2024 BVI Blockchain and Cryptocurrency Regulatory Guidelines

Authors : Chris Duncan & Katrina Lindsay

Chris Duncan and Katrina Lindsay wrote the sixth edition of Global Legal Insight British Virgin Islands (BVI) Chapter of Blockchain and Cryptocurrency Regulatory Guidelines. This chapter covers the legal requirements related to cryptocurrency and blockchain in the British Virgin Islands, including government attitudes and definitions, taxation, money transmission laws and anti-money laundering requirements, mining and licensing requirements.

1. Government attitudes and definitions

The British Virgin Islands has become a leading offshore financial center, facing regulatory changes, economic challenges and natural Advantages include resilience, flexibility and innovation during disasters. Including those companies, institutions and individuals operating in the fields of cryptocurrency, blockchain technology and Web3, using BVI tools to support their international business activities in order to benefit from the BVI’s legal system based on English common law Familiarity and stability, tax-neutral treatment and the business-friendliness and flexibility of the BVI regulatory and judicial system.

The BVI Government works closely with the island’s industry leaders, from lawyers and accountants to insolvency practitioners and regulators, recognizing that a collaborative industry will be better able to meet the needs of those who do the needs of those doing business, while ensuring that jurisdictions have the capabilities to identify and mitigate any associated risks.

This is evident in the approach taken by the British Virgin Islands government to regulate virtual assets. The recently introduced Virtual Asset Service Providers Bill 2022 (the “VASP Bill”) aims to ensure that the British Virgin Islands continues to comply with international standards and comply with the specific recommendations of the Financial Action Task Force on The outcome of a public consultation process in which the Islands Financial Services Commission solicited feedback, input and comments from all stakeholders.

This chapter discusses this key feature of the VASP Act in more detail. However, at a high level, the VASP Bill can be described as a balanced piece of legislation that is both proportionate and relevant. Companies engaged in custody and trading operations are considered higher risk to end users and are therefore subject to higher levels of regulation, while other activities such as innovative technology-based projects and token issuances (an activity that has historically been registered in the British Virgin Islands entities), generally do not fall within the regulatory scope of the VASP Act.

Under the VASP Act, a "virtual asset" is defined as a digital representation of value that can be digitally traded or transferred and used for payment or investment purposes. Specifically excluded are digital representations of fiat currencies, and digital records of the credit of financial institutions against fiat currencies, securities or other financial assets that can be transferred digitally.

2. Cryptocurrency Regulation

The VASP Act comes into effect on February 1, 2023. Any entity wishing to provide virtual asset services or act as a VASP in or from the BVI must be registered with the Commission. VASPs already operating when the VASP Act comes into effect must submit an application to the Commission by July 31, 2023 (enabling them to continue to provide virtual asset services while the application is under review), and any new entities must register before commencing any activities under the VASP Act Contact the committee before.

Application to register as a VASP must be made on a form approved by the Commission, specifying the category of VASP registration requested and accompanied by (a) a business plan setting out the nature and scale of the virtual asset activities ;(b) details of proposed directors, senior managers and compliance officers, including documentation demonstrating that they meet the committee’s fitness and fitness standards;(c) the applicant’s requirements for fulfilling the requirements of the VASP Act and the AML/CTF/PF Legislative Regime Committee policies and procedures adopted to comply with this obligation; (d) applicable application fees.

When the Commission approves a VASP application, it will register the applicant, issue a practicing certificate and impose conditions on registration that it considers appropriate (including the requirement to obtain professional indemnity insurance).

The bill defines a "VASP" as a virtual asset service provider that provides virtual asset services in the form of a business and is registered as a virtual asset service provider for or on behalf of others to perform one or more of the following activities or operations:

Exchanges between virtual assets and legal tender;

Exchanges between one or more forms of virtual assets;

Transfers of virtual assets, where the transfer involves a representative Another person conducts transactions to transfer virtual assets from one virtual asset address or account to another virtual asset address or account;

Custody or management of virtual assets or tools capable of controlling virtual assets;

< p>Participate in and provide financial services related to the issuance or sale of virtual assets by the issuer;

Perform other activities or operations specified in the VASP Act or prescribed by regulations.

