Why Gibraltar? – A look at the up-and-coming star of the hedge fund and virtual assets sector
The strategic importance of Gibraltar in Europe – it’s Dual Regime
Triay
Gibraltar’s ties to the UK can help boost growth
Red Ribbon
Focusing on Fintech ISOLAS
GFIA 07 10 12
Silver linings: Highlighting the strength of Gibraltar’s legislation
Hassans Directory
15 19
n recent years, the role of the hedge fund manager has become exponentially more complex to navigate. In addition to both traditional and crypto asset markets experiencing volatility and uncertainty, the imposition of increasingly onerous legislative and regulatory requirements on the investment sector worldwide places another hurdle in front of us that we must navigate.
In the United States, the Securities and Exchange Commission (SEC) has recently taken the stance that the “staking” of virtual assets should fall within the same regulatory framework that governs the sale of securities. This has led to a $30 million regulatory settlement imposed on the Kraken exchange, and has caused other virtual asset exchanges to consider their position within the jurisdiction. In the European Union, the Markets in CryptoAssets regulations (MiCA) are set to revolutionise the regulatory landscape within which Virtual Asset Service Providers (VASPs) such as Distributed Ledger Technology (DLT) firms operate.
On a jurisdictional level, individual countries are also introducing sets of legislation and regulations affecting the governance and management of investments. In the Cayman Islands, for example, the Cayman Islands Monetary Authority (CIMA) now requires all private funds to have their accounts annually audited by a CIMA-approved firm, significantly increasing costs throughout the lifetime of the fund.
While some may view the current landscape as intimidating, the proverbial shining light at the end of the tunnel looks to be a jurisdiction that many may have not heard of, bar reference to the giant and ominous limestone Rock that casts its shadow across the entrance to the Mediterranean. Gibraltar, a British Overseas Territory located at the southern tip of the Iberian Peninsula, has in recent years become an increasingly popular jurisdiction for all types of funds due to its stable political environment, zero capital gains tax, and strong virtual asset regulatory framework to name a few.
One of the main benefits of Gibraltar as the emerging jurisdiction of choice for traditional and crypto hedge funds is its robust regulatory system. The Gibraltar Financial Services Commission (GFSC) is the local supervisory body responsible for overseeing the compliance of the financial services industry. The GFSC has a long-standing reputation for being a crypto-friendly regulatory body that is at the forefront of the globe when setting revolutionising standards and requirements applicable to those firms operating within the virtual asset realm.
Gibraltar first introduced its DLT regulatory framework for service providers in 2018. The principlesbased regime is designed to allow for sufficient space for growth and
innovation within this fast-paced nascent sector. The framework ensures that all providers operating within the space adhere to requirements relating to: operating with honesty and integrity; paying due regard to the interests and needs of its customers; maintaining adequate financial and non-financial resources; establishing effective business controls; protecting client assets; maintaining effective corporate governance arrangements; ensuring access protocols are maintained to high standards; preventing the facilitation of financial crime; ensuring that business contingency measures remain combust; and lastly, conducting itself in a manner which maintains or enhances the integrity of the market it participates in.
Since the inception of the regime, world-renowned leaders in the virtual asset industry have flocked to the jurisdiction to operate within the excellent regulatory standard that has been fostered. Binance, the world’s largest virtual asset exchange, has recently started recruitment for its Gibraltar based team. Xapo, a credit institution dealing in both fiat and virtual assets, operates out of its global headquarters based in Gibraltar. Huobi and Bitso – both virtual asset exchanges – have also set up their European headquarters on the Rock. The comprehensive regulatory framework provides a secure, supportive environment for these firms to grow in a manner that upholds the protection of consumers and the financial market to the highest standard.
For all types of fund managers and investors, Gibraltar’s 2022 Dual Funds Regime, provides benefits unrivalled by other jurisdictions. The Alternative Investment Fund Managers Directive (AIFMD) compliant regime provides funds meeting specific criteria the choice to safely opt-out of the EU modelled directive, granting fund managers greater cost savings and less stringent requirements while still offering access to global audiences. Investors are then able to benefit from the protections set out for them by the GFSC and an EU modelled directive, all the while knowing that their fund is not subject to additional fees and unnecessary red tape.
