Law and Practice
1. Fintech Market
1.1 Evolution of the Fintech Market
In recent years, the government of the British Virgin Islands (BVI) and the BVI Financial Services Commission (FSC) – the principal financial services regulator – have made progress on important initiatives that demonstrate the BVI's unequivocal commitment to digital transformation and fintech innovation.
Legislation Recognising Electronic Means
Legislation has been passed in order to support a digital environment in the BVI and provide the means for the operation of e-government services. This includes the Electronic Transactions Act 2021, the Electronic Transfer of Funds Act 2021, and the Electronic Filing Act 2021. These Acts are designed to enhance the BVI's legal system so that it legally recognises the filing, creation or retention of official documents with or by a government body by electronic means. They also legally recognise the provision, deliverance and retention of – or access to – information or documents by electronic means, where the law requires access be given to information or documents (or for the same to be retained, delivered or presented in original form).
Previously, the Electronic Transactions Act 2001 had already recognised electronic signatures legally. Furthermore, in 2018, the BVI permitted the use of "appropriate digital and electronic means" to carry out identification and verification for purposes of compliance with AML/CFT rules and regulations.
Expansion of Money Services Business
A 2019 amendment to the Financing and Money Services Act 2009 expanded the definition of "money services business" beyond money transmission to include "electronic money", "mobile money", "payments of money" and other alternative methods of money and payment transmission. The 2019 amendment also introduced a new licence class (Class F), which permits the holder to carry 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. The amendment is not yet in force, however.
Data Protection Obligations
The BVI enacted the Data Protection Act 2021 (DPA), which imposes data protection obligations on data controllers who process, have control over or authorise the processing of personal data. In essence, the data controller may not process personal data unless it satisfies one of the conditions specified in the DPA and must protect the personal data when processing it. The data subject has certain access and other rights. Sensitive personal data is subject to stricter rules.
BVI Regulatory Sandbox
Importantly, in 2020 the FSC introduced a "regulatory sandbox" that has been open to applications since the beginning of October 2020. The objectives of the BVI's regulatory sandbox are to align regulation and innovation by providing a defined test environment and a tailored and focused supervisory framework, while protecting market participants. The goal is to permit the generation of new innovative fintech-related business models in the BVI. See 2.5 Regulatory Sandbox for more details.
The VASP Act
The BVI adopted the Financial Action Task Force (FATF) recommendations on virtual asset service providers by way of the Virtual Asset Service Providers Act 2022 (the "VASP Act"), which came into force on 1 February 2023, together with the Virtual Asset Service Providers Guide to the Prevention of Money Laundering, Terrorist Financing and Proliferation Financing (the "VASP AML Guide") and FSC Guidance on Application for Registration of a VASP (the "VASP Registration Guidance"). See 2.2 Regulatory Regime for further details.
2. Fintech Business Models and Regulation in General
2.1 Predominant Business Models
The fintech-related business models in the BVI are divided into four categories:
- funds that invest in digital assets or blockchain-based businesses;
- token issuers who may either seek to offer and promote crypto-coins (classic, stable or altcoins) or raise capital to fund the development of a blockchain-based business;
- digital asset exchange providers, either in a centralised or decentralised (DEX) offering; and
- NFT platforms.
The business models are driven by new entrants rather than legacy players.
2.2 Regulatory Regime
The competent financial services regulator is the FSC. Entities and individuals conducting regulated financial services activities in or from within the BVI are required to obtain a licence or be registered with the FSC to conduct the regulated activities.
Principal Financial Services Legislation
The principal financial services legislation comprises the following (as amended, where relevant):
- the Securities and Investment Business Act (2020 Revision) (SIBA);
- the Banks and Trust Companies Act (2020 Revision) (BTCA);
- the Financing and Money Services Act (2020 Revision) (FMSA); and
- the VASP Act.
The BVI also implemented legislation on AML/CFT and proliferation financing (CPF) that adopts the FATF recommendations on VASPs – this came into force on 1 December 2022. The supervisory powers of the FSC are based on the Financial Services Commission Act (2020 Revision) (the "FSC Act").
The VASP Act
As mentioned in 1.1 Evolution of the Fintech Market, the VASP Act came into force on 1 February 2023. It provides a registration regime for VASPS – ie, any person carrying out the business of providing a "virtual asset service" in or from within the BVI.
