British Virgin Islands
Cryptocurrency Licensing and Regulations

BVI Innovative Fintech products new regulations
British Virgin Islands Crypto-currency and ICOs
Regulated activities

British Virgin Islands
Cryptocurrency Company Licensing and Regulations
BVI Innovative Fintech products
New regulations

It has been recently introduced in BVI new innovative fintech regulations, reaffirming BVI as a jurisdiction of choice for new financial products and services, thus showing a development in the approach taken by the BVI to the new fintech products.

The Financial Services (Regulatory Sandbox) Regulations, 2020 (the Regulations) were introduced in June 2020 and commenced on 31 August 2020. The Regulations are intended to provide a way for new, innovative fintech products to be trialed for a limited time by BVI companies, without the need to comply with the more onerous licensing requirements set out in more mainstream financial services regulations.

"Innovative Fintech" is defined in the Regulations 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 respect to the conduct or provision of a financial services business'.

In this context, financial services business relates to activities that would usually fall to be regulated and licensed, such as fund management, banking, money services, and operating an investment exchange. Where an entity that is engaged in innovative fintech is permitted to operate within the regulatory sandbox (the sandbox), such licensing requirements do not apply for so long as the entity is within the sandbox.



BVI Crypto Summary

Cryptocurrency seen as legal tender No
Local regulatory agency Commission The BVI Financial Services
Special licenses for those who open a crypto company in BVI No
Special licenses for crypto exchanges in BVI No
Anti-money laundering rules Generally applicable

FATCA provisions relevant for ICOs
Special requirements for investors who register a crypto company in BVI No
Residency requirements for investors No
Types of companies used by those who open a crypto company in BVI The IBC for conducting business outside of BVI (offshore company)

The limited and unlimited company for doing business in BVI
Minimum capital for a crypto company in BVI Not applicable
Minimum number of shareholders 1
Minimum number of directors 1
Business license Registered with the Register of BVI
Mandatory requirements for the crypto company Registered office located in BVI and registered agent in BVI
Crypto company taxation BVI is a tax-neutral jurisdiction
Reasons to open a crypto company in BVI No corporate taxes and no requirements on the nationality of investors, no residency requirements. Currently, no mandatory regulations for virtual assets trading and activities

British Virgin Islands Cryptocurency Company Application and Approval

An entity that wishes to be considered to operate within the sandbox needs to make an application to the Financial Services Commission (the FSC), which application must be accompanied by the following:

  1. a written indication that the applicant is utilising or intends to utilise innovative fintech whereby the product or service is innovative and has the required potential;
  2. a detailed and comprehensive business proposal;
  3. a written indication of the test scenarios the applicant has carried out, based on the applicant's business model, to demonstrate the usefulness, functionality and potential of the product or service, including the projected outcomes of the test scenarios and the appropriate indicators to be used in measuring such outcomes;
  4. a statement of the maximum number of clients the applicant will have or engage while in the sandbox;
  5. a written description of the risks that may be associated with the applicant’s business model and the framework established or to be established to ensure an adequate management of the risks;
  6. a written indication of the resources (financial, technological, human and otherwise) at the disposal of the applicant which the applicant intends to use to support participation in and testing within the sandbox, including ensuring the appropriate control and mitigation of potential risks and losses arising from offering the product or service that is the subject of innovative fintech; and
  7. written strategies for existing the sandbox, both (a) without seeking a license under mainstream regulatory legislation, and (b) by transitioning to being a licensed entity, including an indication of the potential to realistically deploy the innovative fintech with respect to financial services business after the applicant has ceased to participate in the sandbox.
Ongoing Obligations

A sandbox participant that is a BVI company must have at least two individual directors (as opposed to corporate directors), or two individual partners in the case of a limited partnership and may not have more clients than were approved by the FSC during the application process. They must also take adequate measures to identify potential risks relating to their business and to take measures to address those risks (including prevention of money laundering and terrorist financing).

Where there is a development or change to the conduct of the participant's business, or change in the environment in which it operates, which may have an impact on its risk profile or obligations under the Regulations, the participant is required to immediately notify the FSC.

Participants in the sandbox will be required to keep adequate records and to file interim reports with the FSC, at such intervals as the FSC may determine. These reports must be signed by the chief executive officer (or equivalent).

When soliciting clients, a participant will be required to alert the client to the fact that they are not licensed by the FSC and disclose to the client or potential client the risks of participating in the sandbox, that the activities are being conducted pursuant to the participant's business proposal, and for how long the FSC has approved the participant operating within the sandbox.