Fund managers may also set up the entity as an Experienced Investor Fund (EIF), a regulated vehicle that
allows for an unlimited number of experienced HNWI and institutional investors, or alternatively, as a private scheme; a leaner, more cost efficient “family and friends” solution allowing the fund manager the time to build a track-record, with the opportunity to later expand the vehicle by converting to an EIF at any point after 12 months. The regime’s flexibility extends itself to the type of structure available to fund managers, who may choose to grow their fund as either a private limited company, a limited partnership (with or without legal personality), a protected cell company (PCC) or a protected cell limited partnership (PCLP), the latter two offering the possibility of segregating assets into sub-funds (also known as cells) within the same legal entity.
The development and training of the local workforce, together with top talent in the crypto world making its move to Gibraltar, the jurisdiction has become a hub of expertise. Lawyers, fund administrators, bankers, compliance professionals, and more have greatly
increased their understanding and familiarity with virtual assets to meet the demand head on. So much so, that the jurisdiction has been named as the third top crypto hedge fund domicile according to PricewaterhouseCoopers 4th Annual Global Hedge Fund Report for 2022.
Overall, the developed and comprehensive regulatory framework for VASPs, and the flexibility afforded by the Dual Funds Regime to fund managers, along with the secure and supportive environment fostered by the jurisdiction to allow these industries to do what they do best, has started the see the locus shift north-east from the Caribbean towards the Mediterranean. Fund managers and other world-leading crypto-friendly firms need to be aware of the opportunities available not only to what is right in front of their eyes, but to also be on the lookout for the gargantuan limestone Rock hiding right underneath their nose.
ibraltar’s geographic position makes it strategically important. That is also the case in the context of financial services.
Gibraltar left the European Union with United Kingdom and is now the only jurisdiction in the world that continues to have a common market with the United Kingdom, but there is more that Gibraltar offers fund managers.
Self-governing, a common law jurisdiction with an attractive fiscal environment and with a financial services regulator (the Gibraltar Financial Services Commission) (the “GFSC”) which takes great pride in engaging with the industry that it regulates: Gibraltar continues to attract financial services businesses requiring UK market access or alternatively looking to do business on a global scale.
It is now generally accepted that the Alternative Investment Fund Managers Directive (“AIFMD”) had a profound effect on the fund management industry. The implementation date for AIFMD was 22 July 2013 and Gibraltar, like every other EU Member State, was required to “adopt and publish the laws, regulations and administrative provisions necessary to comply with this Directive” by that date.
Unlike Ucits, which has become the gold standard of retail funds, AIFMD carries with it negative connotations among the industry, primarily because of the perception that it was a knee-jerk reaction to the 2008 financial crisis. Some will argue that the unintended consequence of AIFMD was an exodus of funds from the European Union to some of the traditional offshore jurisdictions. It is a common view that
AIFMD made it almost impossible for EU Member States to compete with what those offshore jurisdictions could offer.
Gibraltar’s fund management industry pre-dates AIFMD. Gibraltar has had, and continues to have, its own robust and tested domestic legislation for alternative investment funds: the experienced investor fund regime and the private fund regime. Regimes that had worked for many years pre-AIFMD and which continue to work to this day.
Brexit was no different to other periods of change, there were challenges but similarly there were opportunities.
Gibraltar’s exit from the European Union could not mean that as from exit day all EU law would be disregarded. There did however need to be some recognition that Gibraltar had ceased to form part of the European Union. Its competitor jurisdictions had ceased to be its old fellow Member States and would, overnight, become all those non-EU jurisdictions with whom it had previously not been able to compete.
The dual regime, that is now law, recognises Gibraltar’s new position and permits a fund domiciled in Gibraltar to safely opt out of AIFMD and continue operating under Gibraltar’s robust and tested domestic regime, which by design, is very attractive when compared to the offshore jurisdictions.
Gibraltar is entrepreneurial, its history speaks for itself and like on many other occasions, with the creation of the dualregime it has grasped the opportunity which on this occasion Brexit had forged for the fund management industry.
Gibraltar’s importance on the continent for investment funds was recognised in the PricewaterhouseCoopers, the Alternative Investment Management Association (AIMA) and Elwood Technologies Global Crypto Hedge Fund Report which ranked Gibraltar as the top jurisdiction in Europe for crypto funds.
