British Virgin Islands Cryptocurrency Laws Regulation of Digital Currencies: Cryptocurrency, Bitcoins, Blockchain Technology
In 2020, the BVI Financial Services Commission (FSC) issued Guidance on the Regulation of Virtual Assets in the Virgin Islands. The Guidance provides regulatory views on a number of activities, though makes clear that certain activities are not currently regulated by the FSC.
In addition, the BVI’s FSC has introduced a regulatory “sandbox” under the Financial Services (Regulatory Sandbox) Regulations, 2020. These Regulations apply to any BVI business company, foreign company, limited partnership, micro-business company, licensee, and any other person that the Commission has otherwise approved to participate in a Regulatory Sandbox that is proposing to engage or is engaged in innovative FinTech.
The FSC provides that licensing, authorization or approval is required for any activity for which such is required under existing financial services legislation unless specifically excluded. When determining whether licensing is required for virtual asset-related activities, an assessment of the following factors is relevant –
The way the virtual asset (crypto asset) is being utilized;
The types of business activities being proposed or conducted;
Whether the business activities are analogous with those conducted through traditional businesses; and
The characteristics and business activities (economic substance) relating to an offering/issuance.
The FSC adopts the FATF’s definition of a virtual asset, defining it as a digital representation of value that can be digitally traded or transferred and can be used for payment or investment purposes. Virtual currencies do not, however, include digital representations of fiat currencies. Where an activity or intermediary is required to maintain a license or certificate under the definition of “relevant business” in regulation 2 of the Anti-money Laundering Regulations, 2008, the regulated person must ensure its on-going compliance with those Regulations, including the Anti-Money Laundering and Terrorist Financing Code of Practice, 2008; the Regulatory Code; and the Financial Services Commission Act, 2001.
Where a virtual asset product or service provides a benefit or right beyond a medium of exchange, it may be subject to the Securities and Investment Business Act, 2010 (“SIBA”). The chart below provides a useful summary of certain virtual currency activities potentially governed by the SIBA.
Section 40
“Mutual fund” means a company or any other body, a partnership or a unit trust that is incorporated, formed or organised, whether under the laws of the Virgin Islands or the laws of any other country, which –
(a) collects and pools investor funds for the purpose of collective investment, and
(b) issues fund interests that entitle the holder to receive on-demand or within a specified period after demand an amount computed by reference toItem SIBA Virtual Assets Regulation is required in accordance related Product with SIBA
the value of a proportionate interest in the whole or in a part of the net assets of the company or other body, partnership or unit trust, as the case may be, and includes –
(i) an umbrella fund whose fund interests are split into a number of different class funds or sub-funds, and
(ii) a fund which has a single investor which is a mutual fund not registered or recognized under this Act, but excludes any company or other body, partnership or unit trust which is of a type or description designated by the Mutual Fund Regulations as not being a mutual fund.
Mutual Funds
Part III of SIBA governs Mutual Funds and is applicable where the virtual asset product (digital coin and/or digital token) issued is an interest in a collective investment scheme and satisfies the definition of a mutual fund.
Paragraph 1, Schedule 1 defines shares, interests in a partnership or fund interests, etc. as any of the following –
(a) shares in, and stock in the share capital of, a company;
(b) interests in a partnership;
(c) a fund interest in a mutual fund that does not fall within paragraph (a) or (b).
Initial Coin or Token Offering
Coins, for example Bitcoin, do not in of themselves typically grant the holder rights synonymous with shares.
However, there have been instances where the manner in which the coin or token is used, and the rights attached thereto would grant the holder a share or equity interest. Where a token is therefore issued in this manner and confers such rights, the activity would be considered an
investment as prescribed by schedule 1 of SIBA.
Careful analysis of the terms and features of any virtual asset product is critical. An assessment of the characteristics of the token and token holder’s rights, for example, whether there is a right to vote and determine the manner in which the proceeds raised will be utilised or a right to receive dividends declared or a share of the profit, would aid in determining whether paragraph 1, schedule 1 is applicable.
Paragraph 2, Schedule 1 defines debentures, etc. as –
Debentures, debenture stock, loan stock, bonds, certificates of deposit and any other instruments creating or acknowledging indebtedness, other than –
(a) any instrument acknowledging or creating indebtedness for, or for money borrowed to defray, the consideration payable under a contract for the supply of goods or services;
(b) a cheque or other bill of exchange, a bankers draft or a letter of credit;
(c) a banknote or a statement showing a balance in a
current, deposit or savings account;
(d) by reason of any financial obligation contained in it –
(i) a lease or other disposition of property;
(ii) a mortgage or any other charge; or
(iii) an insurance policy.
