar Banking & Fiat Currencies for Exchanges
Unless you are looking to offer fiat money remittance or prepaid cards linked to the account, supporting fiat wallets may be covered by the DLT provider license and it may not be necessary to acquire an additional electronic money institution license, as is the case in other countries of the EU and the United States, so that your exchange can effectively support fiat currency.
During this last year, we have seen many Exchanges have their bank accounts closed, forcing them to look for alternative systems such as payment processing companies or simply having to halt fiat deposits and withdrawals.
Going through the regulatory filter provides confidence to financial institutions, facilitating bank account opening in Gibraltar and being able to operate your business properly in addition to being able to support customer’s fiat currency wallets.
Legitimacy, Transparency and Competitive edge
Unfortunately, bad practices, market manipulation, and hacks have been common in exchanges.
Considering the current situation, the fact of being regulated and subject to regular controls, audits, and transparency requirements will help the sector gain legitimacy with customers and attract institutional money, not only providing a competitive edge over other exchanges but also establishing industry standards and gaining the needed confidence to boost this industry to mass adoption.
Taxes in Gibraltar
Gibraltar is not a tax-free jurisdiction but its taxation is relatively low and reasonable.
Exchanges incorporated in Gibraltar under the DLT provider license will be subject to a 10% corporate income tax. Capital Gains and Dividend income are exempt from taxation, foreign-source income derived from an activity other than those covered by the license may be exempt from taxation as well.
In addition, there are several tax incentives available for certain qualified startups like being able to claim 100% of their eligible capital allocations in the first year of operation. In addition, for certain start-ups, there are also tax credits available for social security contributions.
Employee and employer, social security contributions account for 10% and 20% of gross earnings up to a maximum of GBP 119.17 and GBP 158.17 per month, respectively.
Personal income tax is applied on a progressive tax rate up to 28% for annual income over GBP 65,000 and subsequently regressive tax rate up to 5% for income over GBP 200,000.
Establishing your business in the Rock means having a real presence in the territory. To obtain the license, you will need to establish an office with real activity and the effective place of business management and decision making must also be in Gibraltar meaning the management team must reside there.
To obtain the license you must demonstrate having a solid business plan, enough financial resources with reasonable allocated capital. You must also have in place adequate IT systems for risk management, protection of the client’s assets and security systems, KYC and prevention of money laundering and financial crime, data protection, and high-standard security access protocols.
The background of the promoters and managers of the exchange will be taken into account with a due diligence procedure to ensure that the team is made up of honest, skilled and experienced staff, as well as having adequate legal support, to carry out the business without diminishing the reputation of the jurisdiction.
You must demonstrate how you will comply with the Nine Regulatory Principles of DLT.
How to obtain the DLT Provider License
In short the process of obtaining the license consists of a pre-application where it is determined if the activity falls within the regulation, an initial evaluation where the inherent risks and complexity of the applicant’s proposed activity and business model will be determined and a final process including a presentation to the GSFC to demonstrate how the GFSC’s regulatory outcomes/principles will be met.
After obtaining the license, GSFC officials will visit the office to ensure that the systems, processes, and controls have been implemented effectively and are in line with what was communicated during the application.
The process takes approximately 3 months.
It is important to note that depending on the type of digital assets that are going to be traded in your exchange, you must obtain other licenses. For instance, establishing a platform to trade instruments such as bitcoin derivatives, or security tokens which may require obtaining a Stock Exchange license.
Gibraltar, the next Blockchain hub?
In addition to the DLT Provider license, Gibraltar has already announced that they plan to launch token regulations, creating a fully-regulated market for token sales launching utility tokens, which will be considered commercial products and not securities.
This may not make a big difference from a token perspective due to the inherent global scope of an ICO. A token regulated as a commercial product in Gibraltar can still be considered a security in the US and would be subject to us jurisdiction if the tokens were sold to US persons (among other things which could subject the token sale to US scrutiny).
However, these regulations will allow token sales to be under a greater degree of regulatory certainty, thus providing confidence to potential buyers/participants, erasing bad actors and professionalizing this market.
Gibraltar’s regulations are forward-thinking and show support to this nascent industry. That and its combined business-friendly policies and reasonable taxation provide the Rock with the ingredients to become a global industry pioneer and possibly the next blockchain hub.
We can help you
If you are planning to establish your regulated cryptocurrency exchange in Gibraltar we here at Flag Theory together with our partners in Gibraltar can help you. From company incorporation to the entire license application process, review of the business plan, bank account opening to assist in the development of data protection policies, T & C’s, compliance, contracts and support for the physical establishment in Gibraltar we’ve got you covered.
We can also help you compare other available options that may be more suited to your needs and situation. Contact us, it will be a pleasure to serve you.
Would you like to receive the Flag Theory Weekly Letter in your email?
NOTICE: The contents of this article are not to be considered as a legal opinion or tax advice and should not be relied upon as such. Far Horizon Capital Inc does not hold itself out as a legal or tax advisor. If you wish to receive a legal opinion or tax advice on the matter(s) in this article please contact our offices and we will refer you to an appropriate legal practitioner. Use of our website FlagTheory.com is subject to our terms and conditions.