A person who engages in any of the following activities or operations for or on behalf of others will be deemed to be performing virtual asset services:

Hosting a wallet or having custody or control of another person’s virtual assets, wallet or private keys;

Providing financial services related to the issuance, offer or sale of virtual assets;

Providing equipment such as automated teller machines, Bitcoin teller machines or vending machines to enable transactions through electronic terminals Promote virtual asset activities that enable its owners or operators to proactively facilitate the exchange of virtual assets with legal tender or other virtual currencies;

Engage in providing virtual asset services, issuing virtual assets, or Participate in virtual asset activity business activities.

Whether an entity carries out virtual asset services will depend on whether the relevant assets constitute “virtual assets”. For example, cryptocurrency-based derivatives require more careful consideration and may be subject to one or both of the VASP Act or the British Virgin Islands Securities and Investment Business Act (“SIBA”).

Similarly, consideration should also be given to the list of activities that exclude companies from the scope of the VASP Act, namely provision of ancillary infrastructure to allow others to provide services, such as cloud data storage providers or integrity service providers responsible for verification Accuracy of signature.

While it is not intended to specifically regulate cryptocurrencies, BVI entities operating in the cryptocurrency, blockchain technology and Web3 sectors may also be subject to the BVI's existing regulatory regime, including:

BVI Business Companies Act 2004 (as amended);

SIBA;

Financing and Money Services Act 2009 ("FMSA");

Anti-Money Laundering (Amended) Regulations 2008;

Anti-Money Laundering and Terrorist Financing Code of Conduct;

Economic Entities (Companies and Limited Partnerships) Bill 2018 (Revised) - This Act is particularly important if the BVI company intends to hold any intellectual property rights relating to the underlying technology.

In order to avoid duplication of supervision, VASP clearly stipulates that persons registered under the Act and engaged solely in the business of providing virtual asset services do not need to obtain a SIBA or FMSA license.

3. Sales Regulations

3.1 VASP Act

Under the VASP Act, although not expressly excluded , but it is generally accepted that the single act of issuing or selling virtual assets in the British Virgin Islands is not in itself an activity regulated by the VASP Act. However, if a BVI entity provides financial services in connection with the issuance of virtual assets and the transfer of virtual assets on behalf of another party, this may constitute virtual asset services and require the entity to register with the Commission under the VASP Act.

3.2 SIBA

SIBA regulates the provision of investment services in the British Virgin Islands. SIBA provides that any person who conducts or holds himself out to be engaged in any type of investment business in or from the territory must do so through an entity regulated and licensed by the Commission. The definition of investment business is broad and covers: (i) investment transactions; (ii) arranging investment transactions; (iii) investment management; (iv) investment advice; (v) investment custody; (vi) investment operations; (vii) operating investments Exchange.

The definition of "investment" is also broad and may include: (i) shares, partnership interests, or fund interests; (ii) bonds; (iii) instruments conferring rights on shares, interests, or bonds; ( iv) certificates representing investments; (v) options; (vi) futures; (vii) contracts for difference; (viii) long-term insurance contracts.

Whether virtual assets fall under the SIBA regime will depend on whether they have similar characteristics to stocks in the investment definition.

In addition, any pooled vehicle that invests in the virtual asset space or that accepts virtual assets by subscription and then invests in more traditional asset classes is advised to seek BVI legal advice as to whether such activities require registration as a fund.

4. Taxation

The British Virgin Islands International Tax Authority has not issued any official statement regarding the taxation of virtual assets. However, the BVI is a tax-neutral jurisdiction and its income tax is set at 0%, which means that the BVI government actually levies no income tax. Therefore, BVI entities are not required to file an income tax return but must file an annual economic entity return. Additionally, there is no capital gains tax, gift tax, profits tax, estate tax or inheritance tax in the British Virgin Islands.

For tax purposes, a BVI entity may become a resident of any jurisdiction under tests such as "management and control." All BVI entities are tax exempt in the BVI and certification can be obtained from the BVI registration authority or the Inland Revenue Department. In addition, the BVI operates a source-based tax system under which BVI entities will be taxed on their net income after deducting all BVI expenses. Therefore, a BVI entity operating outside the BVI that is a tax resident of the BVI should not have its foreign source income taxed in the BVI.

