Welcome to this edition of our hugely popular Crypto Questions with Cummings Pepperdine.
In this episode we talk to James Lasry, head of funds at law firm Hassans International, about why Gibraltar is such an interesting jurisdiction for crypto and DLT.
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.
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For a transcript of this episode, please click here.
Hello everybody and welcome to this our latest podcast in the series of hugely popular Cummings Pepperdine Crypto questions. Today I'm delighted that we are going be speaking to the guru of Gibraltar, James Lasry, who is head of funds at the GBR Law firm, Hassans. James, you are going tell us all about crypto regimes and Gibraltar.
I'm looking forward to getting started, but first, tell us a bit more about you and what you are involved in.
Well, thank you Claire. It's a pleasure to be here and I am involved in really primarily crypto funds. Well, funds in general, but lately what we have been doing most of is crypto funds and DLT in general as well.
And Gibraltar in 2018 [00:01:00] came out with a comprehensive regulatory regime for DLT, which is a full financial services style regulatory regime for those who wish to store or transmit value on the blockchain for third parties.
Am I right in thinking that Malta was one of the first to come up with the LT regulation?
Yes, indeed, indeed. And that was that was really a stroke of luck. The government had been working on that for quite a while beforehand. And so for us to be able to come out with that in 2018 really helped. A lot because it gave us a bit of a first mover advantage and it helped create an industry so that even other areas of the industry which didn't rely on those specific regulations were very much helped by them because there was already [00:02:00] an infrastructure for it Yes, I could see that we wanted to deal with crypto.
And that then means you're now entering into your fifth year, so You'll have experienced a lot, but also importantly, you'll have learned a lot over the last four years now, or into the fifth.
Indeed. The guiding principles of those regulations were, rather than creating very prescriptive regulations, they created nine principles, which you have to satisfy in order to be approved.
So rather than telling you how you had to satisfy them, they left that to the applicant to explain to the regulator how they satisfied them topically. One of the most important of the, of the nine principles is how client money and client value protected? [00:03:00] And you have to be very clear on how you segregate client assets from the firm's assets.
Yeah. And you have to be very clear on how those assets are protected, both from a cybersecurity perspective, from a hacking perspective, and, and from the perspective of someone trying to use for purposes other than which they were lodged with you.
And, and does that work as a type of comply or explain with the nine principles? Or do they all have to be complied with because there's no reason why you wouldn't comply?
You have to show them and satisfy the regulator how you comply with. And as with the FFC, it's principles based, so it's not as you're saying Yeah, it, it's not prescriptive, which means that you have to comply with the principles of, [00:04:00] for example, keeping money, keeping client money safe, but there's some flexibility to allow the individual business involved to do that in a way that is correct and suitable for their business.
Indeed as the drafter of the legislation said, if we were to be prescriptive and to have a sort of mfi style regulation for crypto for DLT, by the time the ink was dry on the paper, it would be out of date. Yeah. Something else would come along. And I think also, there's the well-rehearsed argument that the moment you have something which becomes more of a tick box…
Yes, it's very easy to come focused on what you need to do to tick the box rather than what you need to do to make sure that, as an example, if client money is safe and your product is the one that's correct for your industry, your market segment, you know, and your [00:05:00] clients. Indeed, indeed. And, you said that we've had time to learn as well.
So originally there were nine principles. Just recently they added a 10th principle, which is market integrity. You have to show how you are contributing to market integrity with your firm's policies and procedures. And does that, presumably, that would tie in with the requirement too.
Have the policies and procedures in the first place, and we are looking at the policies and procedures which protect not just the client, but the whole marketplace and therefore enhance the reputation you've brought her. Is that, is that the thinking behind it to build on what you've got and give a wider protection?
Very much so. Yeah, very much so. And I think I'm right, aren't I saying, there's, actually three type three regimes, which are probably relevant here. One is the DLT that maybe we could come back to [00:06:00] and you could tell us a bit more. But there's also a crypto regime and then there is sort of what we might call a crypto funds regime.