BVI Crypto-currency and ICOs

Initial coin offerings (ICOs) of crypto-currencies, tokens and other blockchain based assets have raised billions of dollars in recent years. Leading offshore financial centres such as the British Virgin Islands (BVI) have sought to become a major part of this new capital raising phenomenon and there is increasing interest in the use of BVI companies as ICO issuer vehicles. While other offshore jurisdictions have experienced similar interest, structuring an ICO through a BVI company offers a number of advantages which have made the BVI an attractive ICO base. As a result, the jurisdiction has seen a number of highly successful launches during the last 12 months.

ICOs

ICOs are, in essence, just another means of accessing third-party capital. Rather than receiving a security whose return is dependent on the performance of the business of the issuer or its group, as in a traditional IPO, in an ICO investors exchange cash for a new cryptocurrency on a blockchain network. In most cases this crypto asset takes the form of a credit or token for use in purchasing goods or services in the application or enterprise into which the ICO proceeds will be invested. However, rather than using these "utility tokens" for making purchases within the application, most investors will hold the tokens in the hope that the success of the underlying enterprise (in which the new utility token will be the sole or principal unit of exchange) will cause the relative cash value of the utility token to increase as demand for those tokens for use within the application increases and their potential being accepted as wider means of exchange increases.

As the value of a token is determined by the demand for the token itself rather than returns or repayments from some underlying business operated by the issuer, then most types of utility token are not regarded as "investments" or "securities" by regulators and are therefore not subject to many of the regulations and restrictions that might apply to a public debt or equity issue by a company. As a result, ICOs offer an efficient and cost-effective means of accessing mass capital for start-up or early-stage enterprises or technology entrepreneurs which might not otherwise have access to capital markets.

Structuring

Similar to existing forms of special purpose vehicle capital raising, a typical ICO structure will feature a newly formed issuer vehicle (the ICO Issuer) established and managed by a group of ICO sponsors (the sponsors or founders) for the purpose of investing in a particular project which will be detailed in the ICO business plan - known as the "white paper". The white paper will also set out the fundraising target which the ICO Issuer expects to achieve. The ICO Issuer will then raise funds by issuing crypto-currency tokens on a blockchain network in exchange for investor cash (which may be in the form of conventional fiat currency or, in some cases, other crypto-currencies). The new tokens may be used within the project being developed by the founders or held for potential capital gains as demand grows. Once the ICO Issuer has achieved its target fundraising goal, the funds raised will be invested in the project described in the white paper.

Most BVI ICOs are structured through an ICO Issuer incorporated as a BVI business company under the BVI Business Companies Act, 2004 (the BCA).

ICOs in the BVI

The use of a BVI business company incorporated under the BCA as an ICO Issuer brings with it all of the standing advantages associated with BVI business companies and the BVI as a capital friendly jurisdiction.

The BVI Financial Services Commission (FSC) recently issued the Guidance on the Regulation of Virtual Assets in the Virgin Islands (the Guidance), relating to the regulation of virtual assets generally, which would include crypto-currencies and utility tokens. The FSC has taken a constructive attitude towards virtual assets and, generally, is not seeking to impose regulation on virtual assets that they would not have been subject to under the existing, "mainstream" financial services regulatory framework in the BVI.

ICOs and existing BVI Securities and Financial Services Regulation

While there is a clear consensus that an ICO in its customary form would not be restricted or subject to more onerous regulation under existing BVI financial services legislation, it is still important and necessary to consider any proposed ICO against such legislation and with regard to the Guidance so as to ensure that it is appropriately structured, to avoid tripping any restriction or obstacle that otherwise would not apply.

The BVI financial services legislation relevant for consideration in respect of an ICO includes the following:

  • Securities and Investment Business Act 2010 (SIBA)
  • BVI AML Law
  • The Financing and Money Services Act 2009 (FMSA)
  • Beneficial Ownership Secure Search System Act 2017 (the BOSS Act)
  • Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS)
BVI Crypto exchanges

Operating an investment exchange is an activity that is regulated by SIBA, but only to the extent that what is traded on that exchange would qualify as an "investment" under SIBA. Accordingly, where a token is considered to be a utility token (and thus outside of the regulatory purview of the legislation considered above), operating an exchange of such tokens would not be considered to be regulated activity, provided that nothing that would count as an 'investment' is used as a medium of exchange for such utility tokens. So, trading utility tokens for other utility tokens, or even fiat currency or some stable coins, would not be a regulated activity. On the other hand, trading utility tokens for a token with the characteristics of an investment would likely fall to be regulated.