In the context of initial coin offerings, exchange operators need to be aware of the impact of the Foreign Account Tax Compliance Act ("FATCA") and the Common Reporting Standard ("CRS").

5. Money transmission laws and anti-money laundering requirements

The relevant money transmission law in the British Virgin Islands is FMSA, which is responsible for regulating money service businesses. FMSA defines money services businesses to include:

ATM services;

Money transfer services;

Check exchange services;

Currency exchange Services;

The issuance, sale or redemption of money orders or travelers checks.

While it is agreed that “money” and “currency” refer to fiat currencies and not cryptocurrencies, as noted above, the VASP Act expressly excludes registration under the Act for business services solely engaged in the provision of virtual assets Will not be subject to the FMSA, will be of particular relevance and help provide certainty to many virtual asset service providers (for example, those involved in the transfer of virtual assets from one account to another). However, caution is required if a company is deemed to be carrying out any activity that does not fall within the scope of the VASP Act, as the above exemptions do not apply in these circumstances.

Also applicable to VASPs are the Anti-Money Laundering (Amendment) Regulations 2022 and the Anti-Money Laundering and Terrorist Financing (Amendment) Code of Practice 2022, which will be effective from December 1, 2022 From now on, VASPs will be included in the British Virgin Islands AML/CTF regime, which will apply to transactions involving virtual assets worth US$1,000 or more.

Although detailed consideration of the specific requirements of the BVI AML/CTF regime falls outside the scope of this chapter, any person subject to the regime will generally be required to:

Appointment designation An individual to act as head of anti-money laundering compliance to oversee compliance with anti-money laundering laws and liaise with regulators (under the VASP Act, VASPs must have such officers approved by CIMA);

Designate a person to act as head of anti-money laundering compliance Reporting Officer, who serves as the reporting line within the enterprise;

Implement procedures to ensure proper identification of counterparties and conduct risk-based monitoring, taking into account the nature of the counterparty, geographic area of ​​operation and those associated with new technologies such as virtual assets any risks), appropriate record keeping, and appropriate training of employees.

In addition, the Commission also issued "Guidelines for Virtual Asset Service Providers to Prevent Money Laundering, Terrorist Financing and Proliferation Financing" and established new regulatory requirements to ensure that intermediaries obtain relevant legal documents related to the transfer of virtual assets. Sufficient information.

In our experience, most parties are best served by consulting a professional third-party provider to assist with this process.

6. Promotion and testing

The British Virgin Islands launches the Financial Services (Regulatory Sandbox) Regulations 2020 (the "Sandbox Regulations" ) to encourage financial technology companies to carry out technological innovation under a loose regulatory system. The Sandbox Regulations have been introduced for the following purposes:

Start-ups wishing to offer new financial services solutions that are not currently covered (either explicitly or implicitly) by existing BVI legislation Fintech business models;

Start-ups wishing to test innovative technologies to provide licensable financial services;

Already licensed by the Commission wishing to test innovative technologies as their approved financial services An entity that is part of a product.

A person who was approved as a sandbox participant under the Sandbox Regulations before the VASP Act came into force may notify the Commission in writing of its intention to provide innovative fintech related to virtual assets (such notification is deemed to be an application registered as a virtual asset).

If a VASP that is not registered under the VASP Act or is not approved under the Sandbox Regulations wishes to carry out virtual asset services and provide innovative financial technology in accordance with the Sandbox Regulations, it may apply to the Commission in accordance with the Sandbox Regulations and apply It pointed out that it plans to carry out the business of providing virtual asset services and apply innovative financial technology.

7. Ownership and Licensing Requirements

The British Virgin Islands does not impose any restrictions on holding cryptocurrencies for investment purposes. Although currently untested, as the VASP Act is still in its infancy, this article anticipates that investment managers may need to apply for registration under the VASP Act in order to hold these virtual assets (if it is determined that the investment manager is holding these virtual assets on behalf of a third party). It is also yet to be determined whether investment managers licensed under the Approved Managers Regime will also need to register separately under the VASP Act.

