1 Legal and enforcement framework

1.1 In broad terms, which legislative and regulatory provisions govern virtual currencies in your jurisdiction?

The Designated Businesses (Registration and Oversight) Act 2015 provides that businesses whose activities involve virtual currencies (in almost any form) are ‘designated businesses' and are therefore required to register with, and be overseen by, the Isle of Man Financial Services Authority (IOMFSA) for compliance with the Anti-Money Laundering and Countering the Financing of Terrorism Code 2019 (AML/CFT Code).

Persons whose activities involve virtual currencies which are analogous to securities (eg, security tokens) may be required to apply for a financial services licence from the IOMFSA depending upon the nature of the token and the nature of the activities being conducted. It is not possible to be registered as a designated business as well as being licensed by the IOMFSA – these two regimes are mutually exclusive.

1.2 In broad terms, which legislative and regulatory provisions govern entities that provide services relating to virtual currencies? Must they be registered or licensed by a regulatory authority?

There are two key pieces of legislation: the Designated Businesses Act and the Financial Services Act 2008 (together with its associated subordinated legislation, including the Regulated Activities Order 2011 (as amended) and the Financial Services (Exemptions) Regulations 2011 (as amended). Please refer to question 1.1 with regard to the registration/licensing requirements.

1.3 Which bodies are responsible for enforcing the applicable laws and regulations? What powers do they have?

The IOMFSA is responsible for registering and overseeing designated businesses, and is also required to supervise such businesses by way of a regular programme of inspections, compliance and statistical returns to ensure that the business meets the requirements of the AML/CFT Code. The IOMFSA is also responsible for considering licence applications under the FSA 2008.

There is no guarantee that an application for registration or licensing will be accepted. In the event that a business is registered or a licence is issued, the IOMFSA has a wide range of enforcement powers in the event that the legislative requirements are not being met. These powers include the ability to levy fines, issue directions and in the most serious cases revoke a registration or licence.

1.4 What is the regulators' general approach to virtual currencies?

In September 2020 the IOMFSA issued a guidance note on cryptoasset/token activity and regulation. The guidance note states that the IOMFSA's approach to regulation is technology neutral, so the regulator does not seek to regulate blockchain or other distributed ledger technology upon which virtual currencies function, but it will regulate any applications or uses of such technology which fall within the scope of the regulatory framework.

1.5 Has there been any notable enforcement action relating to virtual currencies?

Yes. In 2018 the IOMFSA took regulatory action against a local firm which provided payment support services to merchants operating in the cryptocurrency sphere. The directors of the firm were prosecuted for alleged breaches of the AML/CFT Code, but the charges were withdrawn during the course of the trial after the judge criticised the IOMFSA's approach to the investigation. Since that case, the IOMFSA has published a new enforcement decision-making process, the aim of which is to achieve early settlement of any regulatory issues.

2 Definitions

2.1 How are ‘virtual currencies' defined in your jurisdiction? Have there been any judicial decisions which have helped to define virtual currencies or their interplay with the existing body of laws (eg, contracts law, property law)?

The Designated Businesses Act uses the defined term ‘convertible virtual currency activity' without separately defining ‘convertible virtual currencies'. The definition of ‘convertible virtual currency activity' is as follows:

"convertible virtual currency activity" means issuing, transmitting, transferring, providing safe custody or storage of, administering, managing, lending, buying, selling, exchanging or otherwise trading or intermediating convertible virtual currencies, including cryptocurrencies, virtual assets or similar concepts where the concept is accepted by persons as a means of payment of goods or services, a unit of account, a store of value or a commodity."

There have not yet been any judicial decisions in the Isle of Man in this area of the law.

2.2 How are ‘initial coin offerings' and ‘security token offerings' defined in your jurisdiction?

Neither of these terms is specifically defined in Isle of Man law, but the Isle of Man Financial Services Authority (IOMFSA) guidance note (referred to in the response to question 1.4) provides some helpful commentary on what the IOMFSA considers to be security tokens. It states:

"Security tokens are tokens that provide rights and obligations akin to ‘investments' as defined in the [Regulated Activities Order]. This includes, but is not limited to:

  • Shares
  • Debentures
  • Units in Collective Investment Schemes
  • Derivatives"

The IOMFSA has also issued a separate booklet aimed at consumers which discusses some aspects of initial coin offerings and adopts similar definitions as are used in many other jurisdictions.

2.3 Are stablecoins treated as virtual currencies in your jurisdiction or do they fall under an existing category (eg, electronic money)?

Based upon the IOMFSA guidance note, stablecoins are likely to fall within the purview of electronic money regulation in the Isle of Man, albeit this has not yet been tested in judicial or regulatory proceedings.

3 Virtual currencies market

3.1 Which virtual currencies have become most embedded in your jurisdiction? Does this vary depending on the specific use?