British Virgin Islands Financial Services Regulatory Sandbox

It should be noted that, to deal with situations where a token would be likely to be regulated (whether under SIBA, FMSA, or otherwise), or where an exchange would likely involve the trading of "investments", the BVI has recently introduced the Financial Services (Regulatory Sandbox) Regulations, 2020 (the Regulations). The Regulations provide a "regulatory sandbox" in which it is possible for innovative fintech companies to operate, provided that they operate within a clearly defined business plan and with a limited (and set) number of clients. Accordingly, even in the rare situations that a token may be considered to be within the scope of financial regulation, it may be possible to 'sandbox' that activity, such that full compliance with BVI financial services regulation can be delayed while the fintech is tested.

Cryptocurrency British Virgin Islands Regulated Activities

What is regulated are certain activities which may involve crypto currencies. So, each case has to be examined on its own to determine any relevant implications.

Generally, where a virtual asset or virtual asset related product is deemed an “investment” under the Securities and Investment Business Act (“SIBA”), then if the BVI entity is carrying out certain activities in relation to that investment then it could require licensing.

The “investments” under SIBA include:

  • Shares, etc.: shares, interests in a partnership or fund interests;
  • Debentures, etc.: debentures, debenture stock, loan stock, bonds, certificates of deposit and any other instruments creating or acknowledging indebtedness, other than for money borrowed to defray consideration for the supply of goods or services and also does not include a cheque or other bill of exchange, a bankers draft or a letter of credit;
  • Instruments giving entitlement to shares, debentures: these include warrants or other instruments entitling the holder to subscribe for investments;
  • Certificates representing investments: certificates which confer contractual, or property rights held by a person other than the person on whom the rights are conferred by the certificate or instrument and the transfer of which may be set-up without the consent of that person;
  • Options: options to acquire or dispose of an investment including any currency, palladium, platinum, gold or silver;
  • Futures: a futures contract other than a contract made for commercial and not investment purposes. A contract shall be regarded as made for investment purposes if it is made or traded on an investment exchange, or made otherwise than on such an exchange but expressed to be as traded on such an exchange or on the same terms as those on which an equivalent contract would be made on such an exchange for commercial and not investment purposes;
  • Contracts for differences: rights under a contract for differences or any other contract the purpose or intended purpose of which is to secure a profit or avoid a loss by reference to fluctuations in property or an index other than a contract which involves taking delivery of any property to which the contract relates;
  • Long term insurance contracts: long term insurance contracts or rights and interests in any investments;
  • Rights and interest in investments: rights to and interests in any investment; and
  • Specified investments: anything specified as an investment from time to time by the relevant regulations.

Importantly, cash and real property are not investments under SIBA.

Based on the above, a virtual asset transaction which is a “contract for differences”, for example, would be an “investment” under SIBA.

The types of activity constituting investment business under SIBA are as follows:

  • Dealing in investments;
  • Arranging deals in investments;
  • Managing investments;
  • Providing investment advice;
  • Providing custodial services with respect to investments;
  • Providing administrative services with respect to investments; and
  • Operating an investment exchange.
Crypto exchanges

Operating an investment exchange is an activity that is regulated by SIBA, but only to the extent that what is traded on that exchange would qualify as an "investment" under SIBA. Accordingly, where a token is considered to be a utility token (and thus outside of the regulatory purview of the legislation considered above), operating an exchange of such tokens would not be considered to be regulated activity, provided that nothing that would count as an 'investment' is used as a medium of exchange for such utility tokens. So, trading utility tokens for other utility tokens, or even fiat currency or some stable coins, would not be a regulated activity. On the other hand, trading utility tokens for a token with the characteristics of an investment would likely fall to be regulated.

Regulatory Sandbox

It should be noted that, to deal with situations where a token would be likely to be regulated (whether under SIBA, FMSA, or otherwise), or where an exchange would likely involve the trading of "investments", the BVI has recently introduced the Financial Services (Regulatory Sandbox) Regulations, 2020 (the Regulations). The Regulations provide a "regulatory sandbox" in which it is possible for innovative fintech companies to operate, provided that they operate within a clearly defined business plan and with a limited (and set) number of clients. Accordingly, even in the rare situations that a token may be considered to be within the scope of financial regulation, it may be possible to 'sandbox' that activity, such that full compliance with BVI financial services regulation can be delayed while the fintech is tested.

Final considerations

Existing BVI legislation, as supported by the Guidance, is sufficiently flexible to support ICOs of utility tokens without these being subject to any additional licensing, disclosure or record keeping obligations under existing BVI financial services legislation. This, coupled with those generally advantageous aspects of BVI law, make the BVI an attractive locale for ICOs and it is expected that the number of ICOs involving BVI companies will continue to increase.

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