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Gibraltar and Crypto currency - Each ready for the other?

Timing is everything in most walks of life. Things come together, planets align, and the ideal opportunity for making brave moves comes to pass. Right now, what must be exercising the minds of politicians in Gibraltar is whether this may be the right time to openly embrace the maturing crypto currency sector.

The chequered history of Bitcoin is well known and not dissimilar to most mediums of exchange. People used to bite into coins to check whether or not they were being paid in valuable silver or cheaper lead, and only last year Reuters reported that police had seized €17m worth of forged €50 notes in Naples. This has not stopped people continuing to use notes and coins backed by governments, nor does it seem to have brought a halt to people dealing in Bitcoins. Hence the question is – should Gibraltar lay out the welcoming mat to crypto currency businesses?

This is not just an idle speculative question. Both crypto currencies themselves and the technology behind them (known as the “blockchain” – a record of all steps in the life of the crypto coin) have the power to massively disrupt not only money transfers but also to transform many parts of businesses where validation or approval of phases in a process is required.

It was only last June at the PayExpo in London, for which Gibraltar was a key sponsor, when interest in crypto currencies was seen to have finally broken into the mainstream. Crypto was on the lips of most delegates (even the banks) and questions were being asked about whether or not Gibraltar had the appetite to enter the crypto world. Would they encourage start-ups in the exchanges, investment funds, miners and other related businesses? Would they try to attract the highly skilled developers to Gibraltar and what is it that Gibraltar could offer that would attract them?

While KPMG and Hassans hosted a crypto currency seminar in December aimed at educating the business community in crypto currencies (based on the number of attendees, the Gibraltar business community was eager to learn), we know now, of course, that Gibraltar Finance was also looking into the whole area for much of the summer and autumn and issued a white paper just before Christmas. This paper put forward reasonable suggestions regarding a regulatory framework for funds, exchanges and other crypto businesses and did not seek to prevent businesses from accepting crypto currencies in exchange for goods and services – the risk of movements in exchange resting with the trader, as is the case in dealing with volatile currencies such as the Rouble, Swiss Franc or Euro. What is important about this suggestion is that this would make Gibraltar one of the first jurisdictions to offer a regulatory regime covering funds and exchanges – ahead of the UK, US, Singapore, Hong Kong and the rest of Europe.

In summary, the paper recommended:

  • Crypto currencies should not be afforded the status of a currency nor of a security
  • Crypto currencies should be treated as a commodity
  • Businesses should be free to accept crypto currency as a method of payment
  • The regulatory structure should not seek to regulate the pricing, liquidity, volume or volatility of crypto currencies
  • Clear and unambiguous risk statements must feature in any crypto currency activity

The regulatory approach recommended a concentration on “providing added value to the consumer”. In adopting this approach the authors hoped that the consumer would take comfort that the transaction with the regulated operator would have a greater chance of being completed. As this is a global phenomenon, offering crypto businesses a base from which to offer their services was seen as something that would be attractive to the operators, given Gibraltar’s experience with regulating both financial and online gaming businesses. Added to the availability of staff with relevant experience, a favourable taxation regime and the accessibility of key decision makers, it was felt that Gibraltar had a strong proposition.

Our December seminar clearly showed that the sector was looking to embrace regulation – crypto is no longer the sole preserve of those who want to “buck the system”, instead the sector wanted to come out of the shadows and be treated as viable, clean, respected business.

All of this actually matters to Gibraltar, as it must be aware of the actions of other countries which have a detrimental effect on doing business here. The imposition of POCT on online gaming profits by the UK Government affects Gibraltar more than any other jurisdiction while the drive for greater transparency in the financial sector is likely to see a reduction in the number of trust companies and possibly funds based here. Because we are a location with only 30,000 inhabitants such changes will have a limited effect elsewhere, but they can have a large impact here.

Responses to the white paper were due in by the end of January and are currently being considered. I hope that sufficient consideration will have taken place before KPMG’s eBusiness Summit on 23/24 April, so that Minister Isola or his officials can give us the official Gibraltar position.

So, is the time right? The sector wants regulation and Gibraltar needs to be open to new technologies and appears to be open to providing such regulation. This may well be a situation where the needs and wants of both parties are met, benefiting all concerned. I certainly hope so, and look forward to seeing Gibraltar making as good a success of crypto as it did online gaming in the early part of this century.

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Gibraltar - impact of Brexit

Last week our editor took a general overview of some of the scenarios for Gibraltar if Britain were to leave the Euro. This week, as the atmosphere in the British Conservative Party becomes ever more toxic, Michael Castiel, partner at Hassans lawyers on the Rock, goes into more detail (this piece written before the Iain Duncan Smith resignation and subsequent arguments happened).

However unlikely it may prove, the prospect of Britain's withdrawal from the EU sends shivers through Gibraltar's financial services, gaming and tourism industries, which are at the core of Gibraltar’s economy. For, if Britain leaves the EU, Gibraltar goes too, and, should Brexit occur, it is Gibraltar’s relationship with the UK that as in the past, largely will shape Gibraltar's future.