And I say we might call it that because it's really a funds regime, which is flexible and therefore seems to be well suited for the crypto regime. Am I right in thinking those are the three regimes in this area?
Very much so. The, the DLT regime is when you want to store transmit value on the blockchain for third parties.
And so that's more of a financial services type firm. Whereas if you want to deal for third parties, not in in holding them, but if you want to sell digital assets to the public, then you have a Vast registration which is sort of the implementation of the fifth anti-money laundering directive.
But that's really just a registration and people [00:07:00] confuse that often with full D L T regulation, the vast registration is just there to ensure that. When you sell tokens to people that you actually do, do have a process for anti-money laundering and know your client yeah, it's not really substantial.
So substantive regulation a as the DLT regime is so back, could you tell me how, how you sort of get into the DLT regime and get yourself sort. Get the regulator happy with you, and then perhaps we could then use that as the springboard to talk about the crypto regulation, which of course then would be a good springboard to talk about this sort of, this wider funds regulation.
So if I wanted to come within the DLT regime, what are the steps I would need to. Well, you start with [00:08:00] a business plan show showing what it is you want to do, how you intend to make money, and really what is the service that you want to offer to the public, and who do you want to offer that service to?
What segment of the public? Because obviously it will, there will be a lot more scrutiny if your intention is to offer it to, to retail customers. Retail. Yeah. Yeah. But still the procedures and policies have to be there in place for every type of business. And so once you have a well, you start, I suppose with a, with a concept paper, and then you'll discuss it with your, with your council.
And often you can have a sort of an indicative or, an initial meeting with the regulator to discuss. And that's fair. That's fair. That's a fairly handy Oh, it's, it's it's way of proceeding. Yes. And then the reg [00:09:00] regulator will give some, some feedback, you know, non-binding, but just telling you, well, this is something that we think could work or, yeah.
Or perhaps you need to have bit more of a look at this bit and Yes, because they're not advisors. Yeah, they're, they're regulators. They're not lawyers who give advice. Right. They're presumably they have, it sounds if their approach has been much to work with the industry to help build the right regulations in a strong industry, and therefore it's a helpful teamwork approach.
That's, that is very much the case in Gibraltar and that that's one of the things that I most enjoy about working as a regulatory lawyer in Gibraltar, is that the, the relationship with the regulator is really one of partnership. You're building together. It's this really powerful triumvirate of regulator, industry and government.
We really worked together [00:10:00] in a very effective and powerful manner. I remember. When we were implementing the A I F M D directive in Gibraltar, we had a meeting with the Minister of Financial Services, the regulator, and I was acting for the Gibraltar Funds and Investments Association, which was sort of the industry representative body.
Yeah. We went through each of the delegations in the directive because, you know, each member state could implement certain things in certain sections In certain ways. Yes. Yeah. And so we just went through all of them together to decide what is the best way to do that for Gibraltar.
And we had a British parliamentary draftsman with us who was supposed to Drafted into legislation after the fact. And he came up to me and he says, I've never seen anything like that in, you know, where I come from You'd all be at each other's [00:11:00] throats and, and negotiating, and this would've taken six months, whereas this just took an hour and a half
So I'll tell you, that's a dream come true, isn't it? It really is. It really is. And, and so it's such a pleasure and an honor to work in a jurisdiction like this where, It really, the relationship is really one of partnership. And I, and I tell my clients that you have to understand it.
Cause many of my clients will come from the United States or other jurisdictions where, or, or the uk where the regulation, the, the, the relationship with the regulator necessarily cannot be one of partnership because it's, it's too big. There's no way you can know the people you're working with. Yeah.
And so they're not used to that. So I tell 'em, look, you have to understand this is, it's different here, and you have to see the regulator here as your partner, and treat them as you would treat your partner because they will expect to be [00:12:00] treated in that manner, in the same way.
Yes. So once you get your initial feedback from the regulator then you have to produce a comprehensive business plan and then policies and procedures for a number of issues. And you need to really go through the nine principles and show how it is that you achieve those principles through your policies and procedures.
