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Welcome to the Guernsey Finance podcast page.
Our podcasts bring you all the latest news and insight from Guernsey, the global finance specialist, as well as audio from some of our online events.
Rosie 0:04
Hello and welcome to the Guernsey finance podcast where we bring you developments from Guernsey financial services industry. If you haven't listened to some of our previous podcasts already, you can do so on your preferred podcast platform or by the on demand page at our website weareguernsey.com. My name is Rosie Allsop. I am communications director at Guernsey Finance. We're the agency that promotes the island of Guernsey's specialist financial services in its respective chosen markets under the brand WE ARE GUERNSEY for those of you who aren't familiar with Guernsey, the islands leading global financial center of substance, stability and security committed to the cause of sustainable finance. As a member of several United Nations environmental initiatives and having been proactive in developing sustainable products and services. Today, we're talking about another world first for Guernsey. While we've become accustomed to announcing world firsts and innovations that emerge from Guernsey's financial services industry, such as the world's first regulated green funds regime, the subject of today's podcast is particularly exciting. We're talking about the launch of Guernsey's very first cryptocurrency fund. And I feel it's important to stress that this is very much hot off the press as Guernsey's financial services regulator, the Guernsey Financial Services Commission this week authorised Jacobi Asset Management to launch the world's first tier one bitcoin exchange traded fund also known as an ETF (exchange traded fund). The fund is available to institutional investors and it will seek approval from the Financial Conduct Authority in the UK to list on the UK based arm of the Chicago Board Options Exchange, which points it will become a tier one ETF. It was designed by Guernsey based regulatory consultancy, mature consulting led by managing director Christopher Jehan, who's also head of fund architecture at Jacobi. And my guest on today's podcast, I'm delighted to welcome you, Christopher. It's great to be speaking with you today. Congratulations on the launch.
Chris 2:21
Thank you, Rosie. It's great to be here with you and and thank you. It's been a long road to get here. But it's one that's well worth it. Because to be able to announce a first is an amazing thing.
Rosie 2:35
It's clearly very exciting news. But you know, as you've just alluded to, I gather, it's been quite a process to get to where you are today. Can you tell me a bit more about how it came about?
Chris 2:46
Yes, it was one of those very unusual personal introductions from an existing contacts of mine in the City of London, who introduced a group of four guys to me who said, originally, let's launch a FinTech and crypto funds and fintech fine, Guernsey's done that for any years crypto, of course, we hadn't had a crypto fund to that point. And after many discussions, they decided following some my guidance that we'll do it in Guernsey. And you're right, it was a very long route. And I'm sure we'll get to that in a bit more detail, particularly around the regulatory journey.
Rosie 3:25
So can you explain to me a little bit more about the fund and why it's such great news for Guernsey?
Chris 3:32
Well, firstly, there are a few other Bitcoin ETFs in the world. There's currently are at the point of authorization, three in Canada, one in Brazil, where this one probably differs from some of the others is some of the quality around it. So for example, Fidelity digital assets is the custodian there, a Fidelity, as I'm sure you and many other people will know, is a top tier investment firm in the world, one of the biggest out there. So it's around creating a high quality product, but also one that doesn't participate in Bitcoin, by buying derivatives rather than investing directly in the crypto asset itself. So in that respect, is different from many of the other products out there because along with the few other ETFs there are also things like Exchange Traded notes that do similar.
Rosie 4:26
So I know that you worked with the regulator, the GFSC to bring this into being. Can you tell me a bit more about that? What was their involvement and how did you find that process?
