This piece is my response to the report entitled "Virtual Currencies, A Proposed Regulatory Approach" authored by the Virtual Currency Working Group in Gibraltar.
Virtual Currency, namely Bitcoin centric regulation is developing and different approaches are being forwarded by different countries. The most notable of these being the New York State Department of Financial Services (NYDFS) Bitlicense, which could be considered the pioneer in attempting to create a license regime for the currency. Proposing a regulatory approach for Gibraltar in this sphere, demonstrates that our jurisdiction is open to innovation and technological development. Bitcoin, being the most used virtual currency, is already being accepted by the likes of Apple's App Store, Save the Children, Amazon and Microsoft. If we are able to create a regulatory regime which attracts the companies who offer services to these world renowned corporations and organisations, without thwarting innovation or adoptability, then Gibraltar could put itself on the map as a jurisdiction that enables and innovates rather than ignores. At its lowest value, the marketing possibilities behind these initiatives are invaluable given the mention and exposure that would be achieved from such an exercise. The potential for inflow of capital and corporations appreciating our fiscal and regulatory regime are there.
Virtual currency is widely adopted, but it is still not part of the mainstream. Calling virtual currencies mainstream would suggest it being the common current thought of the majority, when in fact it still hasn't reached that stage. Bitcoin, being the virtual currency that boasts of the largest market capitalisation, still stands at $4 billion, with the runner up Ripple standing at $500million; both small figures compared to mainstream fiat currencies that have a daily forex trade volume of $5.3 trillion (approx. figs). The main hindrance is adoptability, something that startups across the globe are currently addressing. These companies are the ones that need to be attracted to Gibraltar. On an off point, the venture capital flowing into these startups is impressive ($75million being the latest figure in funding); another great marketing possibility in putting Gibraltar on the maps of these venture capital firms who look for fiscally appealing jurisdictions - no capital gains comes to mind.
When it comes to complete bans and overt prohibitions on the use of virtual currencies, namely Bitcoin, there are only a handful of jurisdictions that have moved in this direction - usually it is those with weak currencies experiencing hyperinflation, prohibiting its adoption as a protectionist measure: Bolivia, Russia, Ecuador, Kyrgyzstan and Bangladesh. Iceland has supposedly restricted it, but this is dubious. The use of virtual currencies, namely Bitcoin, is otherwise free to be adopted by anyone who is willing to use it and accept it as a vehicle for the transfer of value, without interference, and with all transactions being published on the decentralised public ledger: the Blockchain. It is positive to see that the proposed regulatory approach does not intend to regulate or ban the exchange of virtual currencies by willing individuals and businesses who wish to adopt it in the making and receiving of payments, but rather, regulation shall apply only to exchanges, wallet providers and transmitters established within the jurisdiction. All the other elements surrounding virtual currencies, such as price, volatility and the Blockchain are going to be left alone, which is the only logical and possible way forward.
This approach should encourage merchants, as well as individuals, to adopt bitcoin payment services as they will be able to utilise the currency without the requirement of having to comply with an arduous regulatory framework which could also prove very costly. At the same time, this could also encourage service providers to seek licensing for their services as a "stamp of approval" and comfort for their customers, from a recognised jurisdiction. Potentially, this could result in a greater adoption than expected at local level, and hopefully, the creation of a home grown startup scene around the currency and its potential uses.
As to AML/CFT requirements, virtual currencies as mentioned above, are wholly decentralised and are not controlled by a central authority. Therefore, they do not require third parties for transactions to take place. As mentioned in the report, the only control that can be exercised is over exchanges, wallets and transmitters established in the jurisdiction, to which the currently applicable AML/CFT standards should apply. The intention of these regulations is to make money laundering and the financing of terrorist plots and groups more difficult to achieve, given that third parties such as banks are involved. But when it comes to virtual currencies, the need for a third party is eradicated and an open-source wallet is all that is needed. Those who want to circumvent AML/CFT regulations can easily do so by avoiding exchanges that require compliance and there are and will be plenty of those. In essence, what a service provider would achieve from licensing in Gibraltar is that they would be complying with EU level obligations in AML/CFT which, as mentioned above, would act as a "stamp of approval" for adopters looking for legitimate providers. The dark web will clearly be full of unregulated providers, but prudent adopters will look for this "stamp" for reassurance in the provider. This is a great selling point; however, the success of this is dependant on how enticing the cost to be regulated in Gibraltar is for a service provider.
To qualify virtual currencies, namely Bitcoin, as a commodity would be to follow the stance adopted by the likes of Japan and Finland, so it is not a radical or unpopular categorisation to use. Furthermore, to categorise it as a currency or a security, would be technically incorrect as there is no recognised issuer or central authority printing or issuing them. As is already known, Bitcoin is created by a process called mining and is carried out by self-proclaimed "miners" who keep the Blockchain updated in exchange for Bitcoin as a reward.
One aspect which we feel requires attention is the need to impose a minimum technology and infrastructure requirement for service providers wanting to enter the arena. This should serve to discourage online businesses, who see a lucrative opportunity in virtual currencies but lack the adequate technology and infrastructure to support their services and potential demand. Such a requirement should assist in mitigating against hackings, delays, crashes in the system, and security breaches - all the usual deficiencies that lead to lack of confidence and instability. Case in point is MTGox: a website that at its peak was handling 70% of all Bitcoin transactions, despite it having been created as a trading platform for “Magic: The Gathering Online” cards like stocks; not as a Bitcoin exchange. The inefficiencies and inadequacies of the platform, to handle the demand, culminated in lengthy transactional delays and a serious hacking scandal that left 850,000.00 Bitcoins missing and the company filing for bankruptcy. Obviously this is something a small jurisdiction like ours needs to keep in mind apart from cyber-security.
On the price of virtual currencies, namely Bitcoin, the assertion that "traditional supply and demand factors do not come into play" is not entirely accurate. To suggest this, goes against Bitcoin's fundamental purpose and principle: that of creating a currency free from manipulation and fixing. Bitcoin's price, is determined by volume and news of an increase or decrease in adoption or prohibition; hence, its price volatility. This link from bitcoin.org explains how the price works: https://bitcoin.org/en/faq#what-determines-bitcoins-price
It is clear that virtual currencies, namely Bitcoin, are changing everything. People are now able to transfer and receive value across borders, 24hours a day - including weekends - and at minimum costs without interference from third parties. With virtual currencies, namely Bitcoin, being mooted as the first application of many to make use of blockchain technology, the developments in this sphere will mean that regulation will need to be an evolving set of rules to accommodate all future developments. The fact that we are already proposing a regulatory framework is a huge step in the right direction, but that it will need moulding and adaptation is a fact that will need to be kept in mind. It is also positive to see this approach, as trying to fit virtual currencies into an existing framework would prove to be disastrous. With the true potential lying in the blockchain technology that supports virtual currencies, namely Bitcoin, the other applications that could be built on the blockchain ledger (i.e. smart contracts, decentralised storage solutions, marketplaces and next-generation databases for example), also provide great potential, especially for those jurisdictions that attract technology developers in this sphere.
One thing is certain, with the speed of development in this industry, appropriate regulation will need to be developed and kept updated and under constant review by the right people, with the appropriate expertise. This will ensure that as a jurisdiction, we always provide accurate and conscious regulations that encourage innovation and the development of this upcoming industry.