Associated guidance has also been provided by way of the VASP AML Guide and VASP Registration Guidance, both published on 1 February 2023.
Definition of a virtual asset
In order to provide a "virtual asset 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 – as are certain closed-loop items such as airline miles and credit card awards.
Definition of a virtual asset service
A "virtual asset service" means the business of engaging, on behalf of another person, in any VASP activity or operation (as outlined in the definition of VASP). This 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 in order 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 out of the business of a virtual asset 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 in order 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.
Generally, a provider of virtual assets custody services or a virtual assets exchange operator will need to be registered under the VASP Act.
Virtual Assets Perimeter Guidance
Depending on the type of virtual asset, an analysis may be needed to determine whether the associated activities of a fintech business fall within scope of SIBA and/or the VASP Act.
To be within the scope of SIBA, the fintech business would need to constitute an "investment business", which – in turn – would hinge on whether the subject matter of the fintech services offered includes "investments". In the Guidance on Regulation of Virtual Assets in the Virgin Islands (the "Virtual Asset Guidance") issued in July 2020, the FSC observed in relation to SIBA's parameter that "virtual assets and virtual assets-related products, 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 [SIBA]". The reason is that, depending on the manner in which a token is used and the rights attached to it, the token could be characterised as equity or debt and could therefore be an "investment" within the meaning of 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 SIBA.
To be within the scope of the FMSA, the financing, money transmission, currency exchange, electronic money, or other money service in question would need to concern legal tender (ie, fiat money). 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 cautions that the views and guidance of the FSC should first be secured before proceeding with the virtual money services activity in or from within the BVI.
Further Rules and Regulations
There are a number of further rules and regulations that may apply to firms that conduct fintech business, if such business is in the scope of SIBA, the BTCA, the FMSA or the VASP Act and requires a licence or registration. These rules include AML/CFT/CPF requirements, sanctions rules, beneficial ownership disclosure requirements, reporting requirements in the context of the international exchange of tax information, and economic substance requirements.
2.3 Compensation Models
There are no restrictions in the BVI on the compensation models that industry participants are allowed to use to charge customers.
2.4 Variations Between the Regulation of Fintech and Legacy Players
The FSC does not differentiate between new fintech participants and legacy participants. However, it is important to note the comments in 2.5 Regulatory Sandbox and in 2.12 Conjunction of Unregulated and Regulated Products and Services in relation to incumbent players who wish to extend their business model to a new activity, whether regulated or not. A fintech entity that was doing business as a VASP on 1 February 2023 benefits from a period of transitional relief under the VASP Act and may continue to do business without waiting for registration from the FSC. New entrants after this date may only do business as a VASP once registration has been successfully obtained.
2.5 Regulatory Sandbox
Objectives and Goal
As mentioned in 1.1 Evolution of the Fintech Market, the FSC introduced a regulatory sandbox in 2020 through the Financial Services (Regulatory Sandbox) Regulations 2020 and this has been open to applications since the beginning of October 2020. The objectives of the BVI's regulatory sandbox are to align regulation and innovation by providing a defined test environment and to offer a tailored and focused supervisory framework, while protecting market participants. The goal is to permit the development of new and innovative business models within the BVI.
The sandbox is open to institutional applicants (companies and limited partnerships) that intend to offer an "innovative fintech" business model, which is defined as the "development or implementation of a new system, mechanism, idea, method or other arrangement through the use of technology to create, enhance or promote a product or service with regard to the conduct or provision of a financial services business". To date, there has been one participant in the sandbox.
The VASP Act permits VASPs to participate in the regulatory sandbox under the innovative fintech business model. Participants in the sandbox that are proposing to carry on VASP activities are still required to comply with the aspects of the VASP Act relevant to their proposed VASP activities.
Benefits and Requirements
Sandbox participants will have the benefit of exemptions from specific provisions of the regulatory legislation and rules that might otherwise be applicable. AML/CFT/CPF rules and regulations will apply. A sandbox applicant must submit a business proposal that:
- sets out an innovative product or service that is a regulated activity or has a nexus to financial services; and
- includes details of test scenarios, projected outcomes, and an exit strategy that permits either the winding-down of operations or the transition of the sandbox participant to a regulated entity.
