Written by Holly Whitehead on Monday July 17, 2017
Distributed ledger technology (DLT) – of which blockchain is one particular type – is a decentralised database. This means that instead of records being held by one trusted entity that is the true source of the information (which is how many databases operate at the moment in the form of a ‘centralised ledger’), a group of peers maintain a shared database. Therefore, the consensus of the group is the record: there is no single trusted source. The advantage of this is that it is less vulnerable to hacking or tampering, as someone wishing to alter a record would have to get access to every copy of the database, and the likelihood of this happening before someone notices the difference is very low. For more information on blockchain, take a look at my previous blog Blockchain: an introduction.
Proposal for a DLT regulatory framework
In a move designed to cultivate innovation, encourage economic development and provide safeguards while protecting the jurisdictions’ reputation, HM Government of Gibraltar (HMGoG) have established a Cryptocurrency Working Group (CWG) and recently collaborated with the Gibraltar Financial Services Commission (GFSC) to publish a proposal for an innovative DLT regulatory framework.
Presently, there is no legislation or any regulations – UK or EU – regarding DLT, blockchain or virtual currencies. There are proposed amendments to the Fourth EU Anti Money Laundering Directive (4AMLD), otherwise known as the Fifth EU Anti Money Laundering Directive (5AMLD), which include the broadening of the scope of ‘obliged entities’ to include virtual currencies and virtual currency wallet providers which means they will become subject to money laundering regulations. There are however no proposed prudential or conduct regulations of virtual currency businesses in the UK or the EU.
By proposing these new regulations, Gibraltar is demonstrating that they can react quickly to new opportunities and adapt to changes in technology. This will help the jurisdiction establish itself as good location in which to do business, especially for start-ups and companies wanting to take advantage of this new technology – particularly those engaged in FinTech.
This proposed DLT regulatory framework will apply to any activity that is not already regulated and that will ‘use DLT for the transmission or storage of value belonging to others’. It is also proposed that the GFSC will authorise and supervise these ‘DLT firms’.
The proposal suggests numerous uses for DLT under the framework, just a few of which include:
It is recognised in the proposal that the approach to regulating DLT firms will need to be flexible and outcome-focused due to the rapidly evolving nature of the technology that will be used. However, they will also need to make sure that the approach isn’t seen as a soft touch due to this. It has been suggested therefore that as well as making sure it is flexible, the process will also need to be ‘objective and targeted, measurable and verifiable, and appropriate to activities performed’. Something akin to a risk-based approach will be used in so much as the regulations need to be flexible enough to adapt to each DLT firm’s use of the technology and their features as each firm could be quite different from the next.
Due to these criteria, the proposal has suggested nine ‘principles’ which will need to be met in order to comply with the regulations. This allows for the desired flexibility and for the regulations to be applied proportionately.
There was a four-week-long period of consultation for feedback on the proposal which ended on 6 June 2017. The legislation is currently being prepared following consideration of any matters that arose from the consultation and should be ready for publication later this year. The expected operative date for the DLT regulatory framework is 1 January 2018.
The blockchain has been described as the most significant technological development since Tim Berners Lee founded the world wide web and is a fascinating area of study; our training partner ICT is providing a FREE webinar on the impact of blockchain on 7th August 2017. This online event is hosted by Tim Tyler, AML/Financial Crime Prevention Course Director and subject matter expert. Please note; registration will close at 11:00am BST on the day of the virtual classroom. Please ensure early registration to avoid disappointment.
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