THE BRITISH VIRGIN ISLANDS PROVIDES REGULATORY CLARITY ON DIGITAL ASSETS

THE BRITISH VIRGIN ISLANDS PROVIDES REGULATORY CLARITY ON DIGITAL ASSETS

By ADENIKE SICARD

While there is continued regulatory uncertainty in the United States and other countries regarding their treatment of cryptocurrencies and other digital assets, the British Virgin Islands (“BVI”) has solidified its regulatory presence in the digital space by enacting its Virtual Asset Service Providers, Act 2022.

This is not the BVI’s first move toward ensuring regulatory clarity, compliance and consumer protection. From 2019, the BVI formed a focus group on virtual assets, which resulted in the BVI’s financial services regulatory and supervisory authority, the BVI Financial Services Commission (the “Commission”) issuing its “Guidance on Regulation of Virtual Assets in the Virgin Islands” which, while recognizing uncertainty in the world, clarified the BVI’s position on the regulation of virtual assets related activity, in order to safeguard against breaches of the BVI’s financial services laws relating to the use of, or trading in, virtual assets in or from the BVI.

In 2020, in recognizing the growing importance and use of new technologies in the financial services sector (“FinTech”) and the increasing use of the BVI as a jurisdiction of choice, the Commission established the “financial services regulatory sandbox” to allow FinTech creators a space to operate and test their products in a contained and regulated environment.

In 2022, the BVI amended its AntiMoney Laundering and Counter Terrorist Financing Code of Practice and Anti-Money Laundering Regulations, to clarify that virtual assets service providers (“VASPs”) were deemed “ relevant persons ” under the BVI’s anti-money laundering counter financing of terrorism and proliferation financing regime (“AMLCFT regime”) and, therefore, subject to complying with the full AMLCFT regime, including maintaining effective systems and controls to identify persons with whom the VASPs are conducting business, and engaging in risk assessments and risk management.

Enter 1 February 2023, the BVI then enacted its own Virtual Assets Service Providers Act, 2022 (“VASP Act”), which specifically deals with VASPs operating in and from the BVI.

WHY IS THE VASP ACT NECESSARY?

In an era fraught with fraud and misuse of customer’s funds, it is no surprise that the BVI seeks to protect (1) the growth and development in its financial services industry and business, (2) consumers and investors, who place their trust in the BVI financial services products, and (3) its valued reputation as an international finance center of choice. In 2021, the BVI overtook the United States as the second most popular location for crypto hedge funds to domicile.

According to the 4th Annual Global Crypto Hedge Fund Report 2022 (the “Report”), issued by PriceWaterhouseCoopers Limited, which gives an overview of the global crypto hedge fund market, (the “Report”), the BVI saw its share of the market increase slightly year over year, from 11% to 13% in 2021.

For the top locations chosen by crypto hedge fund managers, the BVI featured just under the fifth position in the world in 2021. A position that we expect to have improved in the last three years, based on the BVI’s actions to implement a carefully planned regulatory regime of VASPs, which incorporated the global standards issued by the FATF to prevent the misuse of virtual assets for money laundering, terrorist financing and proliferation financing.

Over the years, digital assets became an increasingly important part of many hedge fund portfolios, and the BVI saw the establishment of many fund entities investing in the digital space.

According to the Report, most crypto hedge funds chose their locations or domicile based on ‘crypto friendliness’ (22%), ‘regulations’ (20%) and ‘fund friendly’ regulations (17%). While governments worldwide try to figure out how to deal with cryptocurrencies and other digital assets, the results of the Report seem to indicate that most crypto hedge funds wish to operate in countries with the “least uncertainty regarding regulatory changes and government interventions, leaving them to focus on their investment activities”.

According to the Report, most crypto hedge funds chose their locations or domicile based on ‘crypto friendliness’ (22%), ‘regulations’ (20%) and ‘fund friendly’ regulations (17%). While governments worldwide try to figure out how to deal with cryptocurrencies and other digital assets, the results of the Report seem to indicate that most crypto hedge funds wish to operate in countries with the “least uncertainty regarding regulatory changes and government interventions, leaving them to focus on their investment activities”.

The reality is that, over the years, digital assets became an increasingly important part of many hedge fund portfolios, and the BVI saw the establishment of many fund entities investing in the digital space. In reviewing the statistics from the Report, “approximately 1 in 3 of hedge funds surveyed” were investing in digital assets in 2021, as compared to 1 in 5 when they were surveyed in 2020, showing an increase from 21% to 38%. When asked what percentage of their assets under management (“ AuM ”) is invested in digital assets, hedge funds surveyed indicated that assets in their digital wallets accounted for 4% of their AuM, an increase of 1% from the year before. Another point of interest in the Report, which was refreshing to note in these recent times of crypto crashes, is that 91% of survey crypto hedge fund respondents used external auditors to audit their financial statements. The appointment of an auditor and the submission of audited financial statements to the Commission annually, has been a longstanding regulatory requirement for most funds established in the BVI. This simple regulatory requirement has served the BVI and investors in BVI crypto hedge funds well, as it provides a measure of accountability and oversight. The BVI’s VASP Act implements the same regulatory requirement for VASPs to appoint an auditor and to submit audited financial statements annually to the Commission.