Applicants must be fit and proper and – to that end – must demonstrate competence, integrity and financial soundness. Successful applicants will be subject to the following governance requirements:
- a duty to pay a fee;
- a duty to submit regular interim progress reports; and
- duties to maintain adequate and transparent records, risk management policies and controls, and to conduct an independent review of IT systems.
Any material interim changes to the business plan will need prior FSC approval. In addition, successful applicants will be subject to a restriction on the number of clients and a requirement to disclose certain potential risks to each client. The mandatory disclosures concern the following requirements:
- the sandbox participant does not hold a licence or registration issued by the FSC for the particular (sandboxed) activity;
- the business model is being tested within the regulatory sandbox; and
- the duration of the sandbox participation is limited to 18 months (with a potential extension of up to six months).
2.6 Jurisdiction of Regulators
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 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.
In carrying out its functions, the FSC must have regard to:
- the protection of the public against financial loss arising from dishonesty, incompetence, malpractice or insolvency of persons engaged in financial services in or from the BVI;
- the protection and enhancement of the reputation of the BVI as a financial services jurisdiction; and
- the reduction of crime and other unlawful activities in relation to financial services business.
The International Tax Authority (ITA) is the competent authority with regard to international assistance in tax matters and compliance with the BVI's rules and regulations on disclosure of beneficial ownership and maintenance of economic substance.
The ITA is responsible for:
- negotiating and administering requests under tax information exchange agreements and similar agreements in relation to tax matters;
- continuing to develop the BVI tax information exchange mechanisms in accordance with international standards; and
- supervision of legal entities and registered agents that are subject to the BVI's beneficial ownership disclosure regime and the economic substance regime.
The BVI Financial Investigation Agency (FIA) was established under the Financial Investigation Agency Act (2020 Revision). The FIA is responsible for receiving, obtaining, investigating, analysing and disseminating information that relates to a financial offence (money laundering and/or drug money laundering), the proceeds of crime, or a request for legal assistance.
The DPA bestows power on an Information Commissioner to investigate data protection-related complaints, serve information and enforcement notices, carry out an assessment of the processing of personal data, and request a warrant to enter and search premises. A data subject that is aggrieved by the decision of the Information Commissioner may appeal to the High Court against the decision. To date, the Information Commissioner has not yet been established.
2.7 Outsourcing of Regulated Functions
The FSC provides guidance to licensees on the establishment of outsourcing arrangements and the outsourcing of material functions or activities, which can be found in the Regulatory Code that applies to licensees. Amendments to the Regulatory Code as a result of the VASP Act coming into force are expected shortly. A licensee's board remains ultimately responsible for all outsourced decisions and activities. The Regulatory Code also requires the licensee to establish and maintain appropriate and adequate systems and controls so as to manage its outsourcing risk. Before entering into an outsourcing agreement, the licensee must undertake due diligence on the potential risks, as well as on the proposed service provider and its capacity and ability to undertake the outsourced activities.
Under the provisions of the Regulatory Code, a licensee is not permitted to outsource:
- a compliance function;
- a core management function; or
- any activity that would impair the FSC's ability to supervise the licensee or that would affect the rights of a customer against the licensee (including the right to obtain legal redress).
The Regulatory Code requires the licensee to have in place a comprehensive outsourcing policy, which must be approved by its board and regularly reviewed. In addition, any outsourced activity must be the subject of a written contract that clearly sets out the scope of the activities to be outsourced, the rights and responsibilities of the respective parties, and the protection by the outsourced person of confidential information relating to the licensee's clients. The written agreement must also give the licensee and its auditor access at all times to any relevant documents and information. The licensee is also required to establish and maintain a contingency plan for each outsourcing agreement that it enters into.
Outsourcing of AML/CFT/CPF functions is subject to separate requirements that are set out in the BVI's AML Regulations and the AML/CFT Code of Practice.
2.8 Gatekeeper Liability
If the platform activities constitute regulated business under SIBA, the FMSA, the BTCA or the VASP Act (as the case may be), the fintech provider as licensee or a registered VASP would be responsible for ensuring that the platform business complies with the relevant legislation (including requirements concerning the combating of money laundering, terrorist financing and proliferation financing). In addition, if any person resident in the BVI knows or suspects – or has reasonable grounds for knowing or suspecting – that another person is engaged in money laundering by virtue of information that came to their attention in the course of business, and does not disclose such information to the FIA as soon as reasonably practicable, they commit an offence.
