Regulating Virtual Assets at BVI: Challenges and Opportunities – Fin Tech

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Regulators around the world are wrestling with difficult questions about how virtual assets should be regulated. The past year has seen significant volatility in the prices of major cryptocurrencies. With such volatility, fortunes have been made and lost, with the losses often borne by inexperienced retail investors.

In an effort to protect investors, some onshore jurisdictions (such as the Hong Kong SAR) have proposed that virtual asset exchanges should only be allowed to offer services to professional clients and not be allowed to serve clients Retail.

Similarly, the People’s Bank of China issued a notice in September 2021 regarding the banning of cryptocurrency and related transactions in the PRC.

Indonesian regulators have also recently moved to ban financial firms from facilitating cryptocurrency sales.

At the same time, virtual asset companies have shown increased interest in offshore jurisdictions such as the British Virgin Islands (the “BVI”).

BVI’s attractions include its tax neutrality, respected regulator and responsiveness to global regulatory trends, common law legal system, low costs of setting up and maintaining businesses, and investor familiarity. While these attributes are well understood in the “traditional” corporate and finance sectors, they also prove attractive to companies operating in the virtual asset space which, in addition to being decentralized in nature, tend to be agile, innovative and independent of jurisdiction in terms of their approach to business.

This article examines the current BVI regulatory regime as it may apply to cryptocurrency and virtual asset businesses.

BVI REGULATIONS

BVI does not currently have a specific regulatory framework for virtual assets or cryptocurrencies, although it is expected that the jurisdiction will develop over time (in common with other jurisdictions) a regulatory framework specifically designed for virtual assets.

In the guidance published on July 10, 2020 (the “FSC Guidance”), the BVI Financial Services Commission (“FSC”) has confirmed that whether a license is required for activities related to virtual assets will be determined under existing financial services legislation.

Cryptocurrency and virtual asset businesses (particularly those whose activities include operating a cryptocurrency exchange or engaging in crypto lending) will need to determine whether their proposed activities fall within the scope of the one of the following before settling in the BVI:

  1. the Banking and Trust Companies Act 1990, as amended (the “BTCA”);

  2. the Funding and Money Services Act 2009 (as amended) (“FMSA”); and

  3. the Securities and Investment Business Act, 2010 (“SIBA”).

Each is discussed in more detail in this note.

CROSS-BORDER

Any discussion of the regulation of virtual assets in a single jurisdiction would be incomplete without reference to the significant cross-border risks inherent in the decentralized nature of virtual assets.

A major concern is that while a virtual asset business may in fact be appropriately regulated (or unregulated) in a particular jurisdiction, its service offerings may carry significant regulatory implications in other jurisdictions. , as cross-border targeting of investors and clients may require cross-border registration and regulation as well.

Accordingly, compliance with applicable regulations in an offshore jurisdiction such as the BVI will not exclude a company from regulatory enforcement action in any other jurisdiction in which it makes its services available to customers. Appropriate advice under the laws of these jurisdictions should always be taken.

BANKS AND TRUST COMPANIES ACT

Virtual asset businesses whose activities involve trading in fiat currency or holding fiat currency deposits on behalf of customers must ensure that their activities do not inadvertently constitute “banking activity” as defined in the BTCA (for which the appropriate license is required).

Banking means the activity of accepting deposits of money which can be withdrawn or refunded on demand or after a fixed period or after notice, by check or otherwise and the use of these deposits, in whole or in part :

  1. in making or granting loans, advances, overdrafts, guarantees or similar facilities, or

  2. making investments,

for the account and at the risk of the person accepting such deposits.

Firms or exchanges that hold fiat currency on behalf of their clients and invest in it will need to determine whether the above provisions of the BTCA apply to them.

MONETARY FINANCING AND SERVICES ACT

The FMSA regulates funding activities and money services activities.

Financing activities generally relate to the granting of credit to borrowers located at the BVIs. More relevant to virtual asset businesses, the definition of “funding activity” was expanded in 2019 to include “international financing and lending activity in the peer-to-peer (P2P) FinTech marketplace , including peer-to-business (P2B) and business-to-business (B2B) marketplaces.’

Money services businesses are a category of regulated activity that includes, among others, the activities of transmitting money in any form, including electronic money, mobile money or money payments.

The FSC guidelines confirm that the transmission of virtual assets or products related to virtual assets would not require a license under the FMSA.

However, to the extent that a virtual asset business handles fiat currency on behalf of clients, it should keep the above in mind and seek advice as needed to ensure that its activities are outside the scope of application of the regulations (insofar as it does not hold the necessary license under FMSA).

If a business’s activities fall within the FSMA’s definitions of a money services business or finance business, that business will be required to hold a license under the FMSA (which involves various obligations, including segregation of customer accounts, submission of audited financial statements for each financial year to the CSF and maintenance of capital resources).

SECURITIES AND INVESTMENTS ACT

The following activities require a SIBA license:

  1. negotiate, arrange transactions or manage investments;

  2. provision of investment advice;

  3. provision of custodial services relating to placements;

  4. provision of administration services relating to investments; and

  5. operation of an investment exchange.

A key question under SIBA is therefore whether the virtual assets with which the company deals would constitute investments for the purposes of SIBA.

The SIBA regulates many classes of traditional investments such as shares, interests in a partnership or fund, debentures, interests in a collective investment scheme and certain derivatives.

It is a matter of judgment as to whether a specific virtual asset would qualify as an investment for SIBA purposes (which would require a license to engage in the activities listed above with respect to those assets).

A virtual asset or other digital property that is merely a medium of exchange with no benefits or rights other than ownership of the coin would not be considered an investment and the FSC guidelines confirm that such assets will generally not fall under the scope of the regulations.

The FSC guidelines also confirm that utility tokens that only provide the buyer with the ability to purchase goods and services fall outside the scope of the regulations.

However, when a virtual asset provides a benefit or a right beyond a medium of exchange (because, for example, these assets confer rights to shares or create or recognize a debt), SIBA may apply on the basis that this virtual asset constitutes an investment.

Certain virtual assets may offer other benefits to the holder, such as the right to: (i) vote on different protocol proposals, (ii) be eligible for a portion of protocol benefits or fees; or (iii) to participate in a decentralized autonomous organization.

Advice should therefore always be taken before engaging in any activities involving Virtual Assets in or from the BVI to determine whether Virtual Assets may qualify as “investments” for the purposes of the SIBA requiring a license to trade them.

CONCLUSION

Virtual assets remain an exciting and rapidly developing market area, generating challenges and opportunities for virtual asset companies, investors, lawyers and regulators.

Although the BVI does not currently have a regulatory framework specifically designed for virtual assets, industry players wishing to conduct virtual asset-related activities in the BVI or using BVI entities will need to carefully consider whether their proposed activities place them within the framework of existing regulations. BVI Financial Services Legislation.

One of the advantages of the BVIs as an offshore jurisdiction is its experienced network of qualified BVI practitioners located in major business centers around the world, ensuring that real-time legal advice and guidance is available every step of the way. .

Originally published by Asia Business Law Journal, April 2022

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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