You submit all of that with the application form, and there may be a few back and forth with the regulator. And then often they issue, they don't call it a license in principle anymore, but essentially they say, all right, if you, if you comply with a, B, and c.
Then we will consider giving you the license. [00:13:00] Right, so then you have to presume you demonstrate your compliance and that you have everything in place, and then the authorization will be made. Exactly. And a D L T license in alt really it implies having staff, having a premises a certain element of capitalization as well.
It's a firm, and depending on what it does, it generally is run along the lines of a financial services style firm. Right. There is no shortcut to any of this. You are expected to have a proper, fully functioning, fully regulated entity.
Yes. That is able to run correctly and put customers at the heart of everything and keep customers safe. Exactly. So then is with the crypto regime, As far as the process goes, rather than the substance, first of [00:14:00] all, is the process much the same, being authorized under the crypto regime as, as the DLT?
No. Is there the same type of liaison with the regulator or how does that work?
The vast regime, the virtual asset service provider regime is much, much simpler. You don't really have to have a staff in Gibraltar. You, I mean, you have to have a compliance officer a local compliance officer, M L R O, but.
You don't have to have an office. It's just, it's just there for the sale orservicing of digital assets where you don't actually hold them on behalf of third parties. So this is what we, when we talk about the crypto regulation, we are talking about crypto asset business under the fifth money laundering directive.
Exactly. Yeah. So as we have in the uk, [00:15:00] the need to be registered with the FCA, if you're conducting One or both of the two crypto asset businesses of Exchange, exchanging both of VER and now and sort of providing custodian. wallets? Well, no. Because a custodial wallet Would fit under the DLT regime.
Cause you're storing or transmitting value on the blockchain on behalf of third party. So there you'd need a full DLT license. It's, maybe it's a little bit different from the variation on a theme. Yes. Because the, the FCAs regime was conceived more as an anti-money launder regime, but they have put some substantive, Yeah.
Sort of through the back door and just such a broader regulator. Also a place of a, sort of a fair degree of reliance on the joint money [00:16:00] laundering, steering group guidance. Because I know with, certainly with the, the FCA, it’s an international body. And then the FCA are, it's not saying they take everything on board because it's guidance, but they do, they do place a lot of value on the guidance from that body.
Very, very much so. Remember in Gibraltar we have a statutory obligation to match UK regulatory Outcomes to regulate up to UK regulatory standards. So we take that Into account.
So tell me more about, you say it's a little bit easier if we put, so maybe put it that way to then the DLT, but I [00:17:00] understand that as well as fifth money laundering regs. There's An overlay of additional compliance. Could you tell me a bit more about that? Sure.
It’s Quite markedly different from the DLT regime. The DLT licensing process is a good several month process as you'd expect, whereas the vast regime really is anti-money laundering based and therefore, once you submit the application you should receive a response within five to eight weeks.
You know unless there's an issue, but it's a much, much more abbreviated process. And because really you're not, [00:18:00] again, you're not storing value, you're not holding onto other people's assets. You might be selling them digital assets or in some ways servicing assets, but there's no actual sort of pick.
There's no sort of control or holding of client assets, which is the, the most regulated part.. And finally that takes us nicely to the crypto funds regime. Could you tell me a bit about who that's intended for and how someone were to go about applying for authorization under that?
I think as we said earlier, it's a funds regime which is flexible, therefore it's suitable for crypto, I think, rather than being a specific crypto funds regime. Is that correct? That's right. And there were a couple of things that the industry initiated that really made the Gibraltar experience [00:19:00] investor fund regulations particularly suited to.
Crypto funds because as you mentioned, there's no specific crypto funds regime, although there is a code of conduct, which, and that is compiler explain. That is both, there's a general code of conduct for funds, and then there's a specific crypto code of conduct, which was the first of its sort.
Deals with the things that you need to consider and suggests ways in order to deal with them. But if you want to deal with them in different ways, then you're perfectly entitled to. Again, it's, it's very much principles based. Again, it's on what the outcome is for the client to ensure the client is fully looked after.
