The British Virgin Islands has become an attractive destination for technology entrepreneurs, particularly those connected with virtual assets. While much of the BVI's financial services legislation was written before the blockchain revolution began, recent years have seen the BVI take a number of legal and regulatory steps to make the jurisdiction one that will allow innovation to thrive. The new Virtual Asset Service Providers Act 2022 (VASP Act) is the latest legislative development designed to fulfil the BVI's ambition to become a global technology hub.
The VASP Act, which is due to come into force imminently, aims to promote the use of new technology and innovative enterprise in the BVI while complying with international standards set by the Financial Action Task Force (FATF).
KEY DEFINITIONS AND REQUIREMENTS
Importantly, the VASP Act adopts many of the key definitions established by the FATF. This will help ensure a clarity of approach and interpretation.
A "virtual asset" is defined as a digital representation of value that can be digitally traded or transferred and used for payment or investment purposes, but does not include digital representations of fiat currencies. The term "digital representation of fiat currencies" is not defined in the VASP Act, but under the FATF model this is intended to apply only to central bank issued virtual currencies as opposed to private, fiat or asset backed tokens, such as USDT.
"Virtual asset services providers" (VASPs) are businesses providing one or more of the following services:
- exchange between virtual assets and fiat currencies;
- exchange between one or more other forms of convertible virtual assets;
- transfer of virtual assets;
- safekeeping or administration of virtual assets or instruments enabling control over virtual assets; or
- the participation in, and provision of, financial services related to an issuer's offer or sale of a virtual asset.
In addition to the VASP activities described above, certain other virtual asset services which could fall under one of the VASP limbs above are separately defined in the VASP Act and include:
- providing kiosks (such as bitcoin teller machines); and
- hosting wallets or maintaining control over a wallet or private key.
"Virtual assets custody service" means the acceptance for safekeeping of virtual assets that enable the VASP to exercise control over those assets.
"Virtual assets exchange" means 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 another virtual asset.
Clarification is awaited as to whether this definition of an exchange will include peer-to-peer platforms. The FATF guidance recognises that platforms which offer only a forum for buyers and sellers to identify and communicate with each other would generally fall out of scope.
The sole act of issuing a virtual asset is not a covered service under limb (e) of the VASP definition. However, any persons conducting a sale, exchange or transfer of the issued virtual assets, as a business, for or on behalf of another person would potentially be a covered service caught under limbs (a), (b) or (c).
Under the VASP Act, VASPs would need to register with the Financial Services Commission (FSC). In order to register, all VASPs would be subject to a number of general obligations including:
- anti-money laundering obligations;
- strict data protection and cyber security obligations in connection with the personal data they process;
- the filing of annual accounts with the FSC and ongoing financial reporting;
- the requirement for senior officers and beneficial owners to be fit and proper persons;
- the prior approval of senior officer appointments by the FSC; and
- having a dedicated compliance officer.
All VASPs must have a minimum of two individual directors. Further guidance is awaited as the VASP Act provides that the FSC may require one of those individual directors to be physically resident in the BVI "having regard to the nature and risk associated with the VASP".
VASPs who wish to provide custody or exchange services are subject to additional requirements as part of the registration process but these largely focus on demonstrating the security measures in place to ensure the safekeeping and segregation of client assets.
The VASP Act also provides specific exemptions for certain activities which will not require registration. These include:
- the provision of ancillary infrastructure to enable others to offer a service – such as cloud storage;
- the development, sale or offering of software or hardware;
- the provision of an unhosted wallet service where the customer retains control of their own private keys; and
- the acceptance by a merchant of virtual assets as payment for goods and services.
EXISTING VASP OPERATORS
For those operators who are already undertaking activities within the BVI which would fall in scope, the VASP Act includes helpful transitional arrangements. Provided those operators make an application to register as a VASP within six months of the new framework coming into force, they can continue to operate and provide a virtual asset service until their application is processed by the FSC.
For entities that have already been approved to sit in the regulatory sandbox, the VASP Act also provides a route for those entities to register as VASPs.
Details of the registration fees are also awaited from the FSC.
A PRAGMATIC APPROACH
The VASP Act seeks to create a registration regime that is comprehensive and robust, but fair and in line with existing international standards. Those seeking to show the highest level of regulatory compliance and good governance will find this appealing. The Act is crafted to deter bad actors and carries serious penalties, including imprisonment, for those who fail to comply. Taking high quality, specialised legal advice will be absolutely paramount for clients in this space. In particular, VASPs will want to be very clear on their registration requirements, which may not always be straightforward in this fast-moving sector. For bad actors, there is also a body of criminal law which deals with fraudulent and similar activities, particularly those connected with anti-money laundering and counter terrorist financing (AML/CTF).
HOW APPLEBY CAN HELP
Appleby has a wealth of experience working with clients registering as VASPs under the FATF framework in a number of jurisdictions. We can provide guidance on whether an entity requires registration, prepare the application and associated policies and procedures and liaise with the FSC as required. We are also able to provide clients with the required ongoing compliance and AML/CTF support using our proprietary systems that have been specifically developed for VASPs.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.