How Gibraltar is Shaping the Global Regulatory Landscape for Cryptocurrencies and Digital Assets

May 29, 2019

In this podcast, Nick Cowan, the CEO of the Gibraltar Stock Exchange - the world’s first stock exchange to offer the listing services for digital debt securities and digital funds - discusses how Gibraltar is shaping global innovation and regulation in the cryptocurrency space.


Dara Albright: Hello everyone and welcome to the EisnerAmper podcast series. We're always interested in the latest trends and developments as well as any related business and accounting opportunities and challenges. Today is the first in a series of podcasts where we'll be exploring the ever-evolving international regulatory landscape for digital assets. We will be discussing how changing regulations will impact various asset classes, exchanges, investors, bankers, issuers, as well as service providers—essentially, the entire modern ecosystem for financial services. I'm your host Dara Albright, and we're honored to have with us today, Nick Cowan, CEO of the Gibraltar Stock Exchange Group, also known as GSX. Nick, welcome and thanks for being here.

Nick Cowan:Dara, thanks for having me.

Da:Real pleasure. Thank you. Nick, let's dive right in. I understand that Gibraltar will soon be implementing new rules, specifically governing token offerings and secondary transactions. Can you give us a sneak peek of what we could expect?

NC:Sure. I think we're aiming to release some in the next month or two. The government's been talking about and the first release will be the token sale regulations. And these are very much targeted at utility tokens and we tried to put some type of framework and consistency around making sure that any buyers of utility tokens can understand what they're buying, what the utility aspect of the token is, what the technology does, who the controllers are behind the company, which risks of disclosure, just to try to give token buyers all the information they need to make an informed decision. And again, I think that'll be probably one of the early jurisdictions that have come out with a regulatory framework for token sales. And then we're also looking at secondary exchanges because whereas we have the distributed ledger technology (DLT) regulations here in Gibraltar already, what they do is they license effectively the operators of the DLT activity. What they don't do is actually regulate the underlying activities at the secondary exchange. They regulate the operators. The secondary exchange regulations, again, we'll be applying a lot of the traditional methods to cover things like market abuse, watching all of those pump-and-dump schemes, etc. And again, to try to bring some institutional grade standards and investor protection mechanisms to secondary exchanges in the crypto world.

Da: How does Gibraltar view token offerings? Are they considered a security or are they not? Does it distinguish between utility tokens and security tokens?

NC: We basically said the token server regulations cover anything that isn't a security. For example, an issue by a body corporate. It is a security, you are absolutely 100% captured by securities legislation. That doesn't change. As a stock exchange, we already have a framework for digital securities in terms of scripts legislation. In terms of the utility token approach, yes, we have, unlike the SEC who have said, look, we believe that every utility token, every ICO is a security, then you have to demonstrate that it isn't a security by filing it anyway with the SEC. And then we'll tell you whether it's a security or not. The approach here is if it isn't a security, it has no claim on the value of the company, the balance sheet of the company, the equity of the company always related to a tangible asset that underpins the value as long as it constitutes access to a service or a network that's a utility token therefor not a security. And that's what the type of regs are being designed to capture because securities have been regulated for hundreds of years and what we don't want to do is to go and overlay additional regulations on something that is heavily regulated already. This is to provide a new framework for something that's completely unregulated.

Da: That is very interesting. I'm very much looking forward to following the progress in Gibraltar, especially on that. Can you also talk a little bit about how all of these regulations, including not only the Gibraltar digital ledger technology regulatory framework that has already been passed, but some of the newer regulations that are coming down the pike that you just discuss? Talk a little bit about how that is going to impact the growth of GSX, and we’ll get into a little bit about GSX and the listing process as well.

