Assessing the benefits of principles-based regulation - Hon. Albert Isola M.P.

Assessing the benefits of principles-based regulation 11/02/2019

Hon. Albert Isola M.P. - Minister for Commerce of Gibraltar The vital signs of a healthy global blockchain ecosystem include a rapidly expanding jobs market, significant advances in educational support, but perhaps most importantly, the pursuit of regulatory frameworks that accommodate a place for blockchain in the global economy. We are witnessing an unprecedented race towards innovation, with sustainable regulation as the prize awaiting jurisdictions at the finish line. However, this race is a marathon, not a sprint, and a methodical, measured approach is the key to success. Regulators must continue to talk to industry, assess their needs, and build a framework that works for all parties. They must make informed decisions that incorporate a deep understanding of the project, yes, but be equally true to their core principles.

In Gibraltar, we have a rich history of dedicating time and resources to creating the right environment for emerging technologies to thrive. In recent years, I’m pleased to say we have prioritised the exploration of blockchain technology, and are now seeing those efforts pay dividends. That work involved extensive research and collaboration with key industry figures, not least establishing the necessary core principles that hit the right balance between security and flexibility. This collaborative approach has been successful, yielding high-level industry insights that have informed the direction of policy and legislation.

Identify key principles As the first jurisdiction in the world to introduce a purpose built Distributed Ledger Technology (DLT) framework, Gibraltar stands proudly behind the nine core principles underpinning this landmark legislation. We believe maintaining an unwavering focus on these principles is central to facilitating the highest levels of innovation and security, while attracting significant inward investment. The following principles paint a picture of the landscape we want to sustain and build, the standards we will uphold, and the measuring stick for prospective DLT providers to reach.

These principles are built on the values of honesty and integrity, setting high expectations regarding how DLT providers conduct business. Providers must communicate with fairness and clarity at all times. In other words, there must be full disclosure of risks, terms and conditions, and non-misleading information deployed in marketing materials. In the name of protecting consumers' interests along with their own, DLT Providers are expected to maintain sufficient financial resources to ensure that adequate capital is held to support business objectives and in the worst of circumstances an orderly wind down.

While it might seem obvious, honesty and integrity need to be reflected in all aspects of business operations, before companies can be thoroughly assessed as a potential DLT provider. Building on the aforementioned standards, a provider must display good governance practices, as well as a proactive approach to maintaining the highest security standards - including ongoing risk assessment of applications, underlying technology, and cybersecurity.

Assure stakeholders, earn DLT provider status The implementation of rigorous risk management practices sends a clear message to key stakeholders, assuring them that effective controls are in place over company processes and that systems are fit for purpose, while being continuously monitored.

Having robust systems in place to prevent and detect the occurrence of money laundering is another important standard for a licenced DLT provider to achieve.

Ultimately, by demonstrating strong risk management practices, a sharp focus on the protection of clients’ assets, thorough corporate governance arrangements, secure systems and protocols, companies will be able to attract significant inward investment, while also securing their credentials as a bonafide DLT provider.

The knock-on effects of principles based DLT regulation are clear for all to see. It benefits prospective DLT companies, in providing a template for success, a list of criteria they must follow to be recognised as a licenced provider, and in turn, helps them attract the investment they need for their projects to prosper. Secondly, jurisdictions that adopt this style of regulatory approach pave the way for an influx of high quality projects geared towards building blockchain-based solutions to address protracted processes in public services, improve citizen user experience, and overall cross-sectoral efficiency.

In the race for sustainable regulation, poise trumps haste, measured action trumps hurried legislation. This approach coupled with well thought-out, industry-informed principles can underpin a successful framework.