Jan 26, 2022 7:00 AM

Gibraltar Could Launch the World’s First Crypto Stock Exchange

“The Rock” hopes a new stock exchange will attract crypto millionaires who want to avoid hefty taxes.

Houses on a hill overlooking The Rock of Gibraltar — Photograph: Dark_Eni/Getty Images

British entrepreneur and financier Richard O’Dell Poulden hopes that his new venture will relieve the plight of an underserved cohort: Bitcoin billionaires who want to buy a house.

In October, Poulden’s Gibraltar-based company Valereum—at the time named Valereum Blockchain—announced plans to buy an 80 percent stake in the Gibraltar Stock Exchange (GSX), to create an integrated exchange where conventional stocks and financial products could be traded for cryptocurrency. If the Gibraltarian financial regulator approves the deal, it would make the British overseas territory, also dubbed “the Rock,” home to the first stock exchange of this kind in the world. And it would, Poulden says, finally help the crypto millionaires squeeze more money out of their tokens.

Long seen as a tax haven, over the past few years Gibraltar has been working to restyle itself as a global cryptocurrency and blockchain hub, approving a regulatory framework for crypto businesses that want to be based in the territory. Poulden says that allowing financial trades in crypto will solve a big issue for people who hold vast cryptocurrency savings but are finding it hard to monetize them. Converting crypto into state-issued currency on an exchange often means incurring costs such as transaction fees and capital gains taxes; and trying to use it as a collateral to, for example, buy property is onerous—requiring large over-collateralization due to crypto’s tendency to swing wildly (ask the people whose Bitcoin stash has fallen in value by 23 percent since the start of the year). Even if upstart companies such as Miami-based Milo say they can change that, and Wall Street banks are reportedly looking to enter the fray, at the moment the conditions for securing crypto-backed loans are “not tremendously attractive,” says Poulden.

Valereum’s plan "makes crypto a more attractive asset,” Poulden says, “because you can put a portion of your cryptocurrency savings into a fiat security, you can borrow against that, and buy a house.”

According to Valereum executive director Patrick Lyle Young, if the company successfully acquires GSX, the exchange will operate as an ordinary stock exchange, with the sole exception that trades can be paid for in cryptocurrencies rather than just fiat. People will be able to exchange cryptocurrencies for stocks, which will be held in a trust company owned by the exchange. (In December 2021, Valereum bought Juno, a Gibraltar company specializing in the creation of trust companies.) These stocks, which could be from any company, could then be leveraged as collateral for other financial activities, like bank loans. In simple terms, it’s like exchanging collectible cards—everyone walks away happy, and the middleman gets nothing. In that way, Young says, the trade will appear as a cryptocurrency purchase and will not require the crypto to be converted into fiat. “The last thing [Bitcoin holders] want to do is sell, because if they sell the cryptocurrency they're going to have a huge [capital gains] tax bill,” he says. “If they spend the cryptocurrency to buy another asset denominated in cryptocurrency, they don't have that tax liability.” But since they would have access to the stock in the trust company, they might be able to, for instance, use them as collateral for a mortgage.

Valereum’s initial announcement of its plans to acquire GSX mentioned Bitcoin, Dogecoin, Cardano, Ethereum, and Tether among the cryptocurrencies that will be approved for trades on the stock exchange, though Young says the final list is still being worked out.

Young declined to talk about the kind of technology Valereum will use to facilitate the cryptocurrency trades. Blockchain technology—the digital, decentralized ledger underpinning cryptocurrency networks—is often touted as a way to bring more transparency to finance, due to the fact that a swarm of computers as opposed to a single party are in charge of validating transactions. The cryptocurrency industry, and especially the Decentralized Finance of DeFi sector, is also regarded as a test bed for new types of products and assets, such as non-fungible tokens, or NFTs.

Valereum’s proposed takeover will need the approval of the Gibraltar Financial Services Commission. Young says that Valereum has not yet exercised its right of option—which would trigger the purchase—but that the company is in “constant contact” with the FSC. If the deal goes through, Valereum plans to raise £50 million ($67.6 million) to invest in the stock exchange’s infrastructure. “But we may raise more. I mean—we may raise £100 million,” Young says. The company has so far issued £1 million in shares.

Poulden says he has chosen Gibraltar to carry out his plans partly because of his family links to the territory, but mostly because the local government has been an early mover when it comes to regulation of crypto business—and that has earned it a competitive edge over other countries. In 2018, Gibraltar established a list of nine good-practice principles (soon to be upgraded to 10) that all crypto businesses have to abide by in order to get a license to operate from the FSC. “Typically, these kinds of rules are codified for the financial industry,” says Paul Astengo, a senior executive in the Gibraltarian government. “But the blockchain industry is very new, so establishing some very rigid rules would have required us to constantly change and update them, and removed the regulatory certainty we wanted to give blockchain companies.”

Carmel King, a director at accounting and consulting giant Grant Thornton, says that despite the fact that the FSC has just about 80 employees, it has a good track record when it comes to overseeing Gibraltar’s budding crypto sector. “Smaller has meant more agile,” she says. On the other hand, King says, the regulator needs to remain vigilant. “The idea that bad actors will not come to Gibraltar because of the regulated space is a bit of a risky one—you can't afford to be complacent.”

So far, 15 companies, including crypto exchanges Huobi and Bullish, have established their HQs in Gibraltar—and Astengo says that Binance, the world’s largest and arguably most controversial exchange, is also pondering a move to Gibraltar.

But while Gibraltar’s efforts to attract the who’s who of crypto have been successful, its previous attempts to break new ground in cryptocurrency finance are checkered. In 2018 during the baffling surge of initial coin offerings, or token sales—online auctions of absurdly priced cryptocurrency tokens marketed as shares in blockchain companies—GSX launched the Gibraltar Blockchain Exchange, or GBX. Designed as a blend of cryptocurrency exchange and platform for ICOs, GBX faltered as the ICO model died down, and it was taken over by Australian company Mine Digital in early 2021.

GSX’s attempts to bring crypto products onto its stock exchange have had a mixed success. In 2016, the stock exchange announced that it would start allowing the trade of BitcoinETI, a Bitcoin-backed exchange traded instrument (a security whose value is determined by an investment portfolio), which was issued by the financial companies iStructure and Argentarius. By February 2017, the Bitcoin instrument had been delisted, and by September of the same year a smorgasbord of products created by iStructure were also taken off GSX; Argentarius was booted from the exchange for failing to comply with the authorization requirements.

On the other hand, GSX’s 2020 launch of exchange-traded bitcoin funds created by Canadian company 3iQ seems to have panned out. The funds are still available for purchase on the platform.

Gibraltar has form when it comes to building thriving ecosystems for emerging industries: online gambling companies account for around 25 percent of Gibraltar’s $3 billion GDP. In a 2019 speech, Gibraltar’s minister for financial services and gaming, Albert Isola, said he aspired to grow the blockchain sector to a similar size.

According to Joey Garcia, a partner at local legal firm Isolas—where Isola used to practice law before joining the government in 2013—being a magnet for cryptocurrency companies is a more achievable goal for the Rock than rewriting the rules of finance. “Dealing with securities markets and the complexities around that—it’s also super interesting but much more challenging,” Garcia says.

Despite the complexity, Grant Thornton’s King is convinced that the kind of integration Valereum wants to bring about is just a matter of time. “That's the direction of travel,” she says. “Over 2.3 million people in the UK hold cryptocurrency. All of the major investment banks have all set up their crypto desks. The integration is happening across the financial sector.”