Partners Lucy Frew and Sara Hall, senior counsel Iona Wright, and associate Charlie Griffiths provide an overview of crypto-asset regulation in the British Virgin Islands.
Few areas of finance are developing faster than crypto-assets, a category that includes cryptocurrencies, securities tokens and utility tokens, whose common feature is use of distributed ledger technology (DLT). Today there are more than 16,000 individual cryptocurrencies in circulation and daily trading volumes are estimated to be more than $275 billion on more than 400 platforms.
Their rise has led to calls for better regulation due to potential investor protection, money laundering and market integrity risks.
Crypto-asset regulation in the British Virgin Islands
- Which body regulates crypto-assets and related services?
The body in the British Virgin Islands (BVI) that regulates crypto-assets and related services is the Financial Services Commission (FSC). As the principal regulator of the financial services industry in the BVI, the FSC's functions include responsibility for the regulation, supervision and monitoring of regulated entities, the enforcement of financial services laws, the monitoring of regulated entities' compliance with anti-money laundering, counter-terrorist financing and counter-proliferation financing (AML/CFT/CPF) legislation, the issuance of guidance to regulated entities, and the issuance of advisories to regulated entities and the public.
As a financial services regulator, it also performs a co-operative function in facilitating requests for regulator-to-regulator assistance.
- Does any law regulate crypto-assets or crypto-asset service providers such as exchanges?
Virtual Assets Service Providers Act, 2022
The Virtual Assets Service Providers Act 2022 (VASP Act) came into force on February 1, 2023 and provides a registration regime for any person carrying on in or from within the BVI the business of providing a "virtual assets service". Such persons are called virtual asset service providers (VASPs).
Associated guidance has also been provided by way of the VASP Guidance to the Prevention of Money Laundering, Terrorist Financing and Proliferation Financing (VASP AML Guide) and FSC Guidance on Application for Registration of a VASP (VASP Registration Guidance), both published on February 1, 2023.
Definition of a virtual assets service
"Virtual assets service" is defined under the VASP Act as the business of engaging, on behalf of another person, in any VASP activity or operation (as outlined in the definition of VASP), and includes:
- hosting wallets or maintaining custody or control over another person's virtual asset, wallet or private key;
- providing financial services relating to the issuance, offer or sale of a virtual asset;
- providing kiosks (such as automatic teller machines, bitcoin teller machines or vending machines) for the purpose of facilitating virtual asset activities through electronic terminals to enable the owner or operator of the kiosk to actively facilitate the exchange of virtual assets for fiat currency or other virtual assets; or
- engaging in any other activity that constitutes the carrying on of the business of a virtual assets service, issuing virtual assets or being involved in a virtual assets activity, pursuant to the issuance of guidelines.
In addition, "VASP" is defined as including the conduct of one or more of the following activities or operations for or on behalf of another person:
- exchange between virtual assets and fiat currencies;
- exchange between one or more forms of virtual assets;
- transfer of virtual assets, where the transfer relates to conducting a transaction on behalf of another person that moves a virtual asset from one virtual asset address or account to another;
- safekeeping or administration of virtual assets or instruments enabling control over virtual assets;
- participation in, and provision of, financial services related to an issuer's offer or sale of a virtual asset; or
- any such activity or operation as may be specified in the VASP Act or prescribed by regulations.
The sole act of issuing a virtual asset is not a VASP activity under the VASP Act and does not require registration with the FSC as a VASP.
Definition of a virtual assets exchange
A "virtual assets exchange" is defined under the VASP Act to mean a trading platform that is operated for the purpose of allowing an offer or invitation to be made to buy or sell any virtual asset in exchange for money or any virtual asset and which comes into custody, control, power or possession of, or over, any money or any virtual asset at any point in time during its course of business. Note that accepting virtual assets as payment for goods and services does not constitute a VASP activity.
As a result of the definition, the reality is that virtual assets exchanges will also have to be registered to provide virtual assets custody services and comply with the additional VASP Act obligations in this respect.
- Has a national law or regulation defined "crypto-asset" and/or "cryptocurrency"?
To provide a "virtual assets service", there must be a "virtual asset" within the meaning of the VASP Act. "Virtual asset" is defined as a digital representation of value that can be digitally traded or transferred, and can be used for payment or investment purposes.
Digital representations of fiat currencies (essentially, legal tender) and digital records of a credit against a financial institution of fiat currency, securities or other financial assets that can be digitally transferred are specifically excluded, along with certain closed-loop items such as airline miles and credit card awards.
Depending on the type of virtual asset, an analysis may be needed to determine whether the associated activities of a crypto business fall within scope of the Securities and Investment Business Act, Revised Edition 2020 (as amended) ("SIBA") and/or the VASP Act.
To be in the scope of the SIBA, the crypto business would need to constitute an "investment business", which hinges on whether the subject matter of the crypto services offered includes "investments". In its Guidance on Regulation of Virtual Assets in the Virgin Islands, July 2020 (Virtual Asset Guidance), the FSC observed in relation to the SIBA's parameter that "virtual assets and virtual assets-related products used as a means of payment for goods and services (for example, tokens) which provide the purchaser with an ability to only purchase goods and services (utility tokens) would not be captured by financial services legislation".