WHAT REGULATORY OVERSIGHT OF VASPS DOES THE BVI PROVIDE?

From 1 December 2022, all VASPs were required to conduct their know-your-client and due diligence procedures on the users or customers of their virtual asset services, which include the FATF’s recommended “travel rule”1. The purpose of this is to ensure that all VASPs know their customers and to make it difficult for their platforms, exchanges or wallets to be used for nefarious or illegal activities without there being any identification or trace of their users or customers.

Now, with its recently enacted VASP Act, the Commission legally requires all VASPs to obtain a licence from the Commission before any VASPs provides any virtual assets services in or from within the BVI (including using a BVI company, wherever located, to provide such services). The application is a rigorous one, which includes the submission of resumes of all directors of the proposed VASP, references and details on their fitness and propriety, ownership structure and operational procedures of the VASP, such as a business plan, risk assessment framework, cybersecurity and reliability framework, statement of technological infrastructure, custody and safekeeping of assets framework, data protection framework, clients handling and complaints handling framework, financial resources and insurance arrangements, and details of a legal adviser, an approved auditor and authorized representative. The VASP is required to establish measures to protect clients’ assets and there are prohibitions on making or issuing misleading advertisements, to list a few of the VASPs’ obligations. The rigorous process is designed deliberately by the Commission to ensure that any relevant money laundering and terrorist financing risks identified are appropriately managed and mitigated.

INTERNATIONAL NEWS

The International Organization of Securities Commissions (“ IOSCO ”) recently published a report titled “ Policy Recommendations for Crypto and Digital Asset Markets Consultation Report ” with the aim of finalizing IOSCO’s policy recommendations to address market integrity and investor protection issues in crypto-asset markets in early-Q4 2023. The recommendations in this report are aimed at supporting jurisdictions seeking to establish compliant markets for trading crypto or digital or virtual assets and are focused on crypto asset market activities (as opposed to decentralized finance (“DeFi”), which will be consulted on separately by ISOCO).

In my view, this initiative is completely headed in the right direction, by asking relevant questions to obtain feedback from members and being open to them submitting suggestions. In addition, the recommendations made are necessary and relevant in this day and age of relentless fraud and misuse of information.

Based on the BVI’s initiatives with amending its AML laws and regulations, and the implementation of the VASP Act, the BVI has addressed the issues and concerns that the IOSCO Report is aimed at capturing globally in preventing or retarding regulatory arbitrage in the crypto and digital assets space.

CONCERNS ABOUT VASPS GLOBALLY

Among other things, there are overwhelming concerns about customers who deposited their holdings on crypto exchanges and platforms being in jeopardy.

As I write this article, each day I read news being published on large VASPs or crypto exchanges being sued by the US regulators, from FTX, late last year, to Binance US on 5 June 2023, and Coinbase on 6 June 2023. Most of the allegations surround operating unregistered exchanges and, potentially, the misuse of investor funds and/or client assets.

The BVI evidences that it is concerned with ensuring that it is a well-regulated jurisdiction which provides clarity on the laws applicable to VASPs. While the BVI is considered a hub for virtual asset activities and providing such services, it knows all too well that it only takes one bad apple to mar the reputation and hard work of its regulators and service providers.

The onus is on each VASP and each person in the BVI who is involved in the establishment of a VASP under the laws of the BVI, to ensure that they carefully abide by the AML laws and regulations, and the VASP Act, to ensure that as many of the bad apples are not able to utilize their services for illicit means.

KEY TAKE AWAYS

• The BVI is a jurisdiction of choice for VASPs and is a popular location for crypto hedge funds to domicile.

• The BVI provides regulatory certainty and clarity for VASPs.

• The BVI’s Commission publishes a lot of guidance on and to VASPs on its website.

• The BVI’s VASP Act is necessary to regulate VASPs and virtual asset services, reflecting compliance with international FATF standards and IOSCO’s recommendations.

• The BVI is keen on guarding its reputation as a well-regulated jurisdiction of choice for international business.

Adenike Sicard

Managing Partner, Sinclairs BVI

Ms. Sicard has been practising law for over 18 years’ in the British Virgin Islands. She is the Managing Partner of Sinclairs BVI and is the head of the Corporate and Commercial Department. She specialises in corporate and commercial matters, banking and finance, investment funds and regulatory, and real estate matters. Her practice involves her advising on corporate restructuring and financing, joint ventures, mergers and acquisitions, establishing and advising on trusts, private trust companies and VISTA, Wills and succession planning, Probate applications, Company Restorations, establishing, restructuring and advising investment funds.