Corporate flexibility and ease of navigation can explain the increasing popularity of the British Virgin Islands among Asian fund managers, virtual asset businesses and special purpose acquisition companies
Regulators globally are wrestling with tough questions as to 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 losses often borne by inexperienced retail investors.
With an eye to investor protection, some onshore jurisdictions (such as Hong Kong) have proposed that virtual asset exchanges should only be permitted to offer services to professional clients, and would be restricted from serving retail clients. Similarly, the People’s Bank of China in September 2021 published a notice regarding the ban on cryptocurrency and related transactions in mainland China. Indonesian regulators have also recently taken steps to ban financial firms from facilitating cryptocurrency sales.
At the same time, there has been increased interest by virtual asset businesses in offshore jurisdictions such as the British Virgin Islands (BVI).
Attractions of the BVI include its tax neutrality, respected regulator and responsiveness to global regulatory trends, common law legal system, low corporate set-up and maintenance costs, and investor familiarity.
While these attributes are well understood in the “traditional” corporate and finance sectors, they are also proving appealing to businesses operating in the virtual asset space that, in addition to being decentralised by nature, tend to be nimble, innovative and jurisdiction-agnostic in terms of their approach to business.
This article considers the regulatory regime in the BVI as it may apply to cryptocurrency and virtual assets businesses.
REGULATION IN BVI
The BVI does not have a specific regulatory framework for virtual assets or cryptocurrencies, although it is expected that the jurisdiction will in time, in common with other jurisdictions, develop a regulatory framework tailored specifically for virtual assets.
In a guidance issued on 10 July 2020, the BVI Financial Services Commission (FSC) confirmed that the question of whether licensing is required for virtual asset-related activities will be determined under existing financial services legislation.
Cryptocurrency and virtual asset businesses, particularly those with activities that include operating a cryptocurrency exchange or engaging in crypto lending, will need to consider whether their proposed activities fall within any of the following before establishing in the BVI:
- The Banks and Trust Companies Act, 1990 (BTCA) as amended;
- The Financing and Money Services Act, 2009 (FMSA) as amended; and
- The Securities and Investment Business Act, 2010 (SIBA).
Any discussion about the regulation of virtual assets in a single jurisdiction would be incomplete without reference to the significant cross-border risks, which are inherent to the decentralised nature of virtual assets.
A key concern is that although virtual asset businesses may, in fact, be appropriately regulated (or not subject to regulation) in a particular jurisdiction, its service offerings may trigger significant regulatory implications in other jurisdictions, as cross-border targeting of investors and customers 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 business from regulatory enforcement action in any other jurisdiction in which it makes its services available to customers. Appropriate advice under the laws of such jurisdictions should always be taken.
Virtual asset businesses with activities involving dealing in fiat currency, or holding fiat currency deposits on behalf of customers, should ensure that their activities do not inadvertently constitute “banking business” as defined in the Banks and Trust Companies Act (BTCA), for which the appropriate licence is required.
Banking business means the business of accepting deposits of money that may be withdrawn or repaid on demand or after a fixed period, or after notice, by cheque or otherwise, and the employment of such deposits, either in whole or in part: (1) in making or giving loans, advances, overdrafts, guarantees or similar facilities; or (2) the making of investments, for the account and at the risk of the person accepting such deposits. Businesses or exchanges that hold fiat currency on behalf of their clients and invest the same will need to consider whether the above-mentioned provisions of the BTCA apply to them.
The Financing and Money Services Act (FMSA) regulates financing business and money services business.
Financing business broadly relates to the provision of credit to borrowers located in the BVI. More relevantly for virtual asset businesses, the definition of “financing business” was expanded in 2019 to include “carrying on the business of international financing and lending in the peer-to-peer (P2P) fintech market, including peer-to-business (P2B) and business-to-business (B2B) markets”.
Money services business is a category of a regulated activity that includes, among other things, the business of transmission of money in any form, including electronic money, mobile money or payments of money.
The FSC guidance confirms that the transmission of virtual assets or virtual asset-related products will not require a licence under the FMSA.
However, to the extent that a virtual asset business handles fiat currency on behalf of customers, it should be mindful of the above-mentioned definitions and seek advice as required to ensure its activities are not in the scope of regulation to the extent that it does not hold the necessary licence under the FMSA.
Should the activities of a business fall within the FMSA definitions of money services or financing business, that business will be required to hold a licence under the FMSA, which brings with it various obligations including segregating customer accounts, submission of audited financial statements for each financial year to the FSC, and maintenance of capital resources.
The following activities require a licence under the Securities and Investment Business Act (SIBA):
- Dealing, arranging deals in, or managing investments;
- Providing investment advice;
- Providing custodian services with respect to investments;
- Providing administration services with respect to investments; and
- Operating an investment exchange.
Therefore, a key question under the SIBA is whether the virtual assets with which the business is dealing would constitute investments for the purposes of the SIBA.
The SIBA regulates many categories 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 be considered an investment for the purposes of the SIBA, which would require licensing to engage in the activities listed above in respect of such assets.
A virtual asset or other digital property that is only a medium of exchange, with no benefits or rights other than ownership of the coin, would not be considered an investment. The FSC guidance confirms that such assets will generally fall outside the scope of regulation.
The FSC guidance also confirms that utility tokens that only provide the purchaser with an ability to purchase goods and services are not in the scope of regulation.
However, where a virtual asset provides a benefit or right beyond a medium of exchange – for example, such assets grant rights to shares or create or acknowledge a debt – the SIBA can apply on the basis that such virtual asset constitutes an investment.
Some virtual assets can provide other benefits to the holder, such as rights to: (1) vote on different protocol proposals; (2) be eligible for part of the protocol profits or fees; or (3) take part in a decentralised autonomous organisation. Therefore, advice should always be taken prior to engaging in activities involving virtual assets in or from within the BVI to determine whether the virtual assets could be considered “investments” for the SIBA purposes of requiring a licence to deal in them.
Virtual assets remain a rapidly developing and exciting area of the market, generating challenges and opportunities for virtual asset businesses, investors, lawyers and regulators alike.
While the BVI does not currently have a regulatory framework tailored specifically for virtual assets, industry participants wishing to conduct virtual asset-related business in the BVI, or utilising BVI entities, will need to carefully consider whether their proposed activities will bring them within the ambit of existing BVI financial services legislation.
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