The technology transforming financial services and beyond

We live in an increasingly digital world, where more and more relationships are developed and maintained through modern technology. Emails, pictures, voice and video calls and instant messages travel directly between individuals, allowing them to maintain dialogue and trust, no matter how far apart they are.

The global economy has also moved into the digital age over the last decades, and it is estimated that less than 10% of the money in circulation around the globe is now physical cash. However, people generally have to rely on a third party in order to be able to complete a transaction.

Consider the last time you made a transfer to a friend, or made an online purchase – money was transferred from one account to another, without either party ever actually seeing or touching it; the transaction was essentially a series of entries on the ledgers of the banks through which the payments were processed.

However, the global financial crisis of 2007-2008 engendered a steep decline in the public’s trust of the traditional financial institutions on which the global economy had come to rely so heavily. In the wake of this worldwide economic collapse, and many believe in response to it, a whitepaper was published in 2008 by a mysterious individual (or group of individuals) under the pseudonym Satoshi Nakamoto. The paper described a peer to peer electronic currency system that used maths and cryptography to authenticate and protect transactions of value, without the need for any trusted third parties such as banks. Bitcoin, and the many virtual currencies which have since been devised, are all built using Distributed Ledger Technology (DLT), or blockchain technology, as it is commonly referred to.

Put simply, a blockchain is a type of database that is replicated over a network of computers, which uses software code to ensure that each participant’s view of the shared database matches the view of all the other participants. Blockchains store information in batches, called ‘blocks’ that are linked together in a chronological fashion to form a continuous line: metaphorically, a chain of blocks. If you make a change to the information recorded in a particular block, you don’t rewrite it. Instead, the change is recorded in a new block, showing that ‘X’ changed to ‘Y’ at a particular date and time.

Before a block is added to the chain, a few things have to happen. A cryptographic puzzle must be solved, thus creating the block. The computer that solves the puzzle shares the solution to all the other computers on the network, and the network verifies this computer’s proof-of-work. If correct, the block will be added to the chain. The combination of these complex maths puzzles, and verification by many computers, reduces the ability for data tampering, and ensures that we can trust each and every block on the chain. The ability of any participant in the network to trust in the data itself is one of the key value propositions of this technology, as it removes the need for trusted intermediaries such as banks or lawyers.

Governments, institutions and experts around the world have recognised that the applications of this technology can extend far beyond those of virtual currencies: blockchains, or DLT, can be programmed to record and track anything of value. Indeed, many expect that within the next decade, DLT will be used to track land titles, collect taxes, allow immigrants to send money back to countries with limited access to financial institutions, and significantly reduce financial fraud.

Whilst some of the best minds in the world continue to devise new applications for this technology, and to reshape business models in the financial sector and beyond, governments have been unsure of how to bring regulatory oversight to the DLT space, without stifling innovation.

Gibraltar has been the first jurisdiction in the world to step forward and introduce a legal and regulatory framework, specifically designed for companies (‘DLT Providers’) that use DLT to store or transmit value belonging to others.

Recognising that this technology is still evolving, Gibraltar’s approach has been to produce an outcomes-focused, principles-based framework, which sets out 9 principles which DLT Providers must follow, without being prescriptive as to the manner in which they do so. The DLT Regulations are designed to provide DLT Providers with regulatory certainty without limiting their innovation, whilst also providing safeguards for consumers and protecting Gibraltar’s reputation and integrity.

DLT Providers based in Gibraltar will be regulated by the Gibraltar Financial Services Commission, and will be expected to operate to the same high standards as more traditional financial services companies.

Virtual currencies have received a lot of adverse media attention, largely due to their price volatility, their association with cyber theft and the possibility of using them for illicit purposes in unregulated environments. Nevertheless, a consensus is growing among thought leaders worldwide that DLT, the technology which underpins these currencies, will become a global, decentralised source of trust. Indeed, it is hoped that new DLT-based networks will evolve to meet society’s needs more cheaply, efficiently and securely than is possible through traditional systems where intermediaries are so heavily relied upon, and that regulatory frameworks such as Gibraltar’s will help bring about these expansive and exciting possibilities.