However, the FSC also noted that "where a virtual asset product or service provides a benefit or right beyond a medium of exchange, it may be captured under [the SIBA]". The reason is that, depending on the manner in which a token is used and the rights attaching to it, the token could be characterised as equity or debt and could therefore be an "investment" within the meaning of the SIBA.
Similarly, the FSC confirmed in its Virtual Asset Guidance that certain derivatives, in particular futures and contracts for the differences that reference virtual assets, would be investments within the meaning of the SIBA.
Financing and Money Services Act
The FSC confirmed in its Virtual Asset Guidance that "the transmission of virtual assets or virtual asset related products would not require a money services business licence". However, the FSC also cautioned that the views and guidance of the FSC should first be sought before proceeding with any virtual money services activity in or from within the BVI.
- What money laundering regulations, including any due diligence requirements, apply to crypto-assets?
The Anti-Money Laundering Regulations, 2020 Revised Edition (as amended) (AML Regulations) and the Anti-Money Laundering and Terrorist Financing Code of Practice, 2020 Revised Edition (as amended) (AML Code) were amended for VASPs with effect from December 1, 2022.
In particular, the AML Regulations require that entities conducting "relevant business", which includes the business of carrying on or providing a virtual assets service when a transaction involves virtual assets valued at $1,000 or more, must comply with the AML Regulations, while the AML Code is expressed to apply to an entity engaged in "relevant business" within the meaning of the AML Regulations.
The updates to the AML Regulations and the AML Code should be read together with the VASP AML Guide, which sets out guidelines on specific AML/CFT/CPF obligations for VASPs under BVI law.
These include requirements for robust customer due diligence and enhanced customer due diligence procedures, proper recordkeeping measures, and frameworks to fulfil statutory reporting obligations and the monitoring and assessment of risks present in the use and exchange of virtual assets and the operation of VASPs. The VASP is also required to appoint a money laundering reporting officer and notify the FSC and the Financial Investigations Authority within 14 days of the appointment or any change thereof.
- What rules apply to the promotion of crypto-assets?
The VASP Act prohibits VASPs, in relation to any activity that involves the business of the exchange, transfer, safekeeping, administration, or participation in, or provision of, virtual assets (whether or not carried on by the VASP and whether or not the activity is one the VASP is authorised to carry on), or in relation to any virtual asset business, from:
- issuing, or causing or permitting to be issued, an advertisement, brochure or similar document; or
- making, causing or permitting to be made, a statement, promise or forecast,
which the VASP knows is false or misleading or contains an incorrect statement of fact.
In addition, a VASP is prohibited from being reckless as to whether an advertisement, brochure, document, statement, promise or forecast, in a material particular, is false or misleading, contains an incorrect statement of fact or dishonestly conceals a material fact.
If the FSC is of the opinion that an advertisement, brochure or other similar document issued, or to be issued, or a statement, promise or forecast made, or to be made, by or on behalf of a VASP contravenes these prohibitions or is contrary to the public interest, it may:
- direct the VASP not to issue the document, or not to make the statement, promise or forecast, or to withdraw it; or
- grant approval to the VASP to issue the document, or make the statement, promise or forecast, with such changes as the FSC may specify.
Failure to comply with any of the prohibitions or a FSC directive not to issue a document or make a statement, promise or forecast is an offence, with the penalty for legal and natural persons being up to US$75,000 fine and/or five years imprisonment.
There is provision in the VASP Act for the Regulatory Code, Revised Edition 2020 (as amended) (Regulatory Code) to be amended to:
- prohibit the issue of advertisements, brochures or similar documents relating to virtual assets activities of a particular type or description, whether as to the contents of the advertisement, brochure or other document or the persons for whom they are intended; and
- provide for the issue, form and content of advertisements, brochures or similar documents and the making of statements, promises and forecasts relating to virtual assets business.
To date, the Regulatory Code has not yet been amended to account for the VASP Act, although an amendment is expected to be published later in 2023, with a draft expected by mid-year.
- Do different crypto-asset rules apply to wholesale and retail markets, for example, on the sale of derivatives?
The VASP Act and associated guidance does not distinguish between the provision of virtual assets services to wholesale or retail clients. The expected amendments to the Regulatory Code may provide more clarification in this respect.
As mentioned in our response to question 3, certain derivatives, in particular futures and contracts for the differences that reference virtual assets, would be investments within the scope of the SIBA, rather than the VASP Act (although the VASP Act may also need to be considered if there is physical delivery of the virtual asset). Options and spot foreign exchange transactions, by comparison, would need to be considered under the VASP Act.
- Does any existing or proposed national law impose requirements on issuers of stablecoin?
Stablecoins are not subject to a separate regime in the BVI, but instead would likely fall to be considered as "virtual assets" under the VASP Act in the first instance.
The mere issuance of stablecoin by a BVI entity on a proprietary basis is not considered to fall within scope of the VASP Act.
This article has been first published by Thomson Reuters Regulatory Intelligence.