2.9 Significant Enforcement Actions
As much of the cryptocurrency sector has only recently fallen within the scope of regulation by way of the VASP Act, the FSC has taken very little enforcement action against any participants in the cryptocurrency sector. However, the FSC has general powers under the VASP Act to require a VASP to report on its obligations, operations and business activities with regard to the provision of a virtual asset service. It can also exercise any of its powers under the FSC Act in relation to a VASP or the provision of virtual assets in and from within the BVI, including the ability to:
- inspect a regulated entity or any other entity falling under its supervisory remit;
- remove directors and other persons;
- make public statements; and
- appoint examiners and qualified persons.
The FSC and the FIA are able to exercise their respective powers under the BVI's AML/CFT/CPF regime in relation to virtual assets and VASPs. The VASP AML Guide provides further detail in this respect. The FSC is also permitted to take enforcement action under the VASP Act, including revoking a VASP registration, adding conditions to a registration, or imposing civil and/or criminal penalties for breaches of the VASP Act.
2.10 Implications of Additional, Non-financial Services Regulations
The AML Regulations were amended for VASPs with effect from 1 December 2022 to require that entities conducting "relevant business", which includes carrying on or providing a virtual asset service when a transaction involves virtual assets valued at USD1,000 or more, must comply with the AML Regulations.
Data Protection Legislation
As noted in 1.1 Evolution of the Fintech Market, the BVI introduced the DPA in 2021. It imposes data protection obligations in the BVI on data controllers who process, have control over, or authorise the processing of personal data. In essence, the data controller may not process personal data unless it satisfies one of the conditions specified in the DPA, and it must protect the personal data when processing it. The data subject has certain access and other rights. Sensitive personal data is subject to stricter rules. "Personal data" is defined as any information in respect of transactions of a commercial nature that relates directly or indirectly to an identifiable data subject. Data subjects protected under the DPA are natural persons, whether living or deceased.
The Computer Misuse and Cybercrime Act 2014 prohibits the unauthorised access, modification and use of data held on a computer or any computer service – as well as the knowing disclosure of passwords or other means of access to a computer – with a view to cause loss, gain or for any unlawful purpose.
The use of social media and similar tools is not currently regulated, apart from under legislation such as the DPA.
Additional Rules and Regulations
As mentioned in 2.2 Regulatory Regime, there are a number of additional rules and regulations that may apply to firms that engage in fintech businesses, including sanctions rules, beneficial ownership disclosure requirements, reporting requirements in the context of international exchange of tax information, and economic substance requirements. Fintech providers should, in particular, be aware that the owning of IP rights by a legal entity in the BVI would require that entity to comply with economic substance requirements in the BVI if the entity earns identifiable income from the IP.
2.11 Review of Industry Participants by Parties Other than Regulators
Other BVI-based industry participants, such as accountants, auditors and authorised representatives, are required to comply with BVI law where applicable to their business. As noted in 2.8 Gatekeeper Liability, any person resident in the BVI that knows, suspects or has reasonable grounds for knowing or suspecting that another person is engaged in money laundering is required to disclose the same to the FIA.
BVI Finance, the BVI's financial services industry group, works closely with its members, practitioners, the BVI regulators and government to ensure the BVI maintains its competitive global advantage. BVI Finance has fintech as one of its industry focus sectors.
2.12 Conjunction of Unregulated and Regulated Products and Services
In general, activities relating to virtual assets are considered regulated activities under the VASP Act; however, certain types of crypto assets and virtual assets-related activities may still be deemed unregulated. Incumbent licensees under SIBA, the FMSA or the BTCA – or registered VASPs under the VASP Act – may lawfully offer unregulated products and services in addition to their regulated products and services. Nonetheless, an extension of the business offering would need to be pre-disclosed to the FSC by way of an amended business plan and would be subject to FSC approval. Therefore, in practice, a regulated firm may elect to establish a separate entity in the group to offer a new, unregulated product or service.
