Digital Asset Industry: BVI Rises To The Top, Offers A Balanced Regulatory Regime

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O'Neal Webster

Contributor

Since 1989, O’Neal Webster has provided high-quality legal counsel to domestic and international clients with complex matters in commercial, insolvency, and probate litigation; corporate, banking, finance, and investment fund; trusts and estates; intellectual property; real estate; and admiralty from its offices in the British Virgin Islands, London, and New York.
Bitcoin's recent surge in value, climbing from around US $21,000 per Bitcoin to over US $70,000 (currently circa US $69,000), has been a significant development.
British Virgin Islands Technology
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Bitcoin's recent surge in value, climbing from around US $21,000 per Bitcoin to over US $70,000 (currently circa US $69,000), has been a significant development. This, coupled with the introduction of mainstream ETFs in the U.S. and the discussions around the SEC Staff Accounting Bulletin (SAB) 121 (which specifically targets crypto-asset custodians), underscores the increasing relevance of cryptocurrencies and the pressing need for their regulation.

To Regulate or Not to Regulate

Earlier in Bitcoin's life, there was debate over whether cryptocurrencies should be regulated. On the one hand, some crypto proponents favoured little to no regulation to allow the asset class to grow. They feared that regulation would kill the crypto industry before it had a chance to gain widespread adoption. On the other hand, some proponents favoured regulation as giving crypto more legitimacy. By and large, the latter view seems to have won the day. While some governments still ban crypto outright, others have moved to some regulation.

A Balanced Approach

The British Virgin Islands (BVI) has long been recognised for its thoughtful and balanced approach to regulation. As the digital asset industry gained momentum, observers eagerly awaited the BVI's stance on Bitcoin and other cryptocurrencies. The Territory's proactive response did not disappoint, demonstrating its commitment to maintaining a secure and investor-friendly environment.

The BVI Financial Services Commission (FSC) first released formal guidance on digital assets in January 2020, but prior to that, it did not seek to restrict crypto business unduly. This, along with the ease of doing business in the BVI, led to the jurisdiction being one of the top two destinations for Initial Coin Offerings (ICOs).

The BVI has now promulgated laws for the crypto industry. At the end of 2022, the BVI passed the Virtual Assets Services Providers Act, or VASP Act, into law. The VASP Act establishes a formal supervisory framework for the virtual asset space, specifically for virtual asset services providers (VASPs).

BVI Regulations for Virtual Asset Service Providers

The law was designed to address some key issues surrounding digital assets. A main bugaboo of cryptocurrencies is that they can be used to move money across jurisdictions easily and can be used anonymously, thereby facilitating criminal activity. Under the VASP Act, this is addressed by requiring all virtual asset service providers to comply with BVI rules on anti-money laundering, terrorist financing and proliferation financing, to keep track of customer IP addresses, wallet addresses and transaction hashes for that purpose and to also comply with BVI data protection laws.

To reduce the risk of cryptocurrency businesses failing, the VASP Act requires each VASP to have an auditor and to report to the FSC regularly. In addition, to receive a VASP licence, the VASP must demonstrate a robust governance and compliance structure with appropriate safeguards to mitigate various risks.

Infrastructure for Token Issuers

Notably, the BVI seeks to balance allowing the crypto industry to grow while protecting the public and investors by imposing targeted regulations on the industry's crucial players.

As such, the BVI's VASP Act only requires service providers to virtual asset businesses to be regulated. Issuers of digital tokens or cryptocurrencies are not directly regulated under the VASP Act. Instead, the VASP Act seeks to regulate and supervise the service providers that make up the infrastructure in which an actual token issuer will operate. As such, entities engaged in custody services (safekeeping of virtual assets), in running a virtual assets exchange, or in engaging in other virtual assets services on behalf of another must obtain a licence under the VASP Act.

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.

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