2024 BVI Blockchain and Crypto Assets Regulatory Guide

**Compile | Author |**Chris Duncan & Katrina Lindsay

Date: November 03, 2023

Source:

Chris Duncan and Katrina Lindsay authored the British Virgin Islands (BVI) chapter of Global Legal Insight’s sixth edition of the Blockchain and Crypto Assets Regulatory Guide. This chapter covers the BVI’s legal requirements related to Crypto Assets and Blockchain, including government attitudes and definitions, taxation, money transmission laws and AML requirements, Mining and licensing requirements.

1. Government Attitudes and Definitions

The BVI has established itself as a leading offshore financial centre, with the advantages of being resilient, flexible and innovative in the face of regulatory changes, economic challenges and natural disasters. This includes companies, institutions, and individuals doing business in the Crypto Assets, Blockchain technology, and Web3 space, using BVI tools to support their international business activities in order to benefit from the familiarity and stability of the BVI’s common law-based legal system, tax-neutral treatment, and the commercial friendliness and flexibility of the BVI regulatory and judicial system.

Working closely with industry leaders on the island, from lawyers and accountants to Rekt practitioners and regulators, the BVI Government recognises that a collaborating industry will be better able to meet the needs of those doing business there, while ensuring that jurisdictions have the capacity to identify and drop any associated risks.

This is evident in the approach taken by the BVI government to regulate virtual assets. The recently introduced Virtual Asset Service Providers Act 2022 (the “VASP Act”) aims to ensure that the BVI continues to comply with international standards and to comply with the specific recommendations of the Financial Action Task Force (FATF) on the following areas, which is the result of a public consultation process by the BVI Financial Service Commission to solicit feedback, comments and comments from all stakeholders.

This chapter will discuss this key feature of the VASP Act in more detail. However, at a high level, the VASP Act can be described as a balanced piece of legislation that is both proportionate and relevant. Companies engaged in custody and trading businesses are considered to be riskier to end-users and therefore subject to a higher level of regulation, while other activities, such as innovative technology-based projects and Token offerings (which have historically been conducted by BVI registered entities), generally fall outside the 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 can be used for payment or investment purposes. Particularly excluded are the digital representation of fiat currencies and the credit digital records of financial institutions for fiat currencies, securities, or other financial assets that can be digitally transferred.

2. Crypto Assets Regulation

The VASP Act went into effect on February 1, 2023. Any entity wishing to provide virtual asset services or act as a VASP within or from within the BVI must be registered with the Commission. VASPs already in operation at the time of the VASP Act’s entry into force must submit an application to the Commission by July 31, 2023 (enabling them to continue to provide virtual asset services while the application is reviewed), and any new entity must register to contact the Commission prior to commencing any activities under the VASP Act.

Applications for registration as VASPs must be filed on a form approved by the Committee, specifying the type of VASP registration requested, accompanied by (a) a business plan setting out the nature and scale of the virtual asset activity; (b) details of the proposed directors, officers, and compliance officers, including documentation demonstrating that they meet the committee’s fit and proper criteria; and © the applicant is a VASP compliant and AML/CTF/PF (d) The applicable application fee.

When the Commission approves a VASP application, it registers the applicant, issues a practising certificate, and imposes conditions on registration as it deems appropriate (including a requirement for professional indemnity insurance).

The Act defines a “VASP” as a virtual asset service provider that provides virtual asset services in the form of a business and is registered as or on behalf of another person to carry out one or more of the following activities or operations:

• Exchange between virtual assets and fiat currencies;
• Exchange between one or more forms of virtual assets;
• Transfer of virtual assets, where the transfer involves a transaction on behalf of another person 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;
• Participate in and provide financial services in connection with the issuer’s issuance or sale of virtual assets;
• Perform other activities or operations specified in the VASP Act or regulations.

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

• Custodian Wallet or custody or control of another person’s virtual assets, Wallet or Private Key;
• Provision of financial services in connection with the issuance, offer or sale of virtual assets;
• Provide devices such as ATMs, Bitcoin ATMs or vending machines to facilitate virtual asset activity through electronic terminals that enable their owners or operators to proactively facilitate the exchange of virtual assets with fiat or other Vitual Money;
• Engage in activities that constitute the provision of virtual asset services, the issuance of virtual assets, or the business of participating in virtual asset activities in accordance with the Code.

Whether or not an entity carries out virtual asset services will depend on whether the underlying asset constitutes a “virtual asset”. For example, Crypto Assets-based derivatives require more careful consideration and may be subject to either the VASP Act or the BVI Securities and Investment Business Act (“SIBA”) or both.

Similarly, consideration should also be given to the list of activities that exclude companies from the scope of the VASP Act, i.e., the provision of ancillary infrastructure to allow others to provide services, such as a cloud data storage provider or an integrity service provider responsible for verifying the accuracy of the signature.

