Global Legal Insights FinTech 2024: British Virgin Islands chapter

Approaches and developments

The government of the British Virgin Islands (“BVI”) and the BVI Financial Services Commission (“FSC”) – the principal financial services regulator – have progressed important initiatives in recent years that demonstrate the BVI’s unequivocal commitment to digital transformation and Fintech innovation.

The Virtual Assets Service Providers Act, 2022 (“VASP Act”) came into force on 1 February 2023 and provides a registration regime for any person carrying on in or from within the BVI the business of providing a “virtual assets service”.  Such persons are called virtual asset service providers (“VASPs”).  Incumbent VASPs had until 31 July 2023 to submit an application for registration with the FSC, following which operations can continue until the FSC determines the application.  VASPs that were not operational as of 1 February 2023 must wait for the FSC to determine their application before commencing operations.  At the time of writing, the first VASP registrations have been determined by the FSC.  As expected, the FSC has been applying the same thorough approach to applicants for a VASP registration as it would to a licence application.

In recent years, the BVI has passed legislation to support a digital environment in the BVI and provide the means for the operation of e-government services.  This includes the Electronic Transactions Act, 2021, the Electronic Transfer of Funds Act, 2021, and the Electronic Filing Act, 2021.  These Acts are designed to enhance the BVI legal system to legally recognise the filing, creation or retention of official documents with or by a government body by electronic means.  They also legally recognise the provision, deliverance, retention, or access to information or documents by electronic means, where the law requires access be given to information or documents, or for the same to be retained, delivered or presented in original form.

Previously, the Electronic Transactions Act, 2001 had already recognised electronic signatures legally.  Furthermore, in 2018, the BVI permitted the use of “appropriate digital and electronic means” to carry out identification and verification for the purposes of compliance with anti-money laundering, counter-terrorist financing and counter-proliferation financing (“AML/CFT/CPF”) rules and regulations.

A 2019 amendment to the Financing and Money Services Act, Revised Edition 2020 (as amended) (“FMSA”), expanded the definition of “money services business” beyond money transmission to include “electronic money”, “mobile money”, “payments of money” and other alternative methods of money and payment transmission.  That amendment also introduced a new licence class (Class F), which (once the regime is in force) will regulate the business of international financing and lending in the peer-to-peer (“P2P”) Fintech market, including peer-to-business and business-to-business markets.

The BVI enacted the Data Protection Act, 2021, which imposes data protection obligations on “data controllers” who process, or have control over or authorise the processing of, personal data.  In essence, the data controller may not process personal data unless it satisfies one of the conditions specified in the Act, and it must protect the personal data when processing it.  The data subject has certain access and other rights.  Sensitive personal data is subject to stricter rules.

Fintech offering in the BVI

Fintech-related offerings in the BVI can be divided into four categories:

• funds that invest in digital assets or blockchain-based businesses;
• token issuers who may either seek to offer and promote crypto-coins (classic, stable, or altcoins) or raise capital to fund the development of a blockchain-based business;
• digital asset services (such as market making) and exchange providers, either in a centralised or decentralised (“DEX”) offering; and
• Non-Fungible Token platforms.

The business models are driven by new entrants rather than legacy players.  Crypto lending is also becoming increasingly popular, although it brings with it economic substance considerations.

Depending on the type of asset, analysis may be needed to determine whether the associated activities of a Fintech business fall within the scope of the Securities and Investments Business Act, Revised Edition 2020 (as amended) (“SIBA”) and/or the VASP Act.

To be in the scope of the SIBA, the Fintech business would need to constitute an “investment business”, which in turn would hinge on whether the subject matter of the Fintech services offered includes “investments”.  In its Guidance on Regulation of Virtual Assets in the Virgin Islands, July 2020 (“Virtual Asset Guidance”), the FSC observed in relation to the SIBA’s perimeter that virtual assets used as a means of payment for goods and services (for example, tokens) which provide the purchaser with an ability to only purchase goods and services (utility tokens) would not be captured.  However, the FSC also noted that where a virtual asset provides a benefit or right beyond a medium of exchange, it may be captured under the SIBA.  The reason is that, depending on the manner in which a token is used and the rights attaching to it, the token could be characterised as equity or debt and could, therefore, be an “investment” within the meaning of the SIBA.  Similarly, the FSC confirmed in its Virtual Asset Guidance that certain derivatives, in particular, futures and contracts for differences that reference virtual assets, would be investments within the meaning of the SIBA.

The Virtual Asset Guidance also confirms that “the transmission of virtual assets or virtual asset related products would not require a money services business licence” under the FMSA.  However, the FSC cautions that the views and guidance of the FSC should first be secured before proceeding with virtual money services activity in or from within the BVI.  The Virtual Asset Guidance also does not address “financing business” under the FMSA, which is defined widely enough to capture crypto lending to BVI borrowers.Fintech businesses will also need to consider the application of the BVI AML/CFT/CPF regime, as well as sanctions requirements, plus the BVI beneficial ownership, automatic exchange of information and economic substance regimes.

Regulatory and insurance technology

RegTech

RegTech, as such, is not a regulated business in the BVI.  Where provided in relation to virtual assets under the VASP Act, there are specific exclusions that RegTech providers may benefit from, e.g., for software developers and creators of software applications or virtual asset platforms.

A number of provisions are being incorporated into contracts with technology providers.  The key provisions generally relate to protection of IP rights and confidentiality.  The contracts often have provisions requiring the technology providers to safeguard and treat personal data in accordance with certain prescribed standards under data protection laws.

