Gibraltar Minister: Balanced Regulation Key to Restoring Trust in Crypto

There is no doubt that faith in the crypto industry has been shaken in recent weeks.

A dramatic market rout and panic have gripped both retail and institutional investors, forcing them to reconsider holding risk-on assets amid developing macroeconomic factors.

Embattled crypto lender Celsius, which locked users out of their accounts following rumors of its insolvency, continues to face the music from disgruntled participants as it attempts to navigate leveraged positions.

Just weeks prior, the crypto market was rocked by the implosion of the Terra ecosystem when its algorithmic stablecoin de-pegged from a 1:1 ratio with the US dollar in what has been called “reckless financial engineering.”

Year to date, crypto’s bellwether asset bitcoin is down 55% and has fallen 70% from its all-time high of nearly $69,000 in November 2021 to $21,300, according to Blockworks Research data.

While far from the first time the market has witnessed freefall, many minds are questioning how this dismal situation could have been prevented and what avenues should the industry take for future cycles.

To some, such as Albert Isola MP, Gibraltar’s minister for digital and financial services, regulation holds the key to providing appropriate investor protections while helping smooth out volatility over a long-term horizon.

“One of the key issues we’re going to be living through now is trust, and perhaps a lack of trust,” Isola told Blockworks when asked what he thought of crypto’s recent market turmoil. “When people begin to realize that crypto and the space is volatile and subject to fluctuations, as is the traditional financial services market, you begin to think, ‘How can this happen?’ and that all boils down to trust.”

The minister pointed to balanced regulation as a vehicle to restore that trust. “I think it’s in these most challenging times that regulation is even more important. Regulations have got to get better, not worse,” Isola said.

Gibraltar studies lessons learned

According to Isola, regulators around the world would now move to heavily scrutinize firms like Terra and Celsius in order to better understand how they got there, how they behaved during their respective crises and how they are answering the call to fix it.

“In all of these things, it’s never what happens — it’s how you respond to what’s happened that’s important,” the minister said.

Gibraltar considers itself a hub for both budding and established crypto and blockchain businesses, having implemented one of the world’s first licensing regimes for the industry in 2018.

The overseas British territory also amended legislation in April which seeks to curb manipulation by asking crypto firms to respect markets in which they operate and monitor for potentially shady behavior.

The former naval garrison, located on the southern tip of Spain, may also soon permit a takeover of its regulated Gibraltar Stock Exchange by local blockchain firm Valereum in a potential world first that would see crypto, bonds and equities traded under one roof.

Whichever services, whether traditional finance, online gambling or crypto, they have to be regulated, according to Isola, who added appropriate policy not only protects the consumer but the reputation of the jurisdiction.

Gibraltar currently has around 15 major crypto firms operating within its 6.7 km² borders, including the likes of Bitso, FTX, Huobi and Bullish, the exchange backed by PayPal co-founder Peter Thiel. Isola reasoned lessons from overseas jurisdictions like Singapore and the European Union have provided ample examples of how to provide balance between consumer protection and fostering innovation.

It is because of Gibraltar’s favorable regulations that crypto and blockchain businesses from around the world are drawn there, according to Isola.

“The interest of all of us [firms and regulators] in looking after consumers and doing things properly is totally aligned,” he said. “Ultimately, I think our desire is for an international set of standards to be applied around the world.”

“At least let’s have a minimum set so that everybody is playing by a set of basic rules,” Isola added.

Ahead of the curve

Indeed, some have argued for more oversight and control over the way in which Celsius and Terra behaved in the market.

This could have prevented a spillover to other sectors that the industry now finds itself in, as the number of public crypto-related stocks continues to grow.

When asked how difficult it is to stay ahead of financial and technological innovation while metering out appropriate legislation, Isola said the task was considerable due to crypto’s nascence.

“When you’re innovating, by definition you are doing something that has not been done before and that is quite scary,” the minister said. “Yet in every instance, innovation is driven forward by the experts in the field.”

Even proponents of regulation would like to see governmental bodies move faster to set clear rules of the road.

“In terms of the regulator, I think every industry would tell you we wished they could do things quicker, that’s the overriding complaint consistently,” Isola said. “To do things properly, unfortunately, does take time.”

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