Bitcoin is the most widely accepted convertible virtual currency (CVC) and can be used as a means of payment in some retail establishments. It is also accepted by some professional service providers. Other virtual currencies such as Ethereum, Litecoin and Ripple have also gained some traction. No virtual currency is particularly dominant for any particular use cases.

3.2 What different products and services are offered?

CVCs can be bought and sold through independent exchanges for fiat currency, or for other CVCs.

CVCs have also gained traction in the e-gaming market, and it is possible for players to open and fund accounts with licensed Isle of Man gaming operators using CVCs rather than fiat money.

3.3 How are virtual currency service providers generally structured? How are they generally financed?

Most virtual currency service providers are structured as companies with limited liability and are independently privately financed. That said, the Isle of Man Government Department for Enterprise has various funding initiatives to support and encourage new and growing businesses. The most significant is the Enterprise Development Scheme, under which the department can invest up to £1 million in a new or growing business, by way of either equity or debt, subject to certain qualifying criteria.

Other important government initiatives include:

  • grants of up to £10,000, depending on the nature and size of the business;
  • interest-free loans for projects to improve the business's energy efficiency, up to a maximum of £20,000 per project;
  • grants towards premises; equipment; set-up costs (eg, legal fees and hosting fees); rent and employee relocation; and
  • national insurance and income tax holidays or reductions for businesses and their employees.

3.4 Are virtual currency trading platforms subject to a specific regulatory regime in your jurisdiction? Must they be registered or licensed by a regulatory authority? Does this vary depending on whether the platform accepts legal currency or whether the platform is custodial? Are virtual currency trading platforms subject to any form of ‘market abuse' regulation?

Any business which engages in ‘convertible virtual currency activity' in or from the Isle of Man must, as a minimum, register with the IOMFSA under the Designated Businesses Act. Depending on the nature of the business' activities, it may require a financial services licence instead of registering under the act, especially if its activities involve security tokens or other virtual currencies which meet the definition of ‘investment' in Isle of Man law.

The IOMFSA has indicated that token exchanges which provide a primary or secondary market for tokenised securities will be able to operate in the Isle of Man only if they obtain a financial services licence for crowdfunding activities (this is a recognised class of licence); but real-time or automated trading is not permitted.

The Isle of Man does not currently have the legislative framework or regulatory apparatus in place to enable it to license or supervise a securities exchange which complies with the International Organization of Securities Commissions principles.

4 Crossover with banking

4.1 How are virtual currencies positioned within the broader banking landscape in your jurisdiction?

As is common in many jurisdictions, the Isle of Man is yet to see mainstream adoption of virtual currencies. Although acceptance and understanding of virtual currencies are increasing all the time, fiat money remains very much the dominant means of exchange of value.

4.2 What impact could mainstream adoption of virtual currencies have on the ability to control inflation in your jurisdiction?

Theoretically, the mainstream adoption of virtual currencies in the Isle of Man could result in inflation being less prevalent than is the case with fiat currencies, if the supply of such virtual currencies is limited (eg, as is the case with Bitcoin).

4.3 What other implications could the mainstream adoption of virtual currencies have for the banking system in your jurisdiction (eg, with respect to payment services)?

Mainstream adoption of virtual currencies would significantly change the banking system in the Isle of Man. The adoption of purely decentralised virtual currencies would obviously reduce the volume and frequency of transactions which are currently processed through the banking system in fiat currency, and would reduce the role and importance of traditional banking methods. If some of the high-street banks adopt existing virtual currencies, or even create their own, it is possible that online and application-based banking might look fairly similar to what it does now, but with crypto accounts instead of fiat money.

4.4 Regarding decentralised finance, do the banking regulations in your jurisdiction apply to loans of virtual currencies or interest-bearing deposits of virtual currencies? Does this vary depending on whether stablecoins are loaned or deposited?

No, the local banking regulations do not currently make express provision for loans or deposits of virtual currencies, but any person lending virtual currencies or deposits of such currencies may require a licence under the Moneylenders' Act 1991 – this is fact-specific and requires tailored advice.

5 Technology

5.1 Is blockchain technology in itself regulated in your jurisdiction and what specific legal issues are associated with its use?

No, blockchain technology in itself is not regulated. The approach in the Isle of Man is to regulate the uses of blockchain technology, rather than the technology per se.

5.2 What other implications could the mainstream adoption of virtual currencies have from a technological perspective?

A potential implication of the mainstream adoption of virtual currency is in relation to the anti-money laundering (AML) and countering the financing of terrorism (CFT) aspects of payment services. Given that most virtual currencies are anonymous (or pseudo-anonymous), payment transactions may be vulnerable to abuse by money launderers, terrorists, terrorist financiers and persons who seek to evade economic sanctions, unless appropriate measures are taken to guard against the risk of systems being abused in this way. Isle of Man virtual currency businesses may potentially be exposed to higher levels of risk by having customers, business partners or agents based outside of the Isle of Man in jurisdictions with less rigorous AML and CFT standards.

There are potential difficulties in freezing or seizing illicit proceeds which are held in the form of virtual currencies, because of their anonymous and encrypted nature. This would need to be addressed from a law enforcement point of view.

