In 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 Crypto-Assets 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 principles-based 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.
Written by Gregory Martinez, Manager at Abacus Financial Services, and an Executive of the Gibraltar Funds & Investments Association (GFIA)
Gregory Martinez is a chartered certified accountant, having achieved membership status with the ACCA in 2019 whilst working in the audit sector at ‘Big4’ firm EY (formerly Ernst & Young) having specialised in investment funds and private banking. He is a specialist in net asset valuation calculations and processes for a wide variety of fund investment strategies, including cryptocurrency, private equity, financial instruments, and more. Currently serving as an Executive on the Gibraltar Funds & Investments Association (GFIA), he provides valuable advice and expertise to investment funds domiciled in a variety of jurisdictions within his role at Abacus Financial Services.
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