Gibraltar joined the European Union in 1973 as part of the UK. While rights to freedom of services across borders of EU member states apply between Gibraltar and the rest of the EU, because Gibraltar is not a separate member state (and is in fact part of the UK Member State) those rights do not apply between Gibraltar and the UK. Instead a bilateral agreement, formalised almost two decades ago, gives Gibraltar's financial service companies the equivalent EU passporting rights into the UK. Accordingly and pursuant to such agreement, where EU rights in banking, insurance and other financial services are concerned, the UK treats Gibraltar as if it is a separate member state.

This reliance on the special relationship with the UK is recognised by both the Government and the Opposition in Gibraltar, and when the territory (which in this instance as part of the UK electorate) goes to the polls on 23 June, the vote to remain in the EU is likely to be overwhelming. This may have symbolic significance but realistically seems unlikely to influence the outcome. In actual terms, although some non-EU jurisdictions use Gibraltar and its EU passporting rights as a stepping stone into Europe, almost 80% of Gibraltar’s business dealings are with the UK.

But whether or not Britain maintains the 'special relationship' with Gibraltar, if Brexit becomes a reality, other factors will come into play, with the ever-present Spanish Government’s historic sovereignty claim over Gibraltar topping the list.

Recently Spain's caretaker Foreign Minister Jose Maria Margallo went on record that if the UK voted to leave the EU he would immediately 'raise with the UK the question of Gibraltar.' If this was to come about it could take one or more of several different forms, ranging from a complete closure of the border between Spain and Gibraltar, demanding that Gibraltar passport-holders obtain costly visas to visit or transit Spain, imposing more stringent border controls, or a frontier toll on motorists driving into or out of Gibraltar. The latter idea was in fact floated by the Spanish Government three years ago, but dropped when the EU Commission indicated that any such toll would contravene EU law.

Here, again, imponderables come into play, for much will depend on which political parties will form the next Spanish government. A Spanish government headed by the right wing PP party is likely to take a less accommodating attitude towards Gibraltar (the Foreign Minister having recently indicated that in case of Brexit the Spanish Government may opportunistically push once again for a joint sovereignty deal with the UK over Gibraltar) whereas a left of centre coalition will likely adopt a more pragmatic and cooperative relationship with Gibraltar in the event of EU exit.

The most significant changes to Gibraltar's post-Brexit operation as an international finance centre are likely to be in the sphere of tax, and while Gibraltar has always met its obligations in relation to the relevant EU rules and Directives, it has also been slightly uncomfortable with aspects of the EU's moves towards harmonisation of corporate taxes across member states.

Although it was formed as a free market alliance, since its inception fiscal matters have been at the root of the EU, but Gibraltar's 'special relationship' with Britain has allowed considerable latitude in relation to what taxes it imposes or those it doesn't. However, as is the case with other member states, Gibraltar has increasingly found in recent years its fiscal sovereignty eroded and its latitude on tax matters severely curtailed.

As in Britain, Gibraltar has benefitted from several EU Directives introduced to harmonise and support the freedom of establishment, particularly the Parent-Subsidiary Directive which prohibits withholding taxes on cross-border intra-group interest dividend and royalty payments made within the EU.

As a stepping stone for foreign direct investment, should Brexit come about EU subsidiaries could no longer rely on these Directives to allow tax-free dividend or interest payments to their holding companies based in Gibraltar. In the case of the UK, bilateral double tax treaties will no doubt mitigate the impact of the non-application of any tax related Directives. Gibraltar, however, is not currently a party to any bilateral double tax treaties. Accordingly, Gibraltar would either have to seek from the UK the extension of all or some of the UK’s bilateral tax treaties to Gibraltar (subject of course to the agreement by the relevant counterparties) or it would need to negotiate its own network of bilateral double tax treaties with a whole series of EU and non EU Member States. To say the least, neither of these options would be straightforward to implement at short notice and would need the wholehearted support of the British Government

Whilst Gibraltar’s economy is likely to be adversely affected should Brexit occur, there may be some potential benefits. An EU exit would result in fewer regulations and possibly may provide Gibraltar with greater exposure to emerging economies.

From a tax perspective, an EU exit would probably enable Gibraltar to introduce tax rules and incentives that are contrary to EU tax laws and would provide the Gibraltar Government more freedom to adopt competitive tax regimes that may be considered contrary to EU state aid rules. How possible or effective any such strategy would be is doubtful given the OECD driven anti-tax avoidance climate affecting all reputable jurisdictions whether within or outside the EU.

In this as well as other possible change much will hinge on any post-Brexit relationship with the UK - an issue which the Gibraltar Government addressed recently in a paper sent to Westminster's Foreign Affairs Committee. It stressed not only that 'EU membership has been an important factor in the development of Gibraltar’s economy' but also the importance of 'clarity as to the rights the British Government will protect and defend for Gibraltar in the context of its own negotiations.'