The decision for setting up an Initial Coin Offering is not as easy as it sounds. The most crucial question to be answered is which the most suitable region for the establishment ? Cryptocurrencies and Blockchain have enjoyed great success, with some countries to have become global advocates, while others to have actively banned cryptocurrencies and various shades in between.
The most disruptive is Japan, which recognized Bitcoin as legal tender. At the other end of the spectrum, Bangladesh passed a law in 2014 starting that anybody caught using the virtual currency could be jailed under the country’s strict anti-money laws.
Whatever the individual case for a country, the growth in cryptocurrencies in the last ten years has shown that there is a strong momentum around this new technology. For this reason, this is the time for business initiatives around cryptocurrencies, but under the best of conditions.
In the next lines, a Mediterranean paradise for crypto-related business activities, Gibraltar, is presented in terms of its regulation history and adjustment to crypto products and its tax regime.
Gibraltar – as a pioneer in regulating cryptocurrency businesses
Gibraltar is a British Overseas Territory located on the coast of Spain. Gibraltar is an economically prosperous sovereignty with a highly-diversified economy spanning financial services, shipping, tourism, and most notably e-gaming, due to primarily it’s 10% fixed corporate tax rate. The low tax regime and the UN status make The Rock a favorite destination for small businesses.
In July of 2016, the EU regulated Gibraltar Stock Exchange (GSX) welcomes BitcoinETI, an asset-backed Exchanged Traded Instrument that is invested exclusively in Bitcoin, making it the first European regulated product for the leading digital currency.
Since 2016, Gibraltar has been making consistent steps towards cryptocurrency regulation by conducting research on DTL, presenting proposals for the new regulatory framework, and attracting numerous investments from crypto-engaged companies like Xapo and Coinsilium.
However, the Gibraltar Financial Services Commission (GFSC) proceeded to another major and ground-breaking step towards regulating cryptocurrency businesses. To address the rising use of tokens and coins based on Distributed Ledger Technology (DLT), which underpins decentralized virtual currencies, it introduced a new regulatory framework that came into force in January 2018. That regime regulates the activities of Gibraltar-based companies that use DLT for virtual currency exchanges. The framework aims to enhance DLT-based operations and present the country as a sound, safe, and well-regulated place to do business in the space. Moreover, the framework tends to increase the economic development of the region and to help companies to develop new DLT-based products and maintain their competitive advantage.
The scope of DLT framework
Natural and legal persons, which use the DLT for business activities engaged in “the transmission or storage of value belonging to others” and they are not be subjected to other legal regulations will be subjected to this new Gibraltarian DLT framework. These activities may include centralized currency (VC) administrators, VC wallet providers, trading platforms, VC exchanges, payment service providers, issuers of asset-backed tokens, pre-load VC, vouchers and wallets, and peer-to-peer gaming platforms operators.
Nine principles of the DLT framework
- Conduct their business with honesty and integrity.
- Pay due regard to the interests and needs of each and all their customers and communicate with them in a way that is fair, clear and not misleading.
- Maintain adequate financial and non-financial resources.
- Manage and control their business effectively, and conduct their business with due skill, care and diligence; including having proper attention to risks to their business and customers.
- Have effective arrangements in place for the protection of customer assets and money when they are responsible for them.
- Have effective corporate governance arrangements.
- Ensure that all of their systems and security access protocols are maintained to appropriate high standards.
- Have systems in place to prevent, detect and disclose financial crime risks such as money laundering and terrorist financing.
- Be resilient and have contingency arrangements for the orderly and solvent wind down of their business
Gibraltar has, over the last decade, proven its adaptability to evolving technology. By positioning itself as the first jurisdiction worldwide to license and regulate the providers of DLT-based services, and by avoiding rigid legislation, which could stifle innovation, it proved its ability once again.
ICOs in Gibraltar
It would be pointless to talk about Blockchain start-ups without mentioning of Initial Coin Offerings or “ICOs,” by which companies pre-sell a cryptocurrency or token granting investor’s early access to a future product or platform. This year was noticed an explosion in the popularity of this means of funding.
Tokens can be equity-linked or have warrant-type features, and as a result, fall under the category of the existing and extensive governing traditional Initial Public Offerings. This led many to characterize ICOOs’ space as a “Wild West,” in which if regulation lacks, unscrupulous individuals may profit off their unfounded promises to investors, who have no means by which to hold them accountable.
Gibraltar does not regulate or limit either technology itself or the inherent risks in tokens and cryptocurrencies. The DLT Regulations provide an element of consumer protection by safeguarding the required infrastructure and the corporate governance of the operators. This had led to the increase in the number of Blockchain-based start-ups that be established in the region since last May.
The Gibraltar Blockchain Exchange –a sound haven
In January 2018, the Gibraltar Stock Exchange (GSX) announced the launching of the Gibraltar Blockchain Exchange (GBX), which targets at becoming the world’s first nationally regulated exchange for tokenized securities, GBX’s mission is to set up a centralized cryptocurrency exchange for the highest quality cryptocurrencies and tokens, focused on investor confidence and liquidity. To achieve this, its community-based platform will be overseen by an Alliance Council comprised of a cross-section of the community (tech firms, operators, legal advisors, investors and industry experts), which will collaborate with GBX to set up guidance and standards for listing and trading.