Yes. [00:20:00] And how do you, were I as a crypto fund manager and I was coming to you for help with this, what is it an another process where you talk to the regulator first or is it more of a fill in the forms and talk later?
Well, unless you're going to be doing something new or different, in which case it's just common courtesy to go to the regulator and speak to them about it.
Yeah. you really need to establish the fund and the Gibraltar experience Investor fund regime is such where you can launch the fund once you have your authorized directors fund administrator, auditor, author, offering document. Once you have all of that properly set up and you have a legal opinion attesting to.
You can launch the fund with a board meeting so long as within 10 days you notify the regulator of [00:21:00] that along with copies of all the documents.
Could you tell us a bit more about the why the, the experienced professional and what the thresholds are for experienced professional?
They're very much like the FISMA sophisticated or professional investors. In fact, we strive to mirror those in a recent amendment. So either that and you invest a hundred thousand euros are equivalent. Yeah, Which is the minimum. Or if you, have a million euros besides the value of your residential home that qualifies you, or if you're an investment professional, there are a number of ways to qualify as an experienced investor, even if you invest 50,000 euros.
But you have received licensable investment advice Then, so [00:22:00] there's, some flexibility For the industry and the managers, but at the heart of it is only being able to get the right type of person. So as, refer to it in the uk, either you've had proper advice and that could be seen or you're big enough and ugly enough to look after yourself.
Yes, , I'm going to use that. probably a small fund manager needs protection from the clients at that point rather than the other way around.. Possibly. and so you can launch your fund, and this is one of the only fund regimes on this side of the pond where you can actually do that for all kinds of funds.
And, what made it possible for us to use this regime for crypto is really a combination of two things. [00:23:00] First of all, the regulator issued a statement about three or four years ago saying that we are happy for you to use this regime for crypto funds as well. But then there was something quite ground break that we did.
It enacted the dual regime in respect of A I F M D because as you know, Gibraltar had to leave the European Union along with the UK as a result of, of Brexit. Yeah. It might be worth actually touching on that point because I think for a lot of people the sort of the niceties of the link between the UK can be a slightly opaque, so we'll come back to that.
Sure. I mean, Gibraltar was part of the European Union alongside the uk but then when the UK [00:24:00] left Gibraltar was pulled, sort of kicking and screaming out out along with it. And you know, the principle of UK legislation is that whatever legislation was enforced on the eve of Brexit would remain enforced And would continue to remain enforced unless it's changed. Yes. Which means very importantly, that in funds, that the alternative investment fund managers directive still applies in the uk. Even though it's been on shore, it's just, it's. Even though we no longer have the right to passport as a result of it.
So in Gibraltar, we spoke with the regulator and with the government, and we said we no longer have the benefit of the European passport. Can you [00:25:00] please lighten the burden of the regulation compliance with A I F M D so that we can Compete with our new peer class of funds jurisdictions.
And we did that. So now instead of there being three exemptions within A I F M D, there are now four exemptions in Gibraltar. The fourth one being if you notify the regulator that you do not want to be bound by, by A I F M D then you no longer have to comply with the main elements such as the AFIM manager, the AF IM depository, and so on.
And that is extremely important in the context of crypto funds because it's virtually impossible, if not impossible to find an AF IM depository that is willing to hold [00:26:00] and take Responsibility. Yes. Strict liability for crypto assets. It's hard enough finding any bank who will let you hold crypto assets or even proceeds of crypto as we now call it here.
you're absolutely right. It is sort of the perennial issue, isn't it? Yeah. I would say that probably goes to the heart of what I perceive as being one of the biggest issues in crypto, which is safe custody By the person who go by a third party say, you know, the safe custody of a digital asset.
You know, it's key with any asset class. But it's potential, it has different sort of worries where it is a digital asset. Yeah. And I mean that as, as being sort of cold, hot and sort of the hydrogen between, they all have their, Various or difficulties specific to the [00:27:00] type of holding.
Yeah, exactly. But at least in Gibraltar with our regime and, as a result of the dual funds regime, we can choose the most appropriate method of Storage and custody for digital assets without having to worry about a set of regulator, AMFMD, which never had crypto in mind, which is really not fit for purpose for crypto.
