Digital assets businesses in the BVI – practical considerations

The British Virgin Islands (BVI) is a leading jurisdiction in the digital assets sector, offering a cost-effective solution for cryptocurrency trading vehicles, token issuers, virtual asset service providers and other blockchain businesses. Its reliable legal system, tax neutrality and high level of confidentiality are added benefits.

Structuring, commercial issues

One of the first points to be considered by a blockchain business is its proposed legal structure. While the analysis will typically be driven by onshore tax and regulatory issues, other factors also merit consideration. This article examines some of these.

Banking solutions. A BVI company does not need to have a bank account in the BVI but it may prefer to do so. Structuring is relevant in this context because many financial institutions are averse to shareholders and directors that are incorporated or resident in, or nationals of, certain jurisdictions. In this case, or as a further confidentiality safeguard, it may be appropriate to appoint nominee shareholders and/or directors.

Shareholder relationships. The benefit of having an agreement between the shareholders and the relevant company is that the relationship between such parties is regulated with respect to any matters that are agreed between them. While the provisions of a shareholders’ agreement are ultimately a commercial matter for the parties, typical terms include drag and tag rights, rights of first refusal and pre-emption, restrictions on share transfers, board and shareholder reserved matters, and non-compete clauses.

Market practice is to amend and restate the memorandum and articles of association of a BVI company to incorporate relevant provisions of a shareholders’ agreement to avoid a conflict between their terms, and to protect the interests of the parties.

Incentives. A blockchain business will likely need to consider how to incentivise key stakeholders to optimise operational performance. For example, will there be bonus payments, a share incentive plan and/or tailormade incentives? Subject to relevant commercial and tax considerations, the creation of multiple share classes and/or the appointment of a trustee or a nominee may be necessary to facilitate implementing these incentives and should be considered.

Protecting interests. To the extent that multiple stakeholders are involved in advising and/or driving growth at a blockchain business, it is important to protect material business interests (including IP) and to ensure that relevant stakeholders are bound by post-termination restrictions including non-compete and non-solicitation covenants. These types of provisions are typically contained in one or more agreements between the stakeholders and the company; there is no one-size-fits-all approach.

Protection of intellectual property in the BVI is based on the laws of the UK. Although the BVI is not a party to the Paris Convention, it has significant intellectual property protections.

The VASP Act

One of the most important considerations will be whether the business needs to be registered with the BVI Financial Services Commission. This will principally depend on whether its proposed activities fall within the scope of the Virtual Assets Service Providers Act, 2022 (VASP Act), or any other BVI financial services legislation.

It is worth noting that the penalties for conducting regulated business without a licence are severe. Many financial institutions now require a legal opinion on the legality of an unregulated blockchain business as part of their onboarding requirements, owing to the reputational and other consequences that may arise from non-compliance.

Under the VASP Act, a virtual asset service provider (VASP) that provides a “virtual assets service” as a business, and conducts one or more of the following activities or operations for or on behalf of another person, will need to register as a VASP with the BVI Financial Services Commission:

• 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; and
• Participation in, and provision of, financial services related to an issuer’s offer or sale of a virtual asset.

Helpfully, the VASP Act expressly identifies certain services that fall within its scope, and others that are excluded. For example, hosting wallets or maintaining custody or control over another person’s virtual asset, wallet or private key falls within the ambit of the VASP Act, whereas accepting virtual assets as payment for goods or services does not.

The author recommends and encourages blockchain businesses that are located in the BVI, or seeking to operate a BVI entity in the virtual assets sector, to seek legal advice to obtain regulatory clarity on its proposed activities, and to ensure that the business is properly structured and insulated against commercial risks.