Undoubtedly, Gibraltar’s first-mover advantage in regulating blockchain/ distributed ledger technologies business has contributed to its success and it is gratifying to see how other jurisdictions, like the United Kingdom are now following suit with HM Treasury announcing on the 1st February 2023 a consultation entitled “Future financial services regulatory regime for cryptoassets” .
The dual-regime has undoubtedly contributed to the ease of doing business. In the days of AIFMD, a crypto fund would be required to appoint a AIFM depositary for safekeeping. Unfortunately, finding a bank that is able to safekeep crypto is a tall order. The dual-regime eliminates this issue, as it does many other issues, and it is exactly this flexibility of doing business in Gibraltar which has contributed to its success.
Gibraltar is on the European continent but not within the European Union. Why would anyone establish a fund in an offshore jurisdiction, in a different time zone and a 12-hour flight away, when you could do it in Gibraltar?
Negotiations are ongoing with the
Jay has developed a strong reputation as an expert in financial services and regularly advises funds and investment managers on licensing, regulatory, operational and distribution matters. He has been elected on numerous occasions by the legal community in Gibraltar to the executive body of the Gibraltar Funds & Investments Association (GFIA) and is the Chairman of GFIA.
JAY GOMEZ DirectorJay is recognised by Chambers and Partners as “a respected figure in the Gibraltarian legal community, especially in relation to funds matters.” and by Legal 500 as a “rising star”.
European Union for Gibraltar to form a common travel zone with the Schengen Area - thereby eliminating the land frontier between Gibraltar and Spain. On the 28th January 2022, the British Ambassador to Spain, Hugh Elliott was quoted as saying that the treaty on Gibraltar would be closed very soon and would be historic . If that were to be the case, Gibraltar’s strategic location could play an important role in permitting financial institutions to access the UK and global market from Gibraltar and the European market from a subsidiary domiciled and authorised in nearby Spain and both offices within a couple of miles of each other. In doing so, Gibraltar’s strategic importance in Europe for financial services will be rock solid.
Javi has advised on a wide variety of financial services matters which include establishing regulated entities and advising them on their applications to the GFSC. He also regularly advises licensed entities with regulatory issues and has advised a number of clients on the establishment of crypto funds in Gibraltar. Notably, Javi was actively involved in the establishment of the first Gibraltar crypto fund to list on a recognised ESMA stock exchange.
Legal 500 recognises Javi’s involvement in the investment funds sector and Chambers and Partners describe him as having “particular expertise in cryptocurrency matters” and as being “highly responsive, timely, reliable, and has an expert level of legal advice.”
JAVI TRIAY Senior AssociateOur Financial Ser vices team has been at the forefront of Gibraltar s growth and in par ticular in developing Gibraltar as a jurisdiction of choice for the establishment of financial ser vices businesses.
They are per fectly placed to direct you through the process.
he Dual Regime in Gibraltar has given the jurisdiction a number of post-Brexit freedoms many in the UK funds industry will look at with envy. In tandem, the formal realisation of the Gibraltar Authorised Regime (GAR) will provide the domicile with a unique opportunity, compared to other European fund centres, as it builds out market access with the UK.
The Dual Regime allows funds to opt out of the restrictive requirements of the AIFMD and places Gibraltar on more of a level playing field vis-à-vis global jurisdictions. “We would expect the Dual Regime to create new demand for Gibraltar domiciled-funds taking advantage of new freedoms while retaining full FSC authorisations,” outlines Anthony Frieze, Managing Director at Red Ribbon Fund Management.
The introduction of the GAR will also provide Gibraltar with further scope for growth. This development sees the UK and Gibraltar Governments agreeing to reciprocal market access for UK and Gibraltar financial services firms. These arrangements are not available to any other Overseas Territory, Crown Dependency or Third Country.
“Over the coming year, we would expect the formal realisation of what is, in all but name, a single Gibraltar – UK market through the operation of the GAR will give Gibraltar a unique opportunity compared to other European fund centres,” says Anthony.
Brexit did bring opportunity but it also gave rise to some challenges as, in the absence of agreement on financial services, limits the access of locally registered funds to sell into the European market. Anthony
continues: “It is to be hoped that the first opportunity to renew and revise the TCA in 2025 will see the UK-EU being willing to revisit the mutual access of services to each other’s markets which could address this.”
