Despite the devastation it caused across the financial industry, the crypto winter resulting from the fall of FTX helped highlight the rigour of Gibraltar’s legislation around the way client assets are segregated and protected.
By James Lasry, Head of Funds, Deputy Head of Financial Services, Hassans
Despite the devastation it caused across the financial industry, the crypto winter resulting from the fall of FTX helped highlight the rigour of Gibraltar’s legislation around the way client assets are segregated and protected.
Although the fallout of this collapse did impact some crypto funds in Gibraltar, it also helped highlight the strengths of the jurisdiction’s regulation around these types of products. “The DLT [Distributed Ledger Technology] regulations require you to prove and demonstrate how you segregate client assets and protect them as part of your application process,” explains James Lasry, head of the funds team and deputy head of the firm’s financial services team at Hassans.
Writing policies on the custody of assets has been a critical part of Hassans’ work in guiding crypto fund managers when setting up new funds in Gibraltar. “Managers can custody assets in the way they feel is best for the fund and for the investors, which provides a lot of flexibility. However, the key here is what to do with that flexibility,” Lasry says.
Hassans assists with the building of that custody framework, both in terms of the types of the entities within which they custody, and the nature of that custody, in terms of liquidity needs.
For example, a long-only fund might consider keeping the assets, or a portion of the assets, in cold storage. But this is not possible for an algorithmic fund which trades 80% of its assets all the time. Such a fund needs to keep almost everything on an exchange.
Another key piece of advice related to security, Lasry points out, is for funds to have a multi-signatory capacity where no single person can move value outside of the fund by themselves.
Nuanced relationships with crypto natives
Many of the funds being launched in Gibraltar are so-called crypto native funds. This means the individuals running the fund have a crypto background rather than a foundation in the financial industry itself.
This leads to some nuance in terms of the way the client relationship develops, Lasry outlines.
“These clients tend to be younger. They are very smart individuals who understand crypto very well but need guidance for the financial services aspect of setting up and running a fund – mainly in areas like corporate governance,” he says.
Conflict of interest is also an area in which native crypto fund managers need support. Lasry explains: “They will often ask questions around whether a certain transaction will result in a conflict of interest. They’re aware of the concept of conflicts of interest. but they’re not always sure how to apply it in a financial services context.”
The managers of these funds tend to tread very carefully and are cautious before making any decisions for which they do not know the repercussions. “They often ask us before doing anything, which is very refreshing,” Lasry notes.
Regulation a plus
From Hassans’ perspective, managing these crypto native fund relationships means a more engaged and communicative connection. Their queries are often time sensitive and therefore support professionals need to be available to respond at short notice. “The crypto world moves much faster than the traditional financial industry, mainly because the markets are so much more volatile,” Lasry says.
Despite the crypto winter, Hassans has continued helping managers to set up crypto funds in Gibraltar, and Lasry expects this to continue and even increase as the winter edges into a crypto spring.
“We have the professional services infrastructure and regulatory framework which makes setting up a crypto fund in Gibraltar very straightforward,” Lasry notes, “this is especially true for European-based managers as it means they are more likely to attend board meetings in person if the fund is based in Gibraltar as opposed to one of the jurisdictions which is further away geographically.”
Regulation can be seen as a bone of contention or an obstacle for some fund managers, however Lasry recommends that managers coming to Gibraltar consider the regulator as a key partner: “In larger jurisdictions, a partnership between the regulator and a licensee firm is almost impossible. In Gibraltar, you have the opportunity to speak to the regulator, outline what you plan to do and share with them what you want to achieve.”
The funds eco-system in Gibraltar is also very well developed and to this end, Lasry advises fund managers to make full use of the expertise at service providers: “They have a lot of experience to share.”
In other advice to fund managers, Lasry warns against the use of unregulated structures: “The regulation part of setting up a fund in Gibraltar is not particular onerous and a lack of regulation could hamper your growth in the future.”
James Lasry, Head of Funds, Deputy Head of Financial Services, Hassans – 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. James is a highly regarded practitioner who has been instrumental in setting up the majority of Gibraltar’s funds, including the first experienced investor fund, the first protected cell company fund. Most recently he has been involved in launching Gibraltar‘s first protected cell limited partnership fund. James, who is qualified as a certified investment fund director, serves on the board of several investment funds and financial services firms. He has received regulatory approval to serve on the board of the Gibraltar Stock Exchange. James is Chairman of the Gibraltar Funds and Investments Association and he serves on the Gibraltar Finance Centre Council.