6 Data security and cybersecurity

6.1 What is the applicable data protection regime in your jurisdiction and what specific implications does this have for virtual currencies?

The Isle of Man has enacted primary and secondary legislation (the Data Protection Act 2018; the Data Protection (Application of the GDPR) Order 2018; the Data Protection (Application of the LED) Order 2018) and also the GDPR and LED Implementing Regulations 2018) which collectively incorporate the EU General Data Protection Regulation (GDPR) into local law, with some Isle of Man-specific amendments. As a result, Isle of Man law is very similar to that in those jurisdictions in which GDPR has direct effect.

There are no specific implications for virtual currencies, but any business which operates in the virtual currency space will need to consider how the legislation applies to it and the extent of any personal data which it holds.

6.2 What is the applicable cybersecurity regime in your jurisdiction and what specific implications does this have for virtual currencies?

The legislative and regulatory provisions applicable to cyber security are generally found in the financial services legislation and associated guidance issued by the Isle of Man Financial Services Authority (IOMFSA). In summary, the legislation provides that licensed businesses should implement appropriate systems and controls (based upon a technological risk assessment) to reduce the risk of cyber-attacks causing damage to the business. There is also a requirement to notify the IOMFSA of any serious incidents where cybersecurity has been compromised. There is no ‘one size fits all' approach.

7 Financial crime

7.1 What provisions govern money laundering and other forms of financial crime in your jurisdiction and what specific implications do these have for virtual currencies?

The Proceeds of Crime Act 2008 is the key piece of primary legislation relevant to this area of law, supported by various secondary legislation, including the Anti-Money Laundering and Countering the Financing of Terrorism Code 2019 (AML/CFT Code).

As is described in question 1, virtual currency businesses are subject to the AML/CFT Code whether they are licensed by the IOMFSA or are ‘designated businesses' under the Designated Businesses Act.

Businesses registered under the Designated Businesses Act are required to submit annual returns that show compliance with the AML/CFT Code. These businesses are overseen by the IOMFSA to ensure compliance with these laws. There are no bespoke provisions which apply specially to virtual currencies, but a virtual currency business must be able to demonstrate that it complies with the provisions of the AML/CFT Code and must produce a risk assessment appropriate to the nature of its business.

8 Consumer protection

8.1 What consumer protection provisions apply to virtual currencies in your jurisdiction?

Virtual currency businesses licensed by the Isle of Man Financial Services Authority (IOMFSA) are subject to regulatory oversight and the IOMFSA has a range of statutory enforcement powers which it can exercise in order to protect consumers.

In relation to businesses which are not licenced, the IOMFSA does not have the same level of powers, but it can take action against such businesses for non-compliance with the provisions of the AML/CFT Code.

8.2 What other implications could the mainstream adoption of virtual currencies have from a consumer perspective?

It is possible that the Isle of Man will introduce a more bespoke consumer protection regime in the event that consumer adoption of virtual currencies becomes more widespread. Given the inherent risks associated with dealing in virtual currencies, and the undeveloped state of the market, the authorities in the Isle of Man have not yet deemed it appropriate to create a bespoke regime.

9 Competition

9.1 Do virtual currencies present any specific challenges or concerns from a competition perspective?

Not at the present time.

10 Taxation

10.1 How are transactions in virtual currencies treated from a tax perspective in your jurisdiction?

There currently is no legislation that specifically applies to the taxation of virtual currencies. The local approach has been to wait until more developed international guidance is available.

11 Trends and predictions

11.1 How would you describe the current landscape and prevailing trends in your jurisdiction as regards virtual currencies? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

Virtual currencies have a variety of use cases in the Isle of Man, but they have not been widely adopted by the general population in daily life.

Both the Isle of Man Financial Services Authority and the Isle of Man Gambling Supervision Commission (GSC) are receptive to businesses which operate in virtual currencies, and indeed the GSC has published an updated practice note for virtual currencies which confirms that it is possible for players to open an account with an Isle of Man gambling operator by using convertible and non-convertible virtual currencies, provided that the operator accepts such virtual currencies as a means of payment.

There are no confirmed legislative reforms in this area of the law as yet; however, we are aware that the Digital Agency of the Isle of Man Government Department for Enterprise reviews the international legal and regulatory landscape on an ongoing basis with a view to adopting ‘best practice' measures from other jurisdictions.

12 Tips and traps

12.1 What are your top tips for virtual currency providers seeking to enter your jurisdiction and what potential sticking points would you highlight?

Operators should have a clear business plan for what they want to achieve, and should engage in dialogue with the Department for Enterprise and regulatory authorities at an early stage to ensure that the process of setting up on the Isle of Man is as seamless as possible. Potential sticking points are:

  • the lack of a coherent business plan/vision;
  • possible difficulties in obtaining banking facilities; and
  • the present inability to operate an exchange which can provide primary and secondary market trading.

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.