Gibraltar’s links to the UK run deep, though Anthony highlights how as a company with a British-Indian ownership and organisation, Red Ribbon Fund Management remains strongly engaged in opportunities created by Brexit in terms of both deregulation and shifting trade and capital flows that it will lead to.
In line with this, UCITS represent a key area of future growth in Gibraltar.
“There are many UCITS funds based in Europe that sell into the UK. Following Brexit and given Gibraltar’s privileged – and unique access to UK financial markets under the GAR then
the opportunity for Gibraltar to sell UCITS into the UK is an interesting proposition,” says Anthony.
But, as the domicile eyes further development, the industry continues to struggle with a scarcity of qualified staff in the Gibraltar market as well as the cost of relocating staff to Gibraltar given elevated accommodation costs. Anthony identifies that this has already been seen in specific roles such as that of MLROs, but also extends into other areas of asset management expertise and indeed to the resource challenges faced by the FSC: “These concerns have been regularly raised by the industry with HMGoG. Solutions to these issues will be neither fast not easy but need to be the subject of ongoing governmental focus.”
DirectorAnthony is the Managing Director and oversees the day-to-day operations of Red Ribbon Fund Management. He spent most of his banking career over 20 years at JP Morgan, BNY Mellon, Deutsche Bank and Allianz/Dresdner Kleinwort, originally as a stockbroker and then as a senior product specialist and relationship manager in agency repo and collateral management. His clients included some of the world’s largest sovereign wealth funds as well as a wide range of leading central banks and governmental and international investors across Europe, Asia Pacific and the Middle East.
ANTHONY FRIEZE Managing Director
022 was certainly an eventful year for the fintech sector, including for specialist funds. Globally, jurisdictions, including Gibraltar, have felt a shift within the sector – in large part caused by the shockwaves from the FTX collapse. The past year has set the tone for 2023 and forced jurisdictions worldwide to plan long-term solutions to maintain customer trust. It is a dynamic space that can certainly be difficult to keep up with.
Despite the external challenges, Gibraltar will stay focused on developing funds dealing in digital assets. It is committed to supporting the continued growth of fintech in the economy and sees it as the strong pillar for economic growth. It is one of the world’s most welcoming jurisdictions for fintech businesses and attracts
world-leading companies. In line with what came about in 2022, it will be important for Gibraltar to keep up the high standards it has always had in the fintech space and being flexible with the way the space adapts is a huge part of this.
Regulators and other bodies in Gibraltar should work hard to maintain the jurisdiction’s strong position in the league table for crypto funds. Last year, the fourth annual research report into the global crypto hedge fund industry, from PwC and Elwood Asset Management, saw Gibraltar maintain its place as the third most popular domicile globally. Gibraltar ranks behind only the Cayman Islands and the British Virgin Islands, and ahead of financial services behemoth, the United States, in attracting crypto funds to domicile.
number one factor in determining the success of a fund. When consumers lose trust, investments can be pulled from a vehicle, putting it under strain. In recent years the sector has seen this in numerous asset classes, including property – and crypto is no different. With strong regulation, the industry will attract more interest, boosting liquidity and with it, consumer trust.
It is right that financial services are among the most heavily regulated sectors in the world. Since first exploding in 2010, regulation in Fintech has been the number one concern for policymakers globally. It has always been a focal point for Gibraltar, looking to build its reputation as a financial
2018 when Gibraltar became the first jurisdiction in the world to provide a purpose-built regulatory framework for businesses that use blockchain or distributed ledger technology.
Gibraltar is an attractive choice for fintech entrepreneurs and there are currently over 60 fintech start-ups in Gibraltar. The jurisdiction is increasingly being chosen by clients wishing to get regulated, in addition to the jurisdiction in which they were previously regulated. It is strategically placed to serve as a cornerstone jurisdiction for entities exploring regulatory approvals in different territories – a trend continuing to build for digital asset businesses. The jurisdictions ‘right touch, not light touch’ regime, coupled with the 10 core principles, including corporate
JONATHAN GARCIA ISOLAS LLP PartnerThe current environment can be troublesome for any jurisdiction to navigate. The challenges in Gibraltar are not unique and can be seen in any other mature jurisdiction, but different jurisdictions approach issues in varying ways. The issues we see now in the digital asset space are common all over the world and jurisdictions must learn from each other in how to work through these.
