Regulators globally are wrestling with tough questions as to how virtual assets should be regulated. The last year has seen significant volatility in the prices of major cryptocurrencies. With such volatility, fortunes have been made and lost, with losses often borne by inexperienced retail investors.

With an eye to investor protection, some onshore jurisdictions (such as the Hong Kong SAR) have proposed that virtual assets exchanges should only be permitted to offer services to professional clients and would be restricted from serving retail clients. 

Similarly, the People's Bank of China in September 2021 published a notice regarding the ban in the PRC of cryptocurrency and related transactions.

Indonesian regulators have also recently taken steps to ban financial firms from facilitating cryptocurrency sales.

At the same time, there has been increased interest by virtual assets businesses in offshore jurisdictions such as the British Virgin Islands (the "BVI").

Attractions of the BVI include its tax neutrality, respected regulator and responsiveness to global regulatory trends, common law legal system, low corporate set-up and maintenance costs and investor familiarity.  While these attributes are well understood in the 'traditional' corporate and finance sectors, they are also proving appealing to businesses operating in the virtual assets space which, in addition to being decentralised by nature, tend to be nimble, innovative and jurisdiction-agnostic in terms of their approach to business.

This article considers the current regulatory regime in the BVI as it may apply to cryptocurrency and virtual assets businesses.  

REGULATION IN BVI

The BVI does not currently have a specific regulatory framework for virtual assets or cryptocurrencies, although it is expected that the jurisdiction will in time (in common with other jurisdictions) develop a regulatory framework tailored specifically for virtual assets. 

In guidance issued on 10 July 2020 (the "FSC Guidance") the BVI Financial Services Commission ("FSC") confirmed that the question of whether licensing is required for virtual asset related activities will be determined under existing financial services legislation.

Cryptocurrency and virtual assets businesses (particularly those whose activities include operating a cryptocurrency exchange or engaging in crypto lending) will need to consider whether their proposed activities fall within any of the following before establishing in the BVI:

  1. the Banks and Trust Companies Act 1990, as amended (the "BTCA");
  2. the Financing and Money Services Act, 2009 (as amended) ("FMSA"); and
  3. the Securities and Investment Business Act, 2010 ("SIBA").

Each is discussed in further detail in this note.

CROSS BORDER

Any discussion of regulation of virtual assets in a single jurisdiction would be incomplete without reference to the significant cross-border risks which are inherent to the decentralised nature of virtual assets. 

A key concern is that although a virtual assets businesses may in fact be appropriately regulated (or not subject to regulation) in a particular jurisdiction, its service offerings may trigger significant regulatory implications in other jurisdictions as cross-border targeting of investors and customers may require cross-border registration and regulation as well.

Accordingly, compliance with applicable regulation in an offshore jurisdiction such as the BVI will not exclude a business from regulatory enforcement action in any other jurisdiction in which it makes its services available to customers.  Appropriate advice under the laws of such jurisdictions should always be taken.

BANKS AND TRUST COMPANIES ACT

Virtual assets businesses whose activities involve dealing in fiat currency or holding fiat currency deposits on behalf of customers should ensure that their activities do not inadvertently constitute 'banking business' as defined in the BTCA (for which the appropriate licence is required).

Banking business means the business of accepting deposits of money which may be withdrawn or repaid on demand or after a fixed period or after notice, by cheque or otherwise and the employment of such deposits, either in whole or in part—

  1. in making or giving loans, advances, overdrafts, guarantees or similar facilities, or 
  2. the making of investments,

for the account and at the risk of the person accepting such deposits.

Business or exchanges that hold fiat currency on behalf of their clients and invest the same will need to consider whether the above provisions of the BTCA apply to them.

FINANCING AND MONEY SERVICES ACT 

FMSA regulates financing business and money services business.   

Financing business broadly relates to the provision of credit to borrowers located in the BVI.  More relevantly for virtual assets businesses, the definition of 'financing business' was expanded in 2019 to include 'carrying 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.'

Money services business is a category of regulated activity that includes, among other things, the business of transmission of money in any form, including electronic money, mobile money or payments of money. 

The FSC Guidance confirms that the transmission of virtual assets or virtual asset related products would not require a licence under FMSA. 

However, to the extent that a virtual assets business handles fiat currency on behalf of customers it should be mindful of the above and seek advice as required to ensure its activities are not in scope of regulation (to the extent it does not hold the necessary licence under FMSA).

Should the activities of a business fall within the FSMA definitions of money services business or financing business, that business will be required to hold a licence under FMSA (which brings with it various obligations, including segregating customer accounts, submission of audited financial statements for each financial year to the FSC and maintenance of capital resources).

SECURITIES AND INVESTMENT BUSINESS ACT

The following activities require a licence under SIBA:

  1. dealing, arranging deals in or managing investments;
  2. providing investment advice;
  3. providing custodian services with respect to investments;
  4. providing administration services with respect to investments; and
  5. operating an investment exchange.

A key question under SIBA is therefore whether the virtual assets with which the business is dealing would constitute investments for the purposes of SIBA.

SIBA regulates many categories of traditional investments such as shares, interests in a partnership or fund, debentures, interests in a collective investment scheme and certain derivatives. 

It is a matter of judgement as to whether a specific virtual asset would be considered an investment for the purposes of SIBA (which would require licensing to engage in the activities listed above in respect of such assets).

A virtual asset or other digital property which is only a medium of exchange with no benefits or rights other than ownership of the coin would not be considered an investment and the FSC Guidance confirms that such assets will generally fall outside the scope of regulation.

The FSC Guidance also confirms that utility tokens which only provide the purchaser with an ability to purchase goods and services are not in scope of regulation.

However, where a virtual asset provides a benefit or right beyond a medium of exchange (because, for example, such assets grant rights to shares or create or acknowledge a debt) then SIBA can apply on the basis that such virtual asset constitutes an investment. 

Some virtual assets can provide other benefits to the holder such as rights to: (i) vote on different protocol proposals, (ii) be eligible for part of the protocol profits or fees; or (iii) to take part in a decentralized autonomous organization.

Advice should therefore always be taken prior to engaging in activities involving virtual assets in or from within the BVI to determine whether the virtual assets could be considered 'investments' for SIBA purposes requiring a licence to deal in them.

CONCLUSION

Virtual assets remain a rapidly developing and exciting area of the market, generating challenges and opportunities for virtual assets businesses, investors, lawyers and regulators alike.

While the BVI does not currently have a regulatory framework tailored specifically for virtual assets, industry participants wishing to conduct virtual assets related business in the BVI or utilising BVI entities, will need to carefully consider whether their proposed activities will bring them within the ambit of existing BVI financial services legislation.  

One of the benefits of the BVI as an offshore jurisdiction is its experienced network of BVI-qualified practitioners located in major business centres around the world, ensuring that real-time legal advice and guidance is available every step of the way. 

Originally Published by Asia Business Law Journal, April 2022

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.