Chris 4:39
Before we proceeded to substantive work here in Guernsey at a very early stage conversation with the regulator to say, okay, we've not had a cryptocurrency fund here before in Guernsey. We'd like to set it up. What sort of controls would you like to put in place or would you like there to be in place around it? And then his case of during together a framework around those controls, then sitting down with a regulator and saying, okay, here's our control framework. They asked a lot of questions came clarity around that. It's more than one first because not only is it Guernsey first cryptocurrency fund, but we never had an ETF here before as well. So as understanding the ETF out as well, after that it became similar to any fund process. But of course, we already knew what controls we need to put in place. Where it did differ is normally an authorised fund go through what's called a three stage authorization process. In this case, pretty much stages one and two ran together. And actually, it went not only to an authorizations review panel, which is a group of the executives within the regulator, coming together to review a new product proposal. We then actually went to a decision committee of a number of the commissioners of the regulator. And once we got notification, the commissioners decision committee had said, Yes, that was exciting. Okay, now we've just got to put in the final authorization Pass, which was only about two weeks before we got the final authorization.
Rosie 6:14
Wow, that sounds like quite a process. So within many barriers to be overcome in order to get to where you are now to get to this stage, and can you share with me? If so what they were?
Chris 6:28
Yes... currency regulation was not perfectly designed necessarily to fit this product. So even things like anti money laundering regulation, which protects the islands financial services industry from abuse, by money launderers and terrorist finances, even that needed to be looked at and we had to ask for revisions to be made certain pieces of regulation are modifications of rules for this specific case. So I'll give you an example. Funds that list on exchanges typically do not follow normal, what you call anti money laundering know your client process. That's actually a specific exemption allowed within the anti money laundering rules, but that only applied to closed ended funds. ETFs like this are open ended it and they were not allowed within that exemption. So we looked at the original sources, the regulation was drawn from we looked as Iosco documents, we drew parallels through the lines went to the regulator in the form of a letter and said, We need to change the rules fail to allow this regulator agreed. It was logical, it wasn't increasing Guernsey's risk profile. So that without for very rapid consultation, so within a space of about six to eight weeks, we actually managed to get a rule modified.
Rosie 7:45
That's absolutely fantastic. Now, you mentioned it a little bit earlier on the controls framework. Can you tell me a bit about that? What does it look like?
Chris 7:56
Well, it was key areas of concern the regulator would have with a crypto investing funds over other types of there were five key control areas that the regulator was interested in two of them that she did relate to anti money laundering. One was if investors are allowed to bring cryptocurrency, like Bitcoin, how would we actually do diligence that Bitcoin coming into the fold? In this case, we would not allow it that so that was not an issue. However, when the fund itself buys Bitcoin, how do you make sure you're not buying effectively the proceeds of crime, or you're not buying something that could be used for terrorist financing? And there there's a firm involves called Flow traders, who are the authorized participants, they use a tool which actually looks at the provenance of the Bitcoin and the wallets it's been through to actually perform that level of due diligence. So that gave the commission my level of comfort. There were three other very hearing as well was, it is a thumb for institutional clients, only the commission did not want retail clients in the fund. So what controls are we going to put in place to ensure retail clients were allowed in making sure the valuation of the funds so the share price of the fund was robust, was another one. And the final one was the custody and again, I come back to Fidelity digital assets, the custodian for the third and it's a big name in the investment world. Fidelity digital assets is in a temporary permissions regime for crypto firms in the UK, and fully regulated by the Defense Department of Finance in New York. So again, it was making sure we had the right firms, the right controls the right processes put in place. And actually, those five areas were identified a very early stage. And because we identified that early stage, they they flowed right the way through the whole project, and sit in place in the final product.
Rosie 9:49
Interesting. So what's the benefits and the potential of this type of ETF? Are there vehicles that are created elsewhere that can invest in this Guernsey domicile hub?