Tokens/ Coins
A debenture is an instrument acknowledging or creating debt by a company. It may be secured or unsecured.
There are instances where a token or coin issued creates or acknowledges a debt and may be deemed a debenture.
Where the manner in which the token or coin issued creates a debt or liability instrument for the issuer and satisfies the definition of debentures, etc., the instrument would be considered an investment as prescribed by paragraph 2, Schedule 1 of SIBA.
Paragraph 3, Schedule 1 defines instruments giving entitlement to shares, interests or debentures as –
(1) Subject to sub-paragraph (2), warrants or other instruments entitling the holder to subscribe for investments falling within paragraph 1 or 2.
(2) For the purposes of sub- paragraph (1) –
(a)
it is immaterial whether the investments are for the time being in existence or identifiable; and
(b) an investment falling within sub-paragraph (1) shall not be regarded as falling within paragraph 5, 6 or 7.
Tokens/ Coins
Instruments of this nature include warrants and are a type of security that enables the holder to purchase a proportionate amount of stock at a specified price.
Where the manner in which the virtual asset is issued creates an entitlement and satisfies the definition of a warrant or other instrument entitling the holder to subscribe for investments falling within paragraphs 1 or 2 of SIBA (outlined above), the activity would be considered an investment as prescribed by paragraph 3, Schedule 1 of SIBA
Paragraph 5, Schedule 1 defines options as –
Options to acquire or dispose of –
(a) an investment falling within any other
paragraph Schedule;
(b) any currency;
of this
(c) palladium, platinum, gold or silver; or
(d) an option to acquire or dispose of an investment falling within subparagraph (a), (b) or (c) of this paragraph.
Virtual Assets Derivatives
Where a virtual asset product is deemed an investment under any other paragraph within schedule 1 of SIBA, and that investment becomes the subject of an option to acquire or dispose, it would be considered an option as prescribed by paragraph 5, Schedule 1 of SIBA.
Paragraph 6, Schedule 1 of SIBA defines futures as:
(1) Rights under a contract for the sale of a commodity or property of any other description under which delivery is to be made at a future date and at a price agreed upon when the contract is made, other than a contract made for commercial and not investment purposes.
(2) A contract shall be regarded as made for investment purposes if it is made or traded on an investment exchange, or made otherwise than on such an exchange but expressed to be as traded on such an exchange or on the same terms as those on which an equivalent contract would be made on such an exchange.
(3) A contract not falling within subparagraph (2) shall be regarded as made for commercial purposes if, under the terms of the contract, delivery is to be made within seven days.
Virtual Assets Derivatives
A futures contract involving a virtual asset or virtual assets product will be captured by paragraph 6, Schedule 1 of SIBA.
Paragraph 7, Schedule 1 of SIBA defines “contracts for differences” as –
(1) Rights under –
(a) a contract for differences; or
(b)
any other contract the purpose or intended purpose of which is to secure a profit or avoid a loss by reference to fluctuations in –
(i) the value or price of property of any description; or
(ii) an index or other factor designated for that purpose in the contract, other than a contract where the parties intend that the profit is to be obtained or the loss avoided by taking delivery of any property to which the contract relates.
(2) This paragraph does not apply to rights under a contract under which money is received by way of deposit on terms that any interest or other return to be paid on the sum deposited will be
calculated by reference to fluctuations in an index or other factor.
Virtual Assets Derivatives
Where a virtual asset or a related product is the subject of a contract for differences or any other contract the purpose or intended purpose of which is to secure a profit or avoid a loss by reference to fluctuations in the value or price of property of any description, it will be captured by paragraph 7, Schedule 1 of SIBA.
(1) Rights under a contract the effecting and carrying out of which constitutes Class 1 or Class 2 long-term business within the meaning of the Insurance Act, 2008.
(2) This paragraph does not apply to rights under a reinsurance contract.
(3) Rights falling within this paragraph shall not be regarded as falling within paragraph 7.
N/A
At the point of writing, there were no virtual assets investment vehicles or intermediaries with considerations which may be applicable under paragraph 8, Schedule 1 of SIBA. However, where this position changes in due course, these Guidelines may be amended accordingly.
Paragraph 9, Schedule 1 of SIBA defines “rights and interests in investments” as –
Rights to and interests in any investment falling within any of the preceding paragraphs of this Schedule.
