Regulation is sometimes positioned as the enemy of innovation, an antagonistic force that slows progress in the name of bureaucracy. However, if implemented sensibly and proportionately, regulation can strengthen a private sector’s reputation by creating the conditions under which companies can focus on and improve innovation.
To do this right, you need to work with entrepreneurs and give them the opportunity to innovate and experiment. At the same time, standards must be enforced that promote proper corporate governance and prevent illegal activities. By ensuring robust controls, today’s evils such as money laundering and terrorist financing can be adequately addressed. An open dialogue between regulators and companies makes companies and entrepreneurs stakeholders in building a new and open ecosystem.
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A critical aspect of proactive regulation is to keep new emerging technologies out of compliance with existing legislation. Much of this regulation assumes that money is a physical commodity that relies on central banks and complex international agreements to maintain value. The regulation of distributed ledger technology must begin with the perspective that the technology will create a fundamentally new source of value and a new way of doing business.
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Through a carefully selected working group with participants from the private sector, government and regulators, Gibraltar began to reflect on the regulatory process for DLT. We then built our regulation specifically from the first principles for a digital environment in order to avoid the temptation to be restrictive or to create a draft regulation based on a phase of technological maturity that may be out of date. This approach is based on principles rather than strict standards. This allows us to maintain our commitment to high regulatory standards while also giving us the flexibility to provide a “living” regulatory framework for an exciting and rapidly changing market. Nine principles form the basis for a healthy and flexible relationship with DLT providers.
Commitment to these principles has created a thriving DLT sector in Gibraltar. In the future we will continue to adapt and improve them as they support and define this industry. We regard these principles as living instruments that are not set in stone. We have updated seven of the nine principles since they came into force in 2018. We consider this a function rather than a bug. The principles were developed with a certain degree of flexibility. Combined with a regulator that is able to make agile adjustments to market requirements, Gibraltar excels in global finance.
We are also working to add a 10th Core Principle to determine how market integrity can be further protected through legislation to eliminate market manipulation. Market manipulation creates no value and damages both the brand and the reputation of the entire DLT industry. We therefore believe that this move will strengthen the sector and add tremendous value to Gibraltar-based companies.
In order to bring virtual asset server providers or VASPs in line with international standards while realizing their potential, we need to ensure reliable and accurate records of all transactions that they enable according to the requirements of the Financial Action Task Force. This has the added benefit of underscoring the value of digital assets for their ability to disrupt and disrupt traditional finances, thereby reducing unwanted links with illicit payments.
By prioritizing innovation in this way, Gibraltar regulators can primarily act as trusted partners in the DLT sector. One example is our decision to define value within our regulation, which in turn clarifies the definition of VASPs. This gives Gibraltar-based companies the peace of mind that they have clear confirmation of their regulatory status. The end result is that they can focus on building innovative businesses instead of worrying about their regulatory status or fear that future regulations in their country of incorporation could jeopardize that status. Gibraltar-based companies know what to expect from their regulators and know that their government is ready to communicate and work with industry to build a fair and innovative DLT economy.
That assurance is key to empowering our companies to grow with the confidence they need. You can adhere to and benefit from a regulatory system that aims to encourage innovation in a risk-reducing manner and give consumers the same protection they deserve from regulated companies.
The views, thoughts, and opinions expressed here are the sole rights of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Albert Isola is the Minister for Digital and Financial Services in Gibraltar with primary responsibility for raising Gibraltar’s profile as a well-regulated financial services center and leading in the regulation of DLT and online gaming. Previously, Minister Isola served as Gibraltar’s Minister of Commerce and played a key role in leading the Gibraltar-specific DLT legal framework launched in January 2018 for companies using blockchain to store or transfer value.