While not intended to specifically regulate Crypto Assets, BVI entities operating in the Crypto Assets, Blockchain technology and Web3 sectors may also be subject to the BVI’s existing regulatory regime, including:

• British Virgin Islands Business Companies Act 2004 (as amended);
• SIBA； • Financing and Money Services Act, 2009 (“FMSA”);
• AML Regulations 2008 (as amended); • AML and Terrorist Financing Code of Conduct;
• Economic Entities (Companies and Limited Partnerships) Act 2018 (Amended) – 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 regulation, the VASP makes it clear that a person who is registered under the Act and is only engaged in the business of providing virtual asset services is not required to obtain a SIBA or FMSA license.

3. Terms of Sale

3.1 VASP Act

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

3.2 SIBA

SIBA regulates matters such as the provision of investment services in the BVI. SIBA stipulates that anyone who engages in, or claims to be engaged in, any type of investment business in or from within the country must do so through an entity that is regulated and licensed by the Commission. Investment business is broadly defined and covers (i) investment transactions, (ii) arranging investment transactions, (iii) investment management, (iv) investment advice, (v) investment custody, (vi) investment operations, and (vii) operating investment exchanges.

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

Whether a virtual asset falls under the SIBA regime will depend on whether it has characteristics similar to those of stocks in the investment definition.

In addition, it is advisable for any investor in the virtual asset space or to accept virtual assets by way of subscription and then invest in a collective vehicle of a more traditional asset class to seek BVI legal advice as to whether such activities require registration as a fund.

4. Tax

The BVI 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 does not actually collect income tax. As a result, BVI entities are not required to file income tax returns, but are required to file annual economic entity returns. In addition, there is no Capital Gains Tax, gift tax, profits tax, inheritance tax, or inheritance tax in the BVI.

For tax purposes, a BVI entity may become a resident of any jurisdiction under tests such as “management and control”. All BVI entities are exempt from tax in the BVI and can be certified from the BVI Registrar or the Inland Revenue Department. In addition, the BVI has a source-based tax regime under which BVI entities are taxed on their net income after deducting all BVI expenses. Therefore, a BVI entity operating outside the BVI should not be taxed in the BVI on its foreign-source income if it is a tax resident of the BVI.

In the case of ICOs, 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 Act and AML Requirements

The relevant money transmission law in the BVI is the FMSA, which regulates money services businesses. The FMSA defines a money services business as including:

• ATM services;
• Remittance services;
• Cheque exchange service;
• Currency exchange services;
• Issuance, sale, or redemption of money orders or traveler’s checks.

While it is agreed that “money” and “money” refer to fiat currencies rather than Crypto Assets, as noted above, the VASP Act’s explicit exclusion of business services registered under the Act to engage solely in the provision of virtual assets will be exempt from the FMSA, will be of particular relevance and help provide certainty to many virtual asset service providers (e.g., those involved in the transfer of virtual assets from one account to another). However, if a company is deemed to be carrying out any activity that does not fall within the scope of the VASP Act, caution is required as the above exemption does not apply in these cases.

Also applicable to VASPs are the AML (Amendment) Regulations 2022 and the AML and Terrorist Financing (Amendment) Code of Practice 2022, which incorporated VASPs into the BVI AML/CTF regime with effect from 1 December 2022 for transactions involving virtual assets valued at US$1,000 or more.

Although it is beyond the scope of this chapter to consider in detail the specific requirements of the BVI AML/CTF regime, anyone subject to the regime is generally required to do the following:

• Appoint designated individuals as AMLCompliance leaders to monitor their compliance with the AML Act and liaise with regulators (under the VASP Act, VASPs are required to obtain CIMA approval for such officers);
• Designate a person to act as a Money Laundering Reporting Officer and act as a reporting line within the enterprise;
• Implement procedures to ensure proper identification of counterparties, risk-based monitoring (taking into account the nature of counterparties, geographic areas of operations, and any risks associated with new technologies such as virtual assets), appropriate record keeping, and appropriate training for employees.

In addition, the Commission has issued Guidance on the Prevention of Money Laundering, Terrorist Financing and Proliferation Financing for Virtual Asset Service Providers and established new regulatory requirements to ensure that intermediaries have adequate information related to the transfer of virtual assets.

In our experience, it is best for most parties to consult with a professional third-party provider to assist with this process.

6. Promotion & Testing

The BVI introduced the Financial Services (Regulatory Sandbox) Regulations 2020 (the “Sandbox Regulations”) to encourage fintech companies to innovate under a lax regulatory regime. The Sandbox Regulations were introduced for the following purposes:

• Start-ups wishing to offer new financial services solutions involving fintech business models that are not currently covered by current BVI legislation (whether explicit or implicit);
• Start-ups looking to test innovative technologies to provide licensable financial services;
• Entities licensed by the Commission wishing to test innovative technologies as part of their approved Financial Services offerings.