Yeah.. It's quite interesting, this conversation, James, cuz we've, I suppose what we've talked about as long with other things With the onshoring of I F MD and so on has Brexit actually happened and we've talked about I F M D. If you can loosen it and still have a credible regime.
Was the I F M D really worth it? Was it needed? and now we've got an interesting discussion about how do you [00:28:00] regulate crypto? How does the existing Regime for, what are now called traditional assets, how can that be sort of applicable to something which is so new and nuanced and quite sometimes quite chameleon in you what you can do with a digital asset?
Yeah. they would all be hugely interesting round table events from the time, but tell me more about this one type of fund structure that I'm particularly interested. And what we've been talking about leads on to it very nicely for our listeners, and this is the concept of being able to have protected cells, but within a limited partnership.
So not a company, a protected cell, limited partnership. to be [00:29:00] able to have a protected cell is quite an interesting concept. Could you tell me more about how, how Gibraltar developed that and how it works in practice?
Yes, indeed. We've had protected cell companies for about 30 years. And, and, and as have many funds jurisdictions And it helps with economies of scale. But when we came to funds that, for a number of reasons, wished, wished to structure themselves as limited partnerships, they would have to set up a new limited partnership fund for every new Class. Yeah, to achieve the segregation of assets and liabilities. Right. You only ring fence through a different corporate entity. Well, corporate partnership anyway. Yes, yes. And, and so we had a number of clients who said, couldn't you?[00:30:00] Could you create a protected cell company, but in the context of a limited partnership.
And we had the basis of the Delaware series, series partnership which we could model ourselves on. And we thought about it for quite a while. We did some research, we took some council for From an American firm and we established the Protected Cell Limited Partnership, which is a limited partnership, which allows you just like a, create a protected cell company to create different cells and therefore different funds but within the context of that single entity.
So you have only one gp, you have only one auditor, one fund administrator. But they're able to deal with the different funds. And so [00:31:00] it's easy to set up a new fund. It really is just a creation of a new cell, which is very interesting, isn't it? Very interesting.
And I can, you know, I can already think off the top of my head, a number of investment areas, strategies, and areas of client demand, where that would be particularly… Yes, we actually launched the first one just a couple of months ago. And the clients are absolutely delighted with it because it really makes life a lot easier for them.
Yes,. And also for the fund managers. it's just allows some diversity In their offering and, the safe manner of keeping assets segregated from [00:32:00] each other, but with lower costs, low and lower overall admin.
Yeah, that's right. And there aren't many places in the world where you can do that at all. So we're very lucky to have that here.
James, it's been an absolute pleasure. Before we leave, I just wonder if I could invite you to come back later in the year and we can have a talk about what we've seen going on in 2023, and in the rest of the year and going forward into 2024, which, at the moment that Consensus seems to be that in 2024 might be the year where we start to see things really picking up.
We may be in a different economic place and well out of a crypto, the latest crypto winter will certainly shivery period. Indeed, indeed.
Well, absolutely Claire, I'd be delighted. I mean, we've been, we've [00:33:00] been speaking about a lot of these issues for years and so whenever you want me back, be delighted to come be.
Wonderful. Well, James, before, before we say goodbye to everybody, could you just give everybody a way of sort of contacting you. Being able to find out more about everything we've been talking about so people can get in touch after the podcast.
If you look me up on Google I'm sure you'll find me or On LinkedIn and Absolutely, and the website, hassans.gi. Our website is actually Gibraltarlaw. com.
You should also [00:34:00] look at the Gibraltar Funds and Investments Association. So GFI, that is the industry body. there's a lot of information there that could be helpful as well. And I know from experience that actually if you just Googled James Lasri, you can't be missed.
Thank you very James. Well just to say to everyone listening, so you've got James' contacts and if you want to speak to anybody here we're at cummings pepperdine.com. And thank you once again, James, for talking.
Thank you everybody for listening and look forward to our, our next hugely popular crypto questions.