Gibraltar has always approached the digital assets space with a forwardthinking agenda to keep up with the ever-changing space. To rebuild consumer trust and encourage inbound investment into fintech funds, it is essential that the robustness of regulations is maintained while ensuring they continue to adapt to new technology. Consumer trust can be the
Jonathan is a funds specialist, with a wealth of experience across the financial services, regulatory, and DLT sectors. He serves on the Gibraltar Funds & Investment Association’s (GFIA) executive committee and has worked with numerous high-profile clients. Recently, in his capacity as Head of the Technical Committee at GFIA, Jonathan worked with HM Government of Gibraltar to develop the new Limited Partnerships Act and Protected Cell Limited Partnerships Act. He has authored several articles and chapters in respected industry publications, such as for the U.S. Chamber of Digital Commerce.
governance requirements, segregation of client assets and more recently setting the standards for market integrity, makes The Rock a robust and dynamic regulatory choice.
Gibraltar has always been a leader in the fintech space and continues to prove itself even in uncertain times. 2023 serves as an opportunity for Gibraltar to step up to the mark once again and prove itself as a vital jurisdiction in fintech’s global development as the industry continues to mature and increase the number of established investment vehicles such as funds.
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Gibraltar has always approached the digital assets space with a forward-thinking agenda to keep up with the everchanging space
espite the devastation it caused across the financial industry, the crypto winter resulting from the fall of FTX helped highlight the rigour of Gibraltar’s legislation around the way client assets are segregated and protected.
Although the fallout of this collapse did impact some crypto funds in Gibraltar, it also helped highlight the strengths of the jurisdiction’s regulation around these types of products. “The DLT [Distributed Ledger Technology] regulations require you to prove and demonstrate how you segregate client assets and protect them as part of your application process,” explains James Lasry, head of the funds team and deputy head of the firm’s financial services team at Hassans.
Writing policies on the custody of assets has been a critical part of Hassans’ work in guiding crypto fund managers when setting up new funds in Gibraltar. “Managers can custody assets in the way they feel is best for the fund and for the investors, which provides a lot of flexibility. However, the key here is what to do with that flexibility,” Lasry says.
Hassans assists with the building of that custody framework, both in terms of the types of the entities within which they custody, and the nature of that custody, in terms of liquidity needs.
For example, a long-only fund might consider keeping the assets, or a portion of the assets, in cold storage. But this is not possible for an algorithmic fund which trades 80% of its assets all the time. Such a fund
needs to keep almost everything on an exchange.
Another key piece of advice related to security, Lasry points out, is for funds to have a multi-signatory capacity where no single person can move value outside of the fund by themselves.
Many of the funds being launched in Gibraltar are so-called crypto native funds. This means the individuals running the fund have a crypto background rather than a foundation in the financial industry itself.
This leads to some nuance in terms of the way the client relationship develops, Lasry outlines.
“These clients tend to be younger. They are very smart individuals who understand crypto very well but need guidance for the financial services aspect of setting up and running a fund – mainly in areas like corporate governance,” he says.
Conflict of interest is also an area in which native crypto fund managers need support. Lasry explains: “They will often ask questions around whether a certain transaction will result in a conflict of interest. They’re aware of the concept of conflicts of interest. but they’re not always sure how to apply it in a financial services context.”
The managers of these funds tend to tread very carefully and are cautious
before making any decisions for which they do not know the repercussions. “They often ask us before doing anything, which is very refreshing,” Lasry notes.
From Hassans’ perspective, managing these crypto native fund relationships means a more engaged and communicative connection. Their queries are often time sensitive and therefore support professionals need to be available to respond at short notice. “The crypto world moves much faster than the traditional financial industry, mainly because the markets are so much more volatile,” Lasry says.
Despite the crypto winter, Hassans has continued helping managers to set up crypto funds in Gibraltar, and
Lasry expects this to continue and even increase as the winter edges into a crypto spring.