2.13 Impact of AML Rules
The BVI's AML/CFT Code of Practice is expressed to apply to an entity engaged in "relevant business" within the meaning of the AML Regulations. As mentioned in 2.10 Implications of Additional, Non-financial Services Regulations, this definition of "relevant business" was updated in light of FATF's recommendations on virtual asset services providers with effect from 1 December 2022 and now includes the business of carrying on or providing a virtual asset service when a transaction involves virtual assets valued at USD1,000 or more.
The updates to the AML Regulations and the AML/CFT Code of Practice should be read together with the VASP AML Guide published on 1 February 2023, 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.
3.1 Requirement for Different Business Models
BVI financial services legislation does not specifically address robo-advisers. However, should a BVI legal entity hold and operate the algorithm or software that provides a robo-adviser's function, it may be required to be licensed under SIBA – depending on the structure and nature of the business.
3.2 Legacy Players' Implementation of Solutions Introduced by Robo-advisers
No BVI service providers appear to be introducing robo-advisers at this stage.
3.3 Issues Relating to Best Execution of Customer Trades
If a fintech business falls within the scope of SIBA such that the provider is required to be licensed by the FSC, the provider would need to comply with best execution obligations under the Regulatory Code and use reasonable efforts to obtain the best available price when dealing with or for a customer.
4. Online Lenders
4.1 Differences in the Business or Regulation of Loans Provided to Different Entities
If a BVI entity provides loans to borrowers in or outside the BVI and that entity also accepts deposits, the entity would be required to be licensed under the BTCA. If the entity only provides loans and if the borrowers are based in the BVI, the firm would be required to be licensed under the FMSA.
Furthermore, irrespective of regulatory status, if a legal entity engages in the financing and leasing business, that legal entity will need to comply with economic substance requirements in the BVI unless it can successfully claim that its income is taxed in another jurisdiction.
4.2 Underwriting Processes
Underwriting business is not a regulated activity in the BVI. Underwriting activity typically takes place onshore and the FSC will require a lender engaging in it to be in compliance with the laws of the jurisdiction in which the underwriting is taking place.
4.3 Sources of Funds for Loans
Retail lending to BVI residents is primarily conducted by branches of a few major banks that are licensed under the BTCA and that do not hold a restricted banking licence.
A 2018 amendment to the FMSA that came into force in March 2019 introduced a licence class (Class F) that permits the holder to carry 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. However, as noted earlier, the Class F licence is not yet open to applications (pending the enactment of detailed regulations).
4.4 Syndication of Loans
The syndication of loans is typically arranged onshore rather than in the BVI. Accordingly, to the extent that the BVI lending vehicle is involved in a syndication, it must be in compliance with the laws of such onshore jurisdiction.
5. Payment Processors
5.1 Payment Processors' Use of Payment Rails
Payment processors must use existing payment rails at this stage.
5.2 Regulation of Cross-Border Payments and Remittances
Money services are regulated activities under the FMSA. Money transmission includes electronic money, mobile money, payments of money and other alternative methods of money and payment transmission. The FMSA does not distinguish between domestic and cross-border payments.
6. Fund Administrators
6.1 Regulation of Fund Administrators
BVI-based administrators must hold a licence in accordance with SIBA. A mutual fund administrator licensed under SIBA is required to satisfy itself in terms of various criteria regarding the business and operation of a mutual fund and its service providers before it provides fund administration to such mutual fund.
6.2 Contractual Terms
A number of provisions are being incorporated into fund administration documents. Many of these provisions stem from regulatory obligations. Essentially, fund administration agreements include provisions that the administrator must provide the information and documentation required by the AML/CFT/CPF legislation to either the regulated fund itself or the FSC. The BVI's AML/CFT/CPF legislation also requires the fund administrator to maintain records of AML/CFT/CPF documentation for at least five years after conclusion of the transaction. These agreements also require the administrator to report to the fund's Money Laundering Reporting Officer any suspicions it may have relating to money laundering, terrorist financing or proliferation financing potentially occurring through the fund.
In addition to the AML/CFT/CPF requirements, the fund administration agreement will often have provisions requiring the administrator to safeguard and treat personal data in accordance with certain prescribed standards.