Similarly, although it has not yet been tested, investment funds registered or established in the British Virgin Islands may not be required to register with the Commission under the VASP Act if they intend to trade virtual assets as part of their investment strategy. It may do so provided that it is processing these virtual assets on a proprietary basis.

8. Mining

Cryptocurrency mining does not fall within the scope of the VASP Act, so from the BVI’s perspective, regardless of whether Mining activities in the British Virgin Islands are still conducted by companies outside the British Virgin Islands, and mining activities remain unregulated. The cost of electricity in the British Virgin Islands is high, so mining (especially large-scale cryptocurrency mining) in the British Virgin Islands is unlikely to be efficient.

9. Border restrictions and declarations

The British Virgin Islands does not impose any general border restrictions on the ownership or importation of virtual assets.

As part of the British Virgin Islands’ commitment to combating money laundering and the financing of terrorism, the Customs Administration and Duties Act 2010 provides that any person entering or leaving the British Virgin Islands should carry in their baggage or on their person Declares anything over $10,000, including coins, banknotes, travelers checks and negotiable instruments. While the VASP Act does require that value-based provisions contained in any financial services legislation or any other regulations relating to money laundering, terrorism financing and proliferation financing be interpreted to include virtual assets, given the nature of these assets, particularly those based on or assets recorded on a distributed ledger, there is a conceptual question as to what would constitute the import or transportation of such assets. Therefore, we do not expect such requirements to apply to virtual assets.

10. Reporting Requirements

As noted above, for the purposes of the AML Regulation, provide virtual BVI companies servicing assets will be deemed to be carrying on “relevant business” and will be required to comply with the BVI anti-money laundering/counter-terrorism financing/financial crime legislative regime, including compliance with the Travel Rules and reporting to the Commission and/or or the British Virgin Islands Financial Investigation Agency reporting suspicions of money laundering or other criminal activity (if applicable).

The OECD also released the final version of the Crypto-Asset Reporting Framework (“CARF”) and the 2023 update to the CRS, creating a cross-border reporting framework that provides for the standardized exchange of crypto-asset trading information. condition. This article therefore anticipates that the BVI’s CRS legislative framework will be revised to implement the CARF recommendations.

11. Estate Planning and Probate Succession

Cryptocurrencies and other virtual assets are not yet widely used in estate planning and probate succession under British Virgin Islands law .

Neither the VASP Act nor any other specific regime under BVI law specifically addresses the treatment of virtual asset holders upon their death. This means that, in principle, virtual assets will be treated in the same way as any other assets, assuming BVI law governs the succession to the estate of a deceased person. As is the case in many jurisdictions outside the BVI, there may be some uncertainty as to the location of virtual assets. If the assets can be analyzed under the BVI's traditional conflict of laws rules, then the decedent's fictitious assets cannot be validly transferred to his/her heirs or beneficiaries until an application is made to the Probate Registry of the High Court of the BVI . In order to deal with the virtual assets of a deceased person, a person needs to be appointed as the legal personal representative of the deceased by obtaining the appropriate authorization from the Registrar. Two types of grants are available:

Grants of Probate (where the decedent left a will that explicitly dealt with virtual assets in the British Virgin Islands);

Letters of Administration (where the decedent did not leave a will under a will that expressly covers virtual assets in the British Virgin Islands).

In the case of the latter, the decedent will be deemed to have died "intestate" with respect to the virtual assets located in the BVI - even if they had a valid will covering assets in other jurisdictions. The main potential difficulties that may arise are practical. That is, anyone who inherits virtual assets will, on the face of it, generally only if the decedent or the beneficiary's personal representative (as the case may be) possesses or has access to the information necessary to access and control that virtual asset (e.g., storage The virtual asset can only be accessed by providing the private key of the virtual asset's wallet). Most exchanges have policies for transferring virtual assets to close relatives, but these policies and transfer requirements vary from exchange to exchange. Due to the risk of hacking and bankruptcy, it is generally considered prudent to avoid transferring large amounts at any one time. The value remains on the exchange.