“We have the professional services infrastructure and regulatory framework which makes setting up a crypto fund in Gibraltar very straightforward,” Lasry notes, “this is especially true for European-based managers as it means they are more likely to attend board meetings in person if the fund is based in Gibraltar as opposed to one of the jurisdictions which is further away geographically.”
Regulation can be seen as a bone of contention or an obstacle for some fund managers, however Lasry recommends that managers coming to Gibraltar consider the regulator as a key partner: “In larger jurisdictions, a partnership between the regulator and a licensee
firm is almost impossible. In Gibraltar, you have the opportunity to speak to the regulator, outline what you plan to do and share with them what you want to achieve.”
The funds eco-system in Gibraltar is also very well developed and to this end, Lasry advises fund managers to make full use of the expertise at service providers: “They have a lot of experience to share.”
In other advice to fund managers, Lasry warns against the use of unregulated structures: “The regulation part of setting up a fund in Gibraltar is not particular onerous and a lack of regulation could hamper your growth in the future.”
James is a Partner, Head of the Funds Team and Deputy Head of the firm’s Financial Services team. He deals with funds and with regulation of financial services law and blockchain businesses.
James is a highly regarded practitioner who has been instrumental in setting up the majority of Gibraltar’s funds, including the first experienced investor fund, the first protected cell company fund. Most recently he has been involved in launching Gibraltar‘s first protected cell limited partnership fund. James, who is qualified as a certified investment fund director, serves on the board of several investment funds and financial services firms. He has received regulatory approval to serve on the board of the Gibraltar Stock Exchange. James is Chairman of the Gibraltar Funds and Investments Association and he serves on the Gibraltar Finance Centre Council.
JAMES LASRY Head of Funds, Deputy Head of Financial ServicesGFIA is a non-profit organisation formed in 1996. GFIA’s membership includes funds, investment managers, stockbrokers, fund managers, law firms, banks, audit firms, managers & administrators as well as individuals involved in the financial sector in Gibraltar.
GFIA represents its members through its unique close relationship and regular dialogue with HM Government of Gibraltar and the Gibraltar Financial Services Commission with the aim of developing Gibraltar’s industry and product offering. GFIA strives to promote adherence to the principals of investor protection, effective corporate governance, compliance and professionalism in investment and fund activities and this is primarily delivered via guidance and regular training and development of the industry work force.
Hassans is the largest law firm in Gibraltar offering a complete range of legal services to clients both locally and throughout the world. The funds industry in Gibraltar has seen rapid and impressive growth and continues to expand at a phenomenal rate, particularly in light of the emergence of the crypto fund asset class. Hassans has been at the forefront of this growth with its well-resourced, dedicated funds team advising both the Government of Gibraltar and most of the funds domiciled in Gibraltar.
Established in 1892, ISOLAS LLP is a leading international law firm and the oldest law firm in Gibraltar. ISOLAS offer an award-winning and market-leading service, priding itself on its close attention to detail, global professional network and knowledge of the local marketplace. A full-service firm, it provides commercial and pragmatic advice to a diverse range of corporate and personal clients, with special expertise in the areas of investment funds, fintech regulation, maritime law, private client, and the gambling and online gaming sectors
LMAX Digital is the leading institutional spot crypto currency exchange, operated by LMAX Group.
Leveraging LMAX Group proven, robust technology and liquidity relationships, LMAX Digital delivers a market-leading solution for physical trading & custodial services for the most liquid crypto currencies.
Delivering trust, reliability & deep institutional liquidity, LMAX Digital ensures complete transparency, open access and a level playing field for all institutional crypto currency market participants – within a secure trading environment.
LMAX Digital is regulated by the Gibraltar Financial Services Commission (GFSC) as a DLT provider for execution and custody services.
Red Ribbon Fund Management Limited (RRFM) is an AIFM, regulated by the Gibraltar Financial Services Commission. The company primarily manages Experienced Investor Funds that offer specialist fixed income, equity, private equity, currency and property strategies as well as digital asset funds.
Triay is a leading independent Gibraltar law firm with a reputation for legal excellence since 1905. The Financial Services team is at the forefront of the investment funds and managers sector in Gibraltar, with a wealth of experience and hands-on involvement at an industry level. They are ranked as one of Gibraltar’s leading law firms in this sector. Their expertise provides a perfect platform for your introduction to Gibraltar and its advantages.