Where a virtual asset is deemed an investment under any other paragraph within Schedule 1 of SIBA, it will fall within the definition of paragraph 9, Schedule 1 of SIBA.
The following chart provides guidance with respect to virtual currency activities potentially governed by the Securities and Investment Regulation in accordance with SIBA Business Act, 2010
1.
Schedule 2 – Investment Activities
Included activities (Part A) involve –
Dealing in Investments;
Arranging Deals in Investments;
Managing Investments
Providing Investment Advice;
Providing Custodian Services with Respect to Investments;
Providing Administration Services with Respect to Investments; and
Operating an Investment Exchange.
The following two conditions must be satisfied to determine whether a licence is required –
Firstly, whether the product satisfies the definition of an investment as outlined aboveunder “initial Issue”;
Secondly, provided the definition of “investment” is met, an assessment is required to determine whether the investment activity is captured pursuant to Part A of Schedule 2 of SIBA, and is not an excluded activity pursuant to Part B of Schedule 2 of SIBA or the person is not an excluded person pursuant to Part C of Schedule 2 of SIBA.
When a virtual asset product fits the definition of an investment, persons carrying on an investment business activity pursuant to Schedule 2 of SIBA will require a licence. Licensing categories are outlined in Schedule 3 of SIBA.
Thus, where a person provides an investment activity in respect of any defined investment involving a virtual asset, virtual asset product or digital token, a licence will be required.
For example:
i. After a virtual asset is issued, it is stored in a wallet. A wallet provider stores, holds or maintains the virtual asset in a virtual wallet or otherwise for the user. This activity is synonymous to custodian services.
A custodian is a person to whom fund property, or any other type of property or asset is entrusted for safe keeping.
Where a person acts as custodian or depository of assets belonging to another person, and that asset has been defined as an investment, that person is providing Custodial Services. For the avoidance of doubt, this includes virtual assets, derivatives and any other similarly styled product offering that meets the definition of investments.
ii. Operating an exchange would involve the buying and selling of virtual assets or digital tokens deemed investments using fiat currency or other virtual assets; or a listing of investments which involve virtual assets and/or virtual assets related products.
Where a virtual asset or virtual asset related product is deemed an investment, persons operating an exchange will require licensing.
The following provides a summary of virtual currency activities potentially subject to the Financing and Money Services Act, 2009 Virtual Assets Regulation required in accordance (“FMSA”) Related Product FMSA 1.
Section 6
A person carries on money services business if that person carries on the business of –
(a) providing any of the following services:
(i) the dispensing of money, the facilitation of deposits, payments, transfer of money or the reporting of account information via automated teller machines;
(ii) transmission of money in any form, including electronic money, mobile money or payments ofmoney;
(v) the issuance, sale or redemption of money orders or traveller’s cheques; or
(vi) other services as may be specified in the Regulations; or
(b) operating as an agent or franchise holder of a person carrying on a business specified in paragraph (a).
Money Transmission Services
“Money” is defined in the Regulatory Code, 2009 as including notes and coins; postal orders; cheques of any kind, includingtravellers’ cheques; bankers’ drafts and other payable orders; and money deposited in an account; in each case, in any currency.
“Coin” is defined to mean any coin that is legally current in the Territory (see section 2 (1) of the Interpretation Act, (CAP. 136))
Given the definitions outlined above, the transmission of virtual assets or virtual asset related products would not require a money services business licence.
However, considering the impending launch of the Regulatory Sandbox, the views and guidance of the Commission should first be secured before proceeding with the activity in or from within the Territory
P.S. Insights on Cryptocurrency Legal Issues
Most jurisdictions and authorities have yet to enact laws governing cryptocurrencies, meaning that, for most countries, the legality of crypto mining remains unclear.
Under the Financial Crimes Enforcement Network (FinCEN), crypto miners are considered money transmitters, so they may be subject to the laws that govern that activity. In Israel, for instance, crypto mining is treated as a business and is subject to corporate income tax. In India and elsewhere, regulatory uncertainty persists, although Canada and the United States are relatively friendly to crypto mining.
However, apart from jurisdictions that have specifically banned cryptocurrency-related activities, very few countries prohibit crypto mining.
Our Freeman Law Cryptocurrency Law Resource page provides a summary of the legal status of cryptocurrency for each country across the globe with statutory or regulatory provisions governing cryptocurrency. The globe below provides links to country-by-country summaries:
