The emergence and increasing popularity of virtual assets has been so rapid that it has been a challenge for regulation to keep pace. Millions of people now hold virtual assets. Previously, a lack of legislation or legal precedent means there has been limited control over digital assets and their ownership, say Michael Killourhy, Partner in BVI, and David Mathews, managing associate, Ogier.
The most important consideration for cross-border investment, or indeed investment of any kind, is certainty. Previously, there was considerable uncertainty as the status and regulation of certain virtual asset services and other crypto and blockchain-related activities in BVI, particularly where activities were of a type that might fall under traditional financial services legislation if the virtual assets in question were to be regarded as securities or other types of investment (but it was unclear if they were so regarded under standard interpretations of that legislation).
But the regulatory world is catching up as service providers offer specialist assistance in this area. The Financial Action Task Force (FATF) first proposed new guidelines in 2019 to strengthen its standards and clarify how anti-money laundering and counter-terrorist financing requirements should be applied to both virtual assets and to service providers. Countries providing services to owners of virtual assets were required to consider and diminish risks for activities associated with virtual assets and ensure they were appropriately monitored by the relevant authorities.
The latest is the enactment of the British Virgin Islands' (BVI) Virtual Asset Service Providers Act, 2022 (the VASP Act) in December following a consultation draft in September. It is an encouraging step towards maintaining the territory's favoured position as a leading crypto and virtual assets jurisdiction for investors in the sectors, which it has held over the past few years.
Certain activities involving virtual assets not previously regulated in the BVI will become regulated, requiring licensing, and made subject to oversight by the BVI's Financial Services Commission and the BVI's AML laws. However, not all virtual asset activities fall within the ambit of the new regulation, in particular ICOs and other token sales by the generating entity do not appear to be caught.
The VASP Act seeks to introduce a well-balanced registration and supervisory framework for Virtual Assets Service Providers (VASPs). It defines the activities relating to virtual assets that require registration, prescribes requirements for registration, details ongoing requirements and obligations, assigns specific powers to the BVI Financial Services Commission (the Commission), and specifies the penalties for offences committed under the Act.
It implements certain recommendations of FATF and demonstrates the country's desire to maintain its reputation as a highly responsive and responsible international finance centre, committed to complying with rapidly-evolving international standards on transparency and fighting abuse and criminal conduct of all types.
This is just the latest step BVI has taken in keeping ahead of the game. In 2020, the Commission issued guidance on the Regulation of Virtual Assets in BVI, relating to the regulation of virtual assets generally, including cryptocurrencies and utility tokens. The Commission took a constructive attitude towards virtual assets and, generally, did not seek to impose any regulation on virtual assets that they would not have been subject to under the existing, "mainstream" financial services regulatory framework in the BVI.
The VASP Act extends legal certainty and a degree of regulatory reassurance to virtual asset businesses conducted by or involving BVI entities without imposing asymmetric or uncommercial standards that might undermine business.
It is no secret that those operating in the virtual asset, crypto and blockchain space have faced challenges in the last six to 12 months, and the sector is under the microscope as it develops and become increasingly complex. However, this should not imply that this space has no merit or future.
The VASP Act, its scope and approach, marks a balanced strategy for regulation, reflecting BVI's desire to maintain its attractiveness while also affirming its reputation as a responsible international finance centre committed to international standards on transparency and combatting abuse - a reputation that also serves as a commercial attraction.
The VASP Act is significant then in that it provides certainty and reputational enhancement, both to the sector and the jurisdiction, setting out a clear framework but at the same time clarifying and setting the current limits of regulation in a rational manner.
Further guidance on the VASP Act is expected from the Commission, with possible additional regulations. In the meantime, the industry stands ready to advise and assist VASP clients in navigating the new regulatory landscape.
By Michael Killourhy, Partner in BVI, and David Mathews, managing associate, Ogier.