7. Marketplaces, Exchanges and Trading Platforms
7.1 Permissible Trading Platforms
SIBA requires any person who provides a facility for the trading or listing of "investments" to be licensed under SIBA, whereas the VASP Act requires persons operating virtual assets exchanges – whether between virtual assets and fiat currencies or between one or more virtual assets – to be registered as a VASP under the VASP Act.
As noted in 2.2 Regulatory Regime, to be within the scope of SIBA, the fintech business would need to constitute "investment business". This would hinge on whether the subject matter of the fintech services offered is an "investment" within the scope of SIBA or a "virtual asset" within scope of the VASP Act. The FSC observes in its Virtual Asset Guidance that utility tokens would not typically be captured by SIBA. Instead, depending on their characteristics, they could fall within the definition of a "virtual asset" under the VASP Act. However, certain forms of stable coins or altcoins might be "investments", depending on their structure. Similarly, the Virtual Asset Guidance confirms that certain derivatives – in particular, futures and contracts for the differences that reference virtual assets – would be "investments" within the meaning of SIBA.
Requirements of a VASP Operating a Virtual Assets Exchange
The VASP Act provides for VASPs to obtain registration from the FSC when operating a virtual assets exchange (see 2.2 Regulatory Regime for the definition of a virtual assets exchange). As the definition of a virtual assets exchange includes a trading platform that comes into custody, control or possession of – or assumes power over – any money or virtual asset during its course of business, the reality is that exchanges must also be registered in order to provide virtual assets custody services and comply with the additional VASP Act obligations in this respect.
As part of the virtual assets exchange registration process, the FSC will consider whether:
- in relation to virtual assets custody services:
- sufficient information has been provided on the VASP's safekeeping facilities and potential risks, security and client asset segregation measures, and client access methods and disclosures;
- the VASP has taken appropriate measures to limit or mitigate any risks associated with its safekeeping measures;
- the VASP has adequate security and other measures in place to properly safeguard its clients' virtual assets and other related instruments;
- the organisation, management and financial resources of the VASP are adequate to ensure the safekeeping of virtual assets and related instruments; and
- it is not against the public interest to approve the VASP;
- the virtual assets exchange:
- would list or facilitate the issuance of virtual assets;
- has appropriate organisational, managerial and financial resources to ensure its proper operation; and
- has adequate measures to monitor and mitigate any risks related to its operation, including those related to AML/CFT/CPF; and
- approving the virtual assets exchange is not against the public interest.
The VASP Registration Guidance also stipulates that VASPs operating exchanges or providing custody services are viewed as presenting a higher level of risk and therefore the required level of paid-up capitalisation for these businesses will need to be higher.
Restrictions on the Operation of a Virtual Assets Exchange
There are also restrictions on VASPs operating virtual assets exchanges, including in relation to:
- the encumbrance of virtual assets deposits held or maintained on behalf of the VASP's clients in the context of virtual assets custody services;
- the provision of financing to clients for the purpose of virtual assets without FSC approval and the disclosure of associated risks to clients;
- trading or marketing activities in relation to virtual assets for the VASP's own benefit, which may be detrimental to the interests of its clients unless the activities are necessary for the operation of the exchange and disclosed to clients prior to engaging in the activities;
- the permitting of trading of virtual assets in a misleading, deceptive or fraudulent manner;
- the permitting of client trades or purchases of virtual assets without the VASP first making sufficient disclosures and satisfying itself that the client is aware of the risks;
- the provision of fiat currency to fiat currency exchange services for users without written FSC approval; or
- any other activity not specified that has the potential to compromise the VASP's integrity or erode public confidence.
7.2 Regulation of Different Asset Classes
As noted in 2.2 Regulatory Regime and 7.1 Permissible Trading Platforms, depending on how the fintech trading platform is structured, SIBA, the FMSA, the BTCA and/or the VASP Act could potentially be within scope to the effect that the fintech business would be required to obtain a licence or registration from the FSC. Asset classes and products themselves are not regulated per se.
7.3 Impact of the Emergence of Cryptocurrency Exchanges
See 2.2 Regulatory Regime and 7.1 Permissible Trading Platforms. The FSC has not at present licensed or registered any virtual assets exchanges in the BVI.
7.4 Listing Standards
See 7.3 Impact of the Emergence of Cryptocurrency Exchanges.
When approving and registering an applicant to operate a virtual assets exchange, the FSC is able to impose conditions relating to the listing of virtual assets, including issues related to filing reports and providing net worth with regard to the same.