The GBX will be founded on strong and secure technology, attracting top-tier token sales with high entry-barriers and AML and KYC standards, to ensure confidence, trust, and credibility.
Gibraltar’s Taxation on Cryptocurrencies
There are obvious advantages to establishing a cryptocurrency business in Gibraltar, as it is part of the European Union, having joined with the United Kingdom in 1973 and it is regulated to a very high standard but benefits from being outside the VAT zone. Corporation tax in Gibraltar is 10% on profits accruing in or derived from Gibraltar and all individuals will pay personal income tax at an effective rate of less than 25%.
Recoup the reasons to incorporate your ICO in Gibraltar
So far Gibraltar has proved to be a popular jurisdiction in which to establish the ICO company. This is primarily due to the following reasons:
- ICO proceeds are not taxable in Gibraltar
- There are local banks in the jurisdiction which are willing to accept the digital to0kens and convert them to fiat currency
- A wide network of professional service providers are familiar with ICOs and DLT
- An accessible, reputable, and user-friendly financial regulator
The Fund Industry
According to the latest Hedge Fund Research Report, the fund launches exceed fund liquidations for the first time since 2015. Predicted growth areas for 2018 include Blockchain and cryptocurrency through Initial Coin Offerings (ICOs).
Recent press reports show that crypto hedge funds have made exciting returns of more than 1,500% in 2017. Comparing the above return with that of the average return of traditional funds (8%), it is apparent the reason why Crypto funds are attracting. The latest statistics from the Cayman Islands Monetary Authority reveal that there are more than 10,500 funds currently registered in the Cayman Islands. Less than 1% of those funds are believed to exclusively focus on Crypto assets. However, if the market conditions are reaffirmed, a steep increase in fund formations with the focus on cryptocurrency strategies will be noticed, providing that the existing legal framework in the Cayman Islands provides the flexibility to allow technologies like Blockchain to flourish. Furthermore, Cayman Enterprise City, a technology-focused Special Economic Zone, has already become home to multiple companies developing FinTech, Blockchain and Crypto technology.
The benefits of Cayman Funds
The Cayman Islands are the pre-eminent jurisdiction for establishing international investment fund and finance structures. The Cayman Islands are characterized by a stable and predictable political and legal platform that allows participants with different needs from different countries to undertake legitimate transactions in a neutral environment. The highlighted point is the tax neutrality, but also it is offered a top level playing field for the participants. The Cayman Islands also boast world-class service providers, fast processing times, a first-class infrastructure and a widely admired and flexible regulatory framework. The Cayman Islands have also highly respected, regulated and professional service providers and institutions to accompany financial services providing a very high level of service. The laws of the Cayman Islands have substantially based upon English common law and a number of “key” English statutes. This gives Cayman Island’s law and legal system a common origin with those of many jurisdictions of its users, including the United States. It also means that the fund vehicles and the types of securities which Cayman funds offer are well recognized and accepted all around the world, and particularly in New York, London, and Hong Kong.
There are no exchange control restrictions or regulation in the region. This means that funds can be freely transferred in and out of the Cayman Islands in unlimited amounts. Furthermore, the Cayman Internet Park is designed for information technology and software businesses, FinTech Companies, telecommunications companies, internet companies and web portals, a great place for the establishment of partnerships and collaborations. It is one of the fastest growing offshore Information & Communications Technology (ICT) clusters in the Western Hemisphere. It is easy to attract talent to Cayman, as it affords a great lifestyle.
Unlike the US, the Cayman Islands do not regulate tokens or coins as a security. In the Cayman Islands, the definition of a security is codified in the law in a list of instruments that are common in today’s financial market. Because ICO tokens are not on the list, they are not securities in Cayman.
The Cayman Islands Monetary Authority has not issued regulations on ICOs, nor have they made any public statements on the matter. It’s possible that the CIMA will come down against ICOs.
Also, if your ICO token or business is construed as a “money service business” under Cayman law, you will need to have a money service license. That is to say, if you provide, as your principal business, currency exchange or money transmission, you will need a license.
Finally, among the priorities of the Cayman Islands’ authorities is preventing money laundering and terrorist financing. As even a claim of those activities could damage country’s reputation in the financial services industry, the efforts of defeating them are intense. Since one of the advantages of crypto is anonymity, the Cayman Islands; and ICO issuers are left to balance the need for AML and KYC with the privacy found in cryptocurrencies.
The Cayman Islands and Gibraltar are doubtlessly two prominent places for cryptocurrencies entrepreneurs and crypto-related activities not only from the tax perspective but also for the legal, political, and regulatory stability that offer to new and experienced investors and entrepreneurs. Besides the stability, the two nation show particular interest in new technologies and innovation, ensuring prosperous future directions towards cryptocurrency and its underlying technology, Blockchain. Off course, there are many other countries that moving forward in the crypto space and its regulation, such as Estonia, Japan, Denmark Singapore, Slovenia, and Germany, and offshore corporations like Puerto Rico, and Isle of Man that provide beneficial business environments for crypto entrepreneurship.