NC: We made a decision as a company a couple of years ago that we were going to implement distributed ledger technology as a stock exchange. And that was a strategic decision we made in early 2017. So, for us, DLT straight away was absolutely a key driver behind our evolution. I know it was pretty much coupled or pushed by the fact, or strengthened by the fact, that we were in a jurisdiction that we knew was coming out with a framework because we've been involved in those discussions. That was very key to us. We decided that we weren't going to go down the traditional technology roots going through centralized clearers and all that good stuff. We just said you know what, we're going to leapfrog that and go straight into being hopefully one of the first DLT stock exchanges in the world. We then started to look at all the technology that was out there and we looked at the different protocols and we couldn't find anything at that time. I think we're still pretty safe in saying that statement today that we couldn’t find a protocol that actually was built or could support securities for securities as we discussed earlier securities that have a huge amount of regulation around them. We have to be able to control transferability and eligibility and KYC and AML and compliance pre- and post-trade reporting and all sorts of good things. And to be able to program smart contracts that actually represent either the balance sheet, in the case of debt security, or voting rights, dividends, etc., that could meet those regulatory requirements. We made the decision that actually two things happen. Number one, we were going to build our own protocol. That was a big decision for us as a company, and fast forward to where we are today. That's now ready. It's in use; it's deployed. The second decision we made was that actually building a protocol designed specifically for digital securities, but only keeping it for our own use was really dumb because we're a small jurisdiction, we're a small exchange. What we have now is a technology company that we've built this protocol. And in fact, what we've been doing is saying to other exchanges and other investment banks and broker-dealers, asset managers globally, is if you believe in revenue use cases, if you believe in efficiency use cases, if you believe in accessing global liquidity polls, lowering the cost of capital, helping issues come to market, then this is what we've built. You can have your own private permission chain, which we call stacks native. If you're an exchange in Asia, we'll provide you with this complete, front-to-back technology solution that is yours. It's yours as an exchange and that operates within your ecosystem with your member firms and you carry on. But we also built underpinnings that a global ledger global stacks. The challenge with a lot of exchanges is they don't interoperate because the central clearers don't talk to each other. Our global stacks are more effective than that centralized clearer. It means that the Gibraltar stock exchange and our member firms can, if we want to, trade with a stock exchange in Asia, Latin America, Europe and North America. We could all be trading together using the global stacks ledger. We very much came at it from a securities perspective first, not let's look at this tech and try to fit a square peg into a round hole. Let's actually design the technology. We have 40 blockchain developers now within our group. Let's build the tech without developers to say this is what we need. This is what you have to build. Let's make this fit for purpose for securities and go from there. For us as a stock exchange, we've gone a step further. We've actually incorporated a technology company. Part of our group in Ngsx is a client of that technology company. We hope a number of other institutions will be in discussions at a different stage of negotiations with about 25 institutions globally. It's an amazing time for financial markets innovation. Obviously us with our stacks protocol. We can see an enormous shift in the way markets work over the next five years. It's a great time.

Da: That's fantastic, Nick. You're not only innovating from a regulatory standpoint but from a technological one as well. And I think it's going to be really fascinating to watch this unfold and see how it impacts both stocks as well as crypto exchanges around the globe, there being a lot of activity in cryptocurrency funds trying to list over there and what is the process? How long should they expect? What types of requirements are there for listing in Gibraltar from companies here? Do they need to have boots on the ground there?

NC: There are a couple of conversations there. I think first of all, just in terms of the funds business, let's talk about that first and then we'll talk about debt and then we'll talk about equities at the end. In terms of funds, we're also the largest fund administration company in Gibraltar. We bought a couple of fund administrators. That for us is a really fast-growing business. And the reason why is because number one we can get banking for crypto funds, which is huge because banking is a major challenge for these guys globally. By coming onto our platform, we can get you banked, but then we can also help you get listed. In terms of the listing process, whether you are a fund seeking, you can either list traditionally on our exchange, we can do that for you and that's what we've been doing for years. Or we can list you as a tokenized fund. And that is where we've seen, without a doubt, the most aggressive pickup since we announced four weeks ago that we were the first stock change in the world to be able to list tokenize funds and tokenize debt. The fund pipeline is growing rapidly. It's pretty much the same whether you are listing a fund or listing a debt security. We have rules on our website. It tells you what you have to put in your offering document in terms of the disclosures. They're not particularly onerous. Who are you? What does the fund do? What are the asset classes? And then normally that process should take something like six weeks; it's not a particularly long process. You have what we call a nomad or a listing member and they look after you. If you want to do a tokenized bond offering or tokenized fund offering, that's where stacks come into their own. Because what we do is we effectively create a smart contract for you. We do all that for you or the member firm can, but we can do it here and that allows you to deploy it. You built the smart contract literally in 10 minutes with our technology. It's incredibly idiot proof. Even I can do it. And you just go into what's called our stacks token builder and you just build your fund, the details of your funds. It creates the smart contract, it deploys onto the stacks protocol, and then you can start to market your securities once you're approved and investors through the megaphone can subscribe directly and effectively acquire the tokens through the protocols. It's a really smart piece of tech. I would say four to six weeks-ish. And whether you're a US corporate looking to raise a bond issue or a fund manager from the US or from Asia or anywhere, it doesn't matter. It's the same timeframe, but it goes to equities so if the companies looking to issue digital stock or tokenized securities later this year we are aiming to get licensed. All these things are subject to our regulator approving us. But we are in application now and we hope by September we get the green light to not only list digital equities, digital funds, but also we hope to be one of the first trading venues in the world so that we'll get flicked on in September. And that means that we can help you (1) do your primary issue, your STO; and then (2) have your securities trade in a secondary market.

Da:That's fantastic. What are some of the ongoing reporting requirements for the companies to maintain their listings? Like, for example, is it a quarterly report? Do they need annual audits? What are some of the requirements that are needed in Gibraltar?

NC: Basically we are pretty much governed by European legislation, so it's all pretty standard stuff. You've already got two buckets, as we call it. You've got your financial reporting obligations and you've got your non-financial reporting obligations to make sure the market is kept up to speed. Depending on the type of security that you are, the minimum is at least annual audited accounts need to get filed. And we publish those audited accounts. In some instances it can be semiannual because, for example, there just could be a requirement under the legislation because the denomination of the underlying. But financial reporting is a must. And then secondly, we will be called as long financial. So the CEO resigns. You have to tell us, you have to tell that it's just a corporate action. We report that and we published that news for our formal statement on our website. But, again, if you could go to, you'll find all of the rules there. You just download the rules for listing debt on GSX and you'll be able to see what we call them—continuing obligations once public, once you're on the market.

Da: Nick this is terrific. What do you think is going to be the next big invention that's going to transform mankind? And you can be as creative as you want? It doesn't have to be related to digital assets, crypto, a DLT. It could be something way out, wacky, crazy. What is the next big invention that will transform mankind?

NC:I've got absolutely no idea how to answer that. But there's a dumb answer and then there's an answer, which I think could be quite serious. The dumb answer is I would like to be able to eat and drink what I like and not put on 20 kilos. If I could invent that, that would certainly make me happy. One of the things that we've been looking at with regards to status, but I actually think this is important as a use of DLT, is if you think about the digital fingerprint that we have designed that allows what's called online on chain KYC and it’s a part of the stacks protocol. If you, Dara, are a sophisticated investor, a US resident, you are eligible to buy the following securities and you might be ineligible to buy these securities. So we can say, okay, we have an encrypted fingerprint, we know who Dara is, we know what she's allowed to buy. So when you subscribed and tried to buy a bond on stacks, if you are not eligible, then the computer says, no, you're not allowed to buy their securities. And that's the control mechanism that you to have around securities, which a lot of the public chains don't have. So go a step further. Right now if I was hit by a bus on the way home this evening, I absolutely categorically can tell you that my wife has no idea what my life insurance policies are. So what I think and what we believe actually could be is if you think about how inefficient that whole processes if you could embed that into a smart contract. So if something happens to me, everything goes straight to my wife. It's just embedded. And that will allow, I think if you take that a step further with regards to ongoing information about you encrypted, so you comply with the whole GDP. But driving through those efficiencies where I think DLT being immutable and being able to have smart contracts allows you to be able to think about those type of eventualities. The use cases for that, whether it's transfer of ownership of an asset, transfer of ownership on death or whatever, I just think is a really, really massive breakthrough because at the moment everything just seems to be too much a pain to get a lot of this stuff done, and everything just seems to be drawn out. One of the use cases, the DLT, forget disrupting capital markets. I actually think the ability to build digital fingerprints and be able to embed that in a smart contract to allow the human race to focus on other things that they want to do. It's them having to spend hours every year focusing on rubbish that should just be automated. I think that's something in the next five to 10 years, I don't know if it would change mankind, but I know it would change my life.

Da:I couldn't agree more. And thank you, Nick, for your leadership and setting a new precedent for the global market for digital assets. I love what you guys are doing and I'm really looking forward to just watching your progress. Thank you for joining us, and thank everyone for listening to the EisnerAmper podcast series. Please visit for more information on this as well as a host of other topics.

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