7.5 Order-Handling Rules
Licensees under SIBA must comply with certain dealing and managing rules, including order handling rules, in accordance with the Regulatory Code. Amendments to the Regulatory Code to account for the VASP Act are also expected shortly.
7.6 Rise of Peer-to-Peer Trading Platforms
With the 2018 amendment to the FMSA, a new category of financing licence class (Class F) was provided to cover P2P and B2B lending when done through a BVI company (see 1.1 Evolution of the Fintech Market). However, as previously mentioned, the Class F licence is not currently open to applications and no further detailed regulations have yet been published.
7.7 Issues Relating to Best Execution of Customer Trades
BVI investment business licensees under SIBA must comply with certain dealing and managing rules, including best execution rules, in accordance with the Regulatory Code. As mentioned in 2.7 Outsourcing of Regulated Functions, amendments to the Regulatory Code to account for the VASP Act are also expected shortly.
7.8 Rules of Payment for Order Flow
This is not applicable in the BVI.
7.9 Market Integrity Principles
SIBA provides for a market-abuse regime that, in general terms, makes it a criminal offence for a person who has material price-sensitive information about "securities" (within the meaning of SIBA) to deal in, encourage another person to deal in, or to disclose such information inappropriately. In addition, the SIBA market-abuse regime makes it an offence for a person to engage in market manipulation or make misleading statements relating to "investments" within the meaning of SIBA. The SIBA market-abuse regime has limited territorial scope, however, in that an individual does not commit an offence under the regime unless that person was in the BVI when they allegedly committed the offence.
As noted in 7.1 Permissible Trading Platforms, utility tokens are not considered by the FSC to be either "securities" or "investments" under SIBA and, as a result, dealings or statements relating to crypto-assets do not fall within SIBA's market-abuse regime. There is no market-abuse regime for virtual assets as yet.
8. High-Frequency and Algorithmic Trading
8.1 Creation and Usage Regulations
There is currently no specific regulation pertaining to high-frequency or algorithmic trading in the BVI. Depending on the business model, high-frequency or algorithmic trading entities could fall within scope of the BVI regulatory perimeter.
8.2 Requirement to Register as Market Makers When Functioning in a Principal Capacity
If an entity functions in a principal capacity and performs a market-maker role, it must either be licensed or registered under SIBA (eg, as an investment dealer or broker) if the token – or the transaction relating to the token – falls within the definition of "investment" under SIBA. If the entity is market-making as principal in virtual assets for a third party such as an exchange, it will likely be covered by the VASP Act and required to register with the FSC as a VASP.
8.3 Regulatory Distinction Between Funds and Dealers
Pursuant to SIBA, BVI-domiciled investment funds that invest in digital assets need to be:
- licensed by the FSC if they are open-end funds; or
- approved by the FSC if they are closed-end funds.
Investment managers that conduct business in, or from within, the BVI also need to be licensed by the FSC under SIBA. Dealers in digital assets need to be licensed by the FSC if the digital asset or the transaction relating to the digital asset is regarded as an "investment" under SIBA. Alternatively, if the digital assets constitute "virtual assets" under the VASP Act, dealers will likely need to be registered as a VASP with the FSC.
8.4 Regulation of Programmers and Programming
This is not applicable in the BVI (see 8.1 Creation and Usage Regulations). In a virtual assets context, there are specific exemptions from the VASP Act for software developers and creators of software applications or virtual asset platforms – and programmers may be able to benefit from such exemptions.
9. Financial Research Platforms
The offering of research platforms and services is not presently regarded as investment business that requires a licence under SIBA, unless the operator of the platform also provides investment advice.
9.2 Regulation of Unverified Information
See 7.9 Market Integrity Principles.
9.3 Conversation Curation
See 7.9 Market Integrity Principles.
10.1 Underwriting Processes
There do not appear to be any specific and material insurtech underwriting initiatives or developments in the BVI.
10.2 Treatment of Different Types of Insurance
Regulation of insurance business conducted in and from within the BVI includes, but is not limited to, ensuring that any prospective licensees – including domestic or captive insurers, insurance managers, insurance intermediaries (namely, insurance agents or insurance brokers) and loss adjusters – meet the required standards to be licensed. Various categories of insurance licences are provided, depending on where the applicant is incorporated and whether it intends to carry on domestic business.
