Offshore jurisdictions vie for cryptocurrency dominance

The enormous gains made by Bitcoin in 2017 has piqued interest among mainstream investors but enthusiasm has been tempered by its volatility and concerns over its usability as a currency.

Regulators have watched the development of these currencies cautiously and have yet to develop a consensus definition on whether they are assets or currencies.

In a Bitcoin warning published this week Guernsey’s regulator says the cryptocurrency should be treated with “extreme caution”.

“There are signs that the current valuations of Bitcoins are being enhanced by speculative investment flows,” it reads.

“Whilst we appreciate some of those holding Bitcoins over the last 12 months may have made very good financial returns, we would encourage all potential investors to remember that.

“Bitcoins are not backed by underlying assets and that it is possible that those investing in them could see very large losses rather than good returns with the risks being very similar to those associated with gambling.”

While sharing these concerns Gibraltar, Malta, Jersey and UAE regulators have all been working on different ways of bringing digital currencies, led by Bitcoin, into the regulatory fold.

Gibraltar

In July the Gibraltar Financial Services Commission (GFSC) is on the verge of implementing a new licensing system for start-ups focusing on coin technology.

The move would formally recognise the use of blockchain records as an accepted mechanism for transmitting payments.

Blockchain is the process of transacting in Bitcoin and other digital coins which rely on digital ledger technologies.

The GFSC’s digital ledger licence guidance notes covering honesty and integrity, customer care, resources, risk management, protection of assets, corporate governance, cyber security, financial crime and resilience.

The system applies to companies that offer financial services, meaning they transmit money or assets, through the use of Blockchain or distributed ledger technology.

The British overseas territory sees this new regulatory system, which comes into effect in January, as a way to attract new fintech firms after Brexit.

Malta

The Mediterranean island doesn’t want Gibraltar to have clear run with the new technology and has pledged to lead Europe on blockchain and DLTs.

“Our plan for blockchain is twofold: to make public sector operations more efficient through blockchain and make Malta an international hub for business operating block chain technology,” Silvio Schembri, parliamentary secretary for financials and digital, has said.

The jurisdiction is currently consulting on virtual currencies and earlier this month held a major conference on Bitcoin.

Addressing 300 bitcoin and blockchain entrepreneurs, Schembri said the discussion paper would “lead to a policy framework that supports virtual currencies and related technologies while ensuring effective protection for investors, financial markets and stability”.

Jersey

In Jersey cryptocurrency is regulated as an asset class and it launched the world’s first Bitcoin fund in 2014 – the GABI fund established by Global Advisors.

This month Jersey saw its first initial coin offering from Arc Fiduciary, called the ARC Reserve Currency, which is hoped will become a widely used alternative asset.

Commenting on the launch, Stephen Findlay, co-founder of the ARC Reserve Currency, said the asset management industry is “only just beginning to embrace blockchain technology, yet as an industry it is likely to be one of the biggest beneficiaries of distributed ledger technology”.

“One of the challenges the industry faces is to establish the correct regulatory approach for asset-backed cryptocurrencies – or so called crypto assets.

“In establishing ARC Reserve Currency (a crypto asset) we wanted to start to address this regulatory challenge and help to establish a positive framework and appropriate regulatory environment for all crypto assets.

“We selected Jersey as it was clear that they are one of the most forward-thinking and co-ordinated jurisdictions for cryptocurrencies. They were pro-active and engaged in reviewing our approach, and have enabled an important initial step in regulating the issuers of future crypto assets.

“There is still much more to be done on a global scale to establish an appropriate regulatory framework, which can accommodate the borderless nature of crypto assets,” Findlay said.

Whether you invest in a cryptocurrency or use its technology to improve processes and transactions, 2018 looks set to be influenced by the rise of Bitcoin.