Chris 10:02
Okay, if I take your first question there first, the benefits, the potential, potentially is huge, because at the moment Bitcoin itself is, as with any crypto asset, highly unregulated. So what we've done is we've created a regulatory products around that unregulated asset, to give more certainty to institutional investors and investing in it. So, for example, if you invest in Bitcoin directly yourself, you hold it in a wallet, you have a key, if you lose that key, you lost your Bitcoin here, the onus for ensuring safe custody of that is placed on fidelity. So it gives you more certainty because the fund is backed by quality custodian who are responsible for safekeeping of those assets. It's also the fund can avail of discounts in trading for trading higher values of Bitcoin. So those are some of the benefits behind it. As for other vehicles, we're looking at a number of potential feeder ETFs or other vehicles in other jurisdictions to invest into this fund, this fund will not directly sell around the world. So one of the areas we're looking at is the South African feeder ETF, which will be an ETF constituted in South Africa. And then it will be listed on a number of African stock exchanges available to investors in those jurisdictions, without us having to think about directly selling the guns he found there. So creates another layer effectively allowing investments for more domiciles. So it basically allows us to broadenly the investor base the funds.
Rosie 11:46
You know, have personally many, many years experience of working in currencies, financial services industry and doing something around expert. I'm just interested to know what made you choose cryptocurrencies?
Chris 12:02
Well, firstly, I didn't I mean, this was the the guys behind the project, the guys who've brought Jacobi Asset Management together, they came to me with the idea as I said, originally, it was fit a mix of FinTech and crypto devolved into bitcoin ETF. But when that project came to me, because it's never been done before, because it's new and exciting. That's why I decided that this was one to work with, partly to ensure that Guernsey actually maintained its place in the world remaining at the forefront of innovation. So for me, I didn't choose the asset the client debt, but the recommendations put it in Guernsey was largely driven by the desire to keep guns at the forefront of that innovation.
Rosie 12:50
And why did they choose Guernsey? Would you?
Chris 12:54
Like me, was that a personal introduction? I'm based in Guernsey we discussed the domicile and others at great length. It was felt that given the connections that we have here in Guernsey, so, you know, we can talk to the regulator about making a modification to rules. We can talk to government if there's intervention necessary at that point. You know, we were aware that there is an appetite within government for a cryptocurrency type investment vehicle. So, realistically, small jurisdiction like this, we can get changes made that may be more difficult than bigger jurisdiction, so it's the flexibility of the Guernsey regime. Another example would be we can get modifications the rules that apply to our fund only. So in this case to use fidelity, fidelity or non Guernsey custodian. Normally normally an open ended Guernsey scheme fund like this would require Guernsey custodian, but we've got a derogation or modification to the Rule to allow us to use a non Guernsey custodian, again, is the flexibility that Guernsey regime really lends itself to any sort of new product. And, you know, years ago it was private equity, private equity became one of those things that Guernsey does a standard many years ago that was innovation. Now it's areas like cryptocurrency that will be innovation. And we're well aware that not every fund would be able to get through the regulatory process, but the right fund of the right quality with all the control framework being properly explained to the regulator with early engagement. That's what we can now do and this is the case study to show we can do it.
Rosie 14:33
Yeah, very much. So what sort of impact do you anticipate that this will have?
Chris 14:40
I would expect and I'm already seeing people interested in putting other crypto products in Guernsey and not just ones that are related to financial services but pure crypto structures. I think that we're not necessarily going to see a deluge but we will see more interest because it can be done Yeah. And therefore, that actually does allow us to extend our financial services offering other digital offering beyond purely what we've done before, into this exciting new areas.
Rosie 15:12
It's absolutely wonderful to hear about this exciting new innovation that represents a really great opportunity for Guernsey and it's also wonderful to hear yet again, the willingness to listen and the can do attitude of the Financial Services regulator here in Guernsey. I'm afraid that's all we have time for today. All that remains is for me to thank today's guest, Christopher Jehan for joining me, and thanks to you for tuning in. You can find out more about Guernsey and its specialist financial services sector. If you head over to our website at we are guernsey.com and you can listen to more podcasts of this nature. Check out the We Are Guernsey podcast wherever you get your podcasts. Until then, it's goodbye from Guernsey.
Transcribed by https://otter.ai