11.1 Regulation of Regtech Providers
Regtech is not a regulated business in the BVI as such. Where provided in relation to virtual assets under the VASP Act, there are specific exclusions that regtech providers may benefit from.
11.2 Contractual Terms to Assure Performance and Accuracy
A number of provisions are being incorporated into contracts with technology providers. The key provisions generally relate to protection of IP rights and confidentiality. The contracts often have provisions requiring the technology providers to safeguard and treat personal data in accordance with certain prescribed standards under data protection laws.
12.1 Use of Blockchain in the Financial Services Industry
To date, implementation and thought leadership relating to blockchain in the financial services industry in the BVI has predominantly been driven by new players and a few incumbent service providers.
12.2 Local Regulators' Approach to Blockchain
As mentioned in 1.1 Evolution of the Fintech Market, the BVI government and the FSC have made progress in recent years on important initiatives that demonstrate the BVI's unequivocal commitment to digital transformation and fintech innovation (including the use of blockchain).
12.3 Classification of Blockchain Assets
Blockchain assets are likely to fall within the scope of the "virtual assets" definition under the VASP Act. Where virtual asset services are provided for or on behalf of another person as a business in relation to virtual assets, the entity providing such services must be registered as a VASP with the FSC. See 2.2 Regulatory Regime.
12.4 Regulation of "Issuers" of Blockchain Assets
The sole act of issuing virtual assets is not captured by the VASP Act. See 2.2 Regulatory Regime.
12.5 Regulation of Blockchain Asset Trading Platforms
See 2.2 Regulatory Regime and 7.1 Permissible Trading Platforms.
12.6 Regulation of Funds
The intended asset class does not determine whether a scheme that collects and pools investor funds for the purpose of collective investment requires registration or approval under SIBA. Accordingly, a mutual fund or a private investment fund (within the meaning of SIBA) that invests in blockchain assets must be registered with, or approved by, the FSC. If interests in the fund are tokenised, the mere issuance of these tokens by the fund would not fall within the scope of the VASP Act.
The open-end mutual fund structure is more common for those managers looking to pursue an investment strategy that focuses on trading in virtual currencies. These strategies tend to be more liquid in nature and investors are able to redeem their investment on their own initiative.
Private Investment Fund
The closed-end private investment fund structure is more common for those managers looking to pursue an investment strategy that focuses on long-term investments in blockchain start-ups or projects. These strategies tend to be illiquid in nature and investors are unable to redeem their investment without the manager's consent.
12.7 Virtual Currencies
See 2.2 Regulatory Regime.
12.8 Impact of Regulation on "DeFi" Platforms
See 2.2 Regulatory Regime and 7.1 Permissible Trading Platforms. If a DeFi platform falls within the definition of a virtual assets exchange under the VASP Act, the operator of such platform will need to be registered under the VASP Act.
12.9 Non-fungible Tokens (NFTs)
The BVI has adopted FATF's recommendations on virtual asset service providers. As such, interpretation of the VASP Act is expected to follow the position in relation to NFTs and NFT platforms outlined by FATF. Specifically, FATF has noted that – depending on their characteristics – NFTs are generally not considered to be "virtual assets". However, the nature and function of each particular NFT must be considered on a case-by-case basis and, in particular, an NFT may be a "virtual asset" if it can be used for payment or investment purposes. In practice, an NFT is likely to be a "virtual asset" where it is fractionalised and the ownership of the asset can be shared with others. Where this is the case, any activities in the BVI in relation to that NFT must be assessed against the VASP Act to determine whether registration with the FSC is necessary.
13. Open Banking
13.1 Regulation of Open Banking
Open-banking services are not a regulated activity per se, unless the activity constitutes a payment service within the meaning of the FMSA. Unlike the second EU Payment Services Directive, for example, the FMSA does not provide for a separate legal framework that regulates open-banking fintech service providers.
13.2 Concerns Raised by Open Banking
As noted in 1.1 Evolution of the Fintech Market, the BVI enacted data protection legislation in 2021. See also 2.10 Implications of Additional, Non-financial Services Regulations.
Originally Published by Chambers Global Practice Guide 2023
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.