The Isle of Man Financial Services Authority (IOMFSA) has recently held three consultations relating to the regulation of Virtual Asset Services Providers (VASPs) in the jurisdiction. Here, we take a closer look a the background to VASPs regulation in the Isle of Man and what the future may hold.
VASP TERMINOLOGY
The Isle of Man first brought cryptocurrency within its AML/CFT regime in 2015 under the Designated Business (Registration and Oversight) Act 2015 (DBROA15). The sector was in its infancy and lacked a standardised vocabulary, so the Island produced its own definition of "convertible virtual currency activity" to capture a broad range of potential cryptocurrency activities.
Nearly a decade on, the industry is well established and new terms have become common parlance. The IOMFSA is therefore seeking to update terminology used in legislation to "VASP" or "Virtual Asset Services Provider", and align its definitions with those used by the Financial Action Task Force (FATF). This change in terminology is not expected to have a material impact on industry.
TRAVEL RULE
At the same time, the IOMFSA is seeking to introduce the Travel Rule (Transfer of Virtual Assets) Code 2024 as part of the Islands' commitment to international standards. The draft Code will implement the expanded scope of FATF's Recommendation 16, which requires certain information on the originator and beneficiary of transfers to accompany wire transfers of virtual assets. The draft Code has been developed alongside stakeholders, in acknowledgement of the changes to their practices and technological developments which may be needed in order for them to apply the travel rule.
VASP REGULATION
The Isle of Man does not currently have a distinct regulatory regime for VASPs; rather the properties of a virtual asset and the activities undertaken by a business will dictate the applicable regulatory regime. For example, where a virtual asset has characteristics of an investment, related activities may trigger licensing requirements under the Financial Services Act 2008 (FSA08) in respect of investment business.
Registration under the DBROA15 as a VASP is required where the virtual asset business is not otherwise licensed by the IOMFSA or the Gambling Supervision Commission. All such businesses are required to comply with AML/CFT rules, however DBROA15 registration is not full regulation and there are limited protections for consumers and conduct of business rules.
As there is a growing international trend towards greater regulation of VASPS, the IOMFSA issued a discussion paper earlier this year seeking views on its current approach to oversight and potential approaches to further regulation. The suggestions posed by the IOMFSA were:
- maintaining the current approach of AML/CFT supervision only;
- categorising all virtual assets as "investments" and applying the Island's investment business regulatory regime under the FSA08;
- introducing a new class of regulated activity under the FSA08 for the operation of a VASP;
- introducing a new class of regulated activity under the FSA08 for issuing and advising on virtual assets; and/or
- introducing a new class of regulated activity under the FSA08 for issuing and managing stablecoins.
Introducing new categories of VASP activity regulated under the FSA08 would being a significant regulatory burden, as FSA08 licenceholders are subject to a comprehensive regulatory regime in respect of corporate governance, financing standing, safeguarding of client assets, conduct of business, reporting etc.
The IOMFSA's discussion paper was very high level and feedback has not yet been published, so it is not currently clear whether the Isle of Man will indeed move towards greater regulation, when this would be, or quite what this would look like.
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