A person who was approved as a Sandbox participant under the Sandbox Regulations prior to the commencement of the VASP Act may notify the Commission in writing of their intention to offer innovative fintech related to virtual assets (such notice is deemed to be an application for registration as a virtual asset).

VASPs that are not registered under the VASP Act or have not been approved under the Sandbox Regulations wish to carry out virtual asset services and provide innovative fintech under the Sandbox Regulations may apply to the Commission under the Sandbox Regulations and indicate in the application that they intend to carry on the business of providing virtual asset services and applying innovative fintech.

7. Ownership and Licensing Requirements

The BVI does not have any restrictions on holding Crypto Assets for investment purposes. Although not currently tested, 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 confirmed that the asset manager is holding these virtual assets on behalf Auto-Invest of a third party). It has also not yet been determined whether investment managers licensed under the Approved Manager regime will also need to be separately registered under the VASP Act.

Similarly, while not yet tested, an investment fund incorporated or established in the BVI may not need to be registered with the Commission under the VASP Act if it intends to trade virtual assets as part of its investment strategy, provided that it is dealing with these virtual assets on an exclusive basis.

8. Mining

Crypto AssetsMining are not covered by the VASP Act, so from a BVI perspective, Mining activities remain unregulated, whether carried out within the BVI or by a company outside the BVI. The cost of electricity is higher in the BVI, so it is unlikely that the Mining industry within the BVI, especially large-scale Crypto AssetsMining, will be efficient.

9. Border Restrictions and Declarations

The BVI does not impose any general border restrictions on the ownership or import of virtual assets.

As part of the BVI’s commitment to combat Money Laundering and Terrorist Financing, the Customs Administration and Customs Act 2010 requires any person entering or leaving the BVI to declare any items exceeding US$10,000 in their baggage or carry-on baggage, including coins, banknotes, travellers’ cheques 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, terrorist financing and proliferation financing should be interpreted to include virtual assets, given the nature of these assets, particularly those based on or 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 a requirement to apply to virtual assets.

10. Reporting requirements

As noted above, for the purposes of the AML Regulations, BVI companies that provide virtual asset services in connection with transactions involving virtual assets worth US$1,000 or more will be deemed to be carrying on a “relevant business” and will be required to comply with the BVI AML/Counter Terrorist Financing/Financial Crimes legislation regime, including complying with the “Travel Rules” and reporting suspicions of Money Laundering or other criminal activity to the Commission and/or the BVI Financial Investigation Agency, if applicable.

The OECD has also published the final version of the Cryptoasset Reporting Framework (“CARF”) and the 2023 update of the CRS, creating a cross-border reporting framework that provides a standardized exchange of information on cryptoasset transactions. Therefore, this paper anticipates that the BVI will make amendments to the CRS legislative framework to implement the CARF recommendations.

11. Estate Planning & Testamentary Succession

Under BVI law, Crypto Assets and other virtual assets are not yet widely used for estate planning and testamentary succession.

Neither the VASP Act nor any other specific regime under BVI law specifically addresses the post-death treatment of a virtual asset holder. This means that, in principle, assuming that BVI law governs the inheritance of the deceased’s estate, virtual assets will be treated in the same way as any other asset. As is the case in many jurisdictions outside the BVI, there may be some uncertainty about the location of virtual assets. If the assets can be analysed according to the traditional BVI conflict-of-laws rules, the virtual assets of the deceased cannot be effectively 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 the deceased, a person needs to be appointed as the legal personal representative of the deceased by obtaining the appropriate authorization from the registry. There are two types of grants that can be obtained:

• Grant of Probate (the deceased leaves a Will that explicitly relates to BVI virtual assets);
• Grant of Administration (the deceased did not leave a Will that explicitly covered BVI virtual assets).

In relation to the latter, the deceased will be treated as having died “intestate” in a virtual asset where the BVI is located – even if they have a valid Will covering assets in other jurisdictions. The main potential difficulties that may arise are real. That is, any person who inherits a virtual asset, on the face of it, usually only has access to the virtual asset if the personal representative of the deceased or beneficiary (as the case may be) has or has access to the information necessary to access and control the virtual asset (e.g., the private key of the wallet where the virtual asset is stored). Most exchanges have policies for transferring virtual assets to close relatives, but these policies and transfer requirements vary from exchange to exchange, and due to the risk of Hacker attacks and Rekt, it is generally considered prudent to avoid leaving a significant amount of value on the exchange for any amount of time.