Following consultation, the BVI Financial Services Commission (the "FSC") has now enacted the Virtual Assets Service Providers Act, 2022 (the "VASP Act"), with no major changes since its previous draft published last year.
The VASP Act defines a 'virtual asset' as "a digital representation of value that can be digitally traded or transferred, and can be used for payment or investment purposes," which is thought to include non-fungible tokens and all other types of crypto assets.
The VASP Act incorporates the principles outlined by the Financial Action Task Force's (a global anti-money laundering and terrorist financing watchdog) guidance for a risk-based approach to virtual assets and virtual asset service providers (the "FATF Guidance"). The purpose of which (and of the VASP Act) is to extend regulatory oversight to service providers and ensure consumer protection in the virtual assets space.
The VASP Act regulates:
- virtual assets service providers ("VASP");
- virtual assets custody services; and
- virtual assets exchanges.
The activities included in the above categories include, but are not limited to, the following (when conducted by way of business and on behalf of another person):
- hosting wallets or maintaining custody or control over another person's virtual asset, wallet or private key;
- providing financial services relating to the issuance, offer or sale of a virtual asset;
- providing kiosks for the purposes of facilitating virtual assets activities;
- exchange between virtual assets and fiat currencies;
- exchange between one or more forms of virtual assets;
- transfer of virtual assets, where the transfer relates to conducting a transaction on behalf of another person that moves a virtual asset from one virtual asset address or account to another;
- participation in, and provision of, financial services related to an issuer's offer or sale of a virtual asset; or
- acceptance for safekeeping of virtual assets or instruments to enable a VASP to exercise control over the virtual assets or instruments;
- operating a trading platform for the purpose of allowing an offer or invitation to be made to buy or sell any virtual asset in exchange for money or any virtual asset;
- other activity that, under guidelines to be issued, constitutes a virtual asset service, issuing virtual assets or being involved in virtual asset activity; or
- other activity or operation specified in the VASP Act, or prescribed by regulations made thereunder.
Any such BVI entity must apply for registration and comply with certain continuing obligations, including:
- appointing an authorised representative approved by the FSC (with knowledge of virtual asset services, or management skills related to risks in relation to VASPs or otherwise);
- appointing an auditor;
- maintaining adequate systems and controls for ensuring compliance with the VASP Act, which is understood to require the appointment of a compliance officer;
- any VASP which conducts a virtual asset transaction above USD 1,000 in value must comply with the recently updated Anti-Money Laundering Regulations and Anti-Money Laundering and Terrorist Financing Code of Practice (including verifying the identity and address of their customer or counterparty).
The registration requirements and continuing obligations are designed to ensure that service providers in the BVI operate in a prudent manner, comply with international anti-money laundering standards, and are subjected to regulatory oversight.
Where a VASP is already carrying on the business of providing a virtual assets service at the date of coming into force of the VASP Act, that VASP has a period six months of the date of coming into force of the VASP Act within which to submit its application for registration and may continue to provide such service until FSC approves or refuses its application. There will therefore be a benefit to starting business ahead of the coming into force of the VASP Act (although we do not currently know when this will be).
We hope and expect that the FSC will issue related guidance and/or regulations prior to the entry into force of the VASP Act in order to clarify what services, assets, and persons are properly within its scope, as discussed below.
Clarification of excluded types of virtual assets
The VASP Act provides that 'virtual asset' means "a digital representation of value that can be digitally traded or transferred, and can be used for payment or investment purposes," although digital representations of fiat currencies and bank accounts are excluded. There is provision for excluded digital tokens, although there is currently no guidance on which, if any, tokens are actually excluded.
We note that the position taken under the VASP Act concurs with the approach taken by the FATF but differs from approaches taken in other jurisdictions, such as Singapore, where the Financial Services and Markets Act 2022 ("FSMA") provides that a digital token is either "a digital payment token" or "a digital representation of a capital markets product" and excludes certain types of token.
We expect that future guidance and/or regulations may exclude certain types of token (e.g., forms of utility token, service token, non-fungible token ("NFT"), and limited purpose payment token), but it is difficult to determine what may be excluded at this time.
There is evidence for this approach elsewhere. For instance, utility tokens are expressly excluded from the scope of the FSC's Guidance on Regulation of Virtual Assets, and NFTs are generally deemed out of scope in the FATF Guidance. If we look to other jurisdictions, we note that Singapore excludes limited purpose payment tokens from FSMA and Cayman excludes virtual service tokens from its virtual assets legislation.
As such, it is likely that there will be carve-outs for various types of tokens, but we will need to await the guidance and/or regulations before the position is clear.
Clarification of whether token issuers must register
Whilst the list of activities which constitute virtual assets service may in future be expanded by guidelines or regulations, the current definition of virtual assets service is understood not to include issuing virtual assets. Accordingly, BVI companies which issue tokens but do not conduct any other regulated activity under the VASP Act are not currently required to register.
This is in keeping with the FATF Guidance, and the purpose of VASP legislation to regulate service providers, not issuers. We also note that Singapore does not include issuances in the definition of digital token services under FSMA.
Clarification of excluded persons and safe harbours
The VASP Act provides that generic categories of service providers (such as cloud service providers) will fall outside the definition of service provider and makes provision for excluded persons to be set out in subsequent regulations. It is currently unclear as to what types of excluded person will be included or when any such regulations will be brought into force.
Our view is that the market needs clarity on which classes of person are excluded. We note that Singapore provides for the exclusion of lawyers, liquidators, and receivers where services are incidental. Should the FSC take a similar approach, we consider that it would also be prudent to include executors, administrators, and trustees.
Given the wide scope of virtual asset services, it is also possible to foresee other classes of person inadvertently falling within the legislation. We envision scenarios where this could potentially occur under the law of agency, bailment, security, partnership law, or pursuant to the order of a court. We consider that clarity is required in this respect and that the best practise would be to consider exclusions.
We will, however, need to await further guidance and/or regulations before understanding what safe harbours are available.
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