Gibraltar’s innovative approach to crypto regulation, the growth of its fund industry and the appealing tax advantages makes it an attractive destination for crypto entities. Luke Walsh, a PwC Gibraltar advisory partner with over 14 years of experience, explores Gibraltar’s cryptocurrency regulatory landscape.
In his role as a crypto leader, Walsh is responsible for the vast majority of PwC Gibraltar’s crypto advisory engagements and, with his team, has assisted entities through the DLT regulatory process, as well as solving their technical accounting questions. He is a member of the PwC Global Crypto Accounting Working Group that discusses technical crypto accounting and has issued PwC’s thought leadership on crypto accounting matters.
Luke Walsh, PwC Gibraltar Advisory Partner
In 2017, HM Government of Gibraltar issued a public consultation for proposals for a DLT Regulatory Framework. This represented a significant undertaking at the time and a bold move to propose to regulate the crypto market at a time when crypto was still considered the wild west.
The Government’s early proposals, as well as a few early initial coin offerings set the stage for Gibraltar to establish itself as a prime location for the base of established crypto business, crypto start-ups and crypto funds.
Of the numerous factors that have contributed to Gibraltar’s crypto success, the regulatory approach and fund market are of particular interest.
Gibraltar’s DLT Framework
In 2017, HM Government of Gibraltar issued the Financial Services (Distributed Ledger Technology Providers) Regulations 2017 (‘DLT Regulations’) which became effective in January 2018. The issuance of crypto regulations as early as this demonstrated the Government’s attitude towards the crypto industry, with the aim of attracting the right entities to the jurisdiction and conducting crypto business under regulatory supervision.
The DLT Regulations have since been superseded by the Financial Services (Distributed Ledger Technology Providers) Regulations 2020. Any entity which, as a business, stores or transmits value belonging to others using distributed ledger technology is required to be regulated in Gibraltar by the Gibraltar Financial Services Commission (GFSC). The jurisdiction continues to grow and develop its regulatory approach, with the addition of a market integrity principle into the DLT Regulations in April 2022.
The DLT Regulation’s principles-based approach has allowed the application of the regulation to grow since 2018, without having to continuously change the legislation. Furthermore, the DLT Regulation is much more than solely an AML registration and requires DLT Providers to, amongst other requirements, hold an agreed amount of regulatory capital, segregate client funds, conduct daily crypto reconciliations and adhere to market integrity principles.
The jurisdiction’s regulatory approach has ensured that, as much as possible, DLT Providers that are regulated by the GFSC are supervised and need to conduct their business in a similar manner with similar restrictions to traditional financial services business. The approach aims to protect customers, entities, directors and other stakeholders from the inherent risks of doing business in the crypto industry.
Crypto funds
Gibraltar’s approach to crypto also resulted in a substantial growth in its fund industry, with Gibraltar being ranked within the top five crypto fund domiciles in the PwC Annual Crypto Hedge Fund Report for several years running.
Experienced Investor Funds (EIF) have proved a popular choice for crypto funds that wish to utilise a Protected Cell Company structure and be supervised by the GFSC. First establishing a private fund and then converting it into an EIF at a later date is a good way for fund managers to build a track record whilst keeping costs low during the early stages of a fund’s development.
Gibraltar’s tax basis
While the majority of crypto entities may be attracted by the regulatory certainty, there are other advantages to establishing in Gibraltar. With a current corporation tax rate of 12.5 per cent and a maximum effective personal tax rate of 27 per cent, crypto entities and individuals are benefiting from these rates whilst also not being subject to capital gains tax, value added tax or inheritance tax.
Employees that meet certain criteria may also be able to benefit from the High Executive Possessing Specialist Skills (HEPSS) status, which provides favourable personal tax rates to attract specialist talent to Gibraltar in key areas such as crypto.
How PwC Gibraltar can help
We have been assisting crypto clients and traditional clients wishing to move into crypto since 2017. By providing our clients with our full range of services, our community of solvers has been enhancing value for our clients and solving important problems. Some key focus areas for our clients have been:
Regulatory assistance – We have advised and assisted a number of clients through the DLT Provider regulatory application process, by providing advice, guidance on the implementation of policies and specifically assistance in the calculation of DLT Providers’ regulatory capital requirement.
Accounting advice – Entities engaging in crypto transactions are required to consider how to fit the specifics of the crypto transactions into the existing accounting framework. These range from holding different crypto assets, issuing different types of crypto asset, using crypto assets to undertake transactions such as reward employees and service providers and interacting with DeFI protocols. We have assisted a number of entities in developing and implementing their accounting policies and operations to account for crypto transactions.
Tax advice – Following on from the accounting advice, clients usually want to know the tax impact of the transactions that they are undertaking. Our tax professionals have assisted clients in determining the Gibraltar tax treatment of their crypto transactions, as well as providing personal tax advice to individuals and executives moving to Gibraltar.
Fund administration – With the growth of crypto funds in Gibraltar, we are able to provide assistance in the establishment and administration of private funds and EIFs in Gibraltar, combining our regulatory, accounting and tax crypto expertise to provide complete advice to our fund clients. Whether this is in the review of the PPM, the development of fund policies, implementation of risk management, ongoing accounting and Net Asset Value calculations, our team of experienced practitioners is able to apply their skillsets learned from traditional services and apply it to the specific needs of crypto funds.
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