Digital clearing and settlement framework: another world-first for the Rock

Gibraltar is set to enhance its capacity to regulate the providers of products and services that relate to virtual assets, through the development of the world’s first legal framework specifically designed to govern the clearing and settlement of derivative contracts that are settled in virtual assets.

The government is working with the GFSC and Bullish – a leading virtual asset exchange that operates on the Rock – in order to bring this new framework into effect.

What are derivatives?

In 'spot trading', which is what most of us are familiar with, you can buy or sell financial instruments, such as shares in a company, commodities, such as gold, or foreign currencies - if their value goes up, you gain profit, if it goes down, you lose out.

Derivatives trading get a bit more complicated. Derivative contracts are financial contracts whose value is dependent on (or derived from) an underlying asset or group of assets. Because derivative contracts 'derive' their value from an underlying market, they enable you to trade on the price movements of that market without you needing to purchase the asset itself – like physical gold.

As virtual asset markets have matured over recent years, trading in derivatives that allow traders to be exposed to the price movements of virtual assets without actually owning those assets has significantly increased. However, whilst more 'traditional' derivative contracts fall within scope of very prescriptive regulatory regimes, this has so far not been the case for virtual asset derivatives.

What will this mean for Gibraltar as a regulatory jurisdiction?

Gibraltar's clearing and settlement framework will, for the first time, bring a similar level of regulatory oversight to what exists in the traditional finance space. The framework will be designed to reduce counterparty risk, streamline settlement processes and increase market stability, by strictly regulating central counterparties at the heart of this activity.

Gibraltar aims to continue leading the way in the virtual asset space by offering a bespoke regulatory regime, which should increase both institutional and consumer trust in this space.

Minister for Financial Services, Nigel Feetham KC MP, said, “this initiative reflects Gibraltar’s ongoing commitment to responsible innovation, We are proud to lead on the global stage by introducing a framework that fosters trust, resilience, and integrity in virtual asset markets.

While Bullish CEO, Tom Farley, said this partnership exemplifies how innovation can thrive within a robust regulatory framework.