InsureTech

Regulation of insurance business conducted in and from within the BVI includes, but is not limited to, ensuring that any prospective licensees, including domestic or captive insurers, insurance managers, insurance intermediaries (namely, insurance agents or insurance brokers) and loss adjusters, meet the required standards to be licensed.  Various categories of insurance licences are provided, depending on where the applicant is incorporated and whether it intends to carry on domestic business.

Regulatory bodies

The body in the BVI responsible for regulating the Fintech sector is the FSC.  As the principal regulator of the financial services industry in the BVI, the FSC’s functions include responsibility for the regulation, supervision and monitoring of regulated entities, the enforcement of financial services laws, the monitoring of regulated entities’ compliance with AML/CFT/CPF legislation, the issuance of guidance to regulated entities, and the issuance of advisories to regulated entities and the public.  As a financial services regulator, it also performs a co-operative function in facilitating international requests for regulator-to-regulator assistance.

Key regulations and regulatory approaches

VASP regime

The VASP Act provides a registration regime for any person carrying on in or from within the BVI the business of providing a “virtual assets service”.  A “virtual assets service” is the business of engaging, on behalf of another person, in any VASP activity or operation (as outlined in the definition of VASP), and includes:

• 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 (such as automatic teller machines, bitcoin teller machines or vending machines) for the purpose of facilitating virtual asset activities through electronic terminals to enable the owner or operator of the kiosk to actively facilitate the exchange of virtual assets for fiat currency or other virtual assets; or
• engaging in any other activity that constitutes the carrying on of the business of a virtual assets service, issuing virtual assets or being involved in a virtual assets activity, pursuant to the issuance of guidelines (no such guidelines have been issued to date).

In addition, “VASP” is defined as including the conduct of one or more of the following activities or operations for or on behalf of another person:

• 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;
• safekeeping or administration of virtual assets or instruments enabling control over virtual assets;
• participation in, and provision of, financial services related to an issuer’s offer or sale of a virtual asset; or
• any such activity or operation as may be specified in the VASP Act or prescribed by regulations.

Operating a “virtual assets exchange” or providing “virtual assets custody services” (as defined under the VASP Act) also requires registration as a VASP.

The Anti-Money Laundering Regulations, 2020 Revised Edition (as amended) (“AML Regulations”) and the Anti-Money Laundering and Terrorist Financing Code of Practice, 2020 Revised Edition (as amended) (“AML Code”), were amended for VASPs with effect from 1 December 2022 to bring entities carrying on or providing virtual assets services when a transaction involves virtual assets valued at US$1,000 or more, within scope.

Associated guidance has also been provided by way of the VASP Guide to the Prevention of Money Laundering, Terrorist Financing and Proliferation Financing (“VASP AML Guide”) and FSC Guidance on Application for Registration of a VASP (“VASP Registration Guidance”), both published on 1 February 2023.

Both the VASP Act and the amendments to the AML Regulations and the AML Code adopt the Financial Action Task Force’s standards on virtual assets and VASPs.

Regulatory sandbox

The FSC introduced a regulatory sandbox in 2020 through the Financial Services (Regulatory Sandbox) Regulations, 2020 and this has been open to applications since the beginning of October 2020.  The objectives of the BVI’s regulatory sandbox are to align regulation and innovation by providing a defined test environment and to offer a tailored and focused supervisory framework, while protecting market participants.  The goal is to permit the development of new and innovative business models within the BVI.

The sandbox is open to institutional applicants (companies and limited partnerships) that intend to offer an “innovative Fintech” business model, defined as the “development or implementation of a new system, mechanism, idea, method or other arrangement through the use of technology to create, enhance or promote a product or service with respect to the conduct or provision of a financial services business”.

The VASP Act permits VASPs to participate in the regulatory sandbox under the innovative Fintech business model.  Participants in the sandbox that are proposing to carry on VASP activities are still required to comply with the aspects of the VASP Act relevant to their proposed VASP activities.

Sandbox participants have the benefit of exemptions from specific provisions of other regulations that might otherwise be applicable.  AML/CFT/CPF rules and regulations apply.  A sandbox applicant must submit a business proposal that sets out an innovative product or service that is a regulated activity or has a nexus to financial services, and which includes details of test scenarios, projected outcomes, and an exit strategy that permits either the winding-down of operations or the transition of the sandbox participant to a regulated entity.  Applicants must be fit and proper, and to that end, must demonstrate competence, integrity and financial soundness.

Successful applicants are subject to the following requirements:

• a duty to pay a fee;
• a duty to submit regular interim progress reports; and
• duties to maintain adequate and transparent records, risk management policies and controls, and to conduct an independent review of IT systems.

Any material interim changes to the business plan will need prior FSC approval.  In addition, successful applicants will be subject to a restriction on the number of clients and a requirement to disclose certain potential risks to each client.  The mandatory disclosures concern the fact that the sandbox participant does not hold a licence or registration issued by the FSC for the particular (sandboxed) activity, that the business model is being tested within the regulatory sandbox, and that the duration of the sandbox participation is limited to 18 months, with a potential extension of up to six months.

Restrictions

The VASP Act prohibits VASPs, in relation to any activity that involves the business of the exchange, transfer, safekeeping, administration, or participation in, or provision of, virtual assets (whether or not carried on by the VASP and whether or not the activity is one the VASP is authorised to carry on), or in relation to any virtual asset business, from:

• issuing, or causing or permitting to be issued, an advertisement, brochure or similar document; or
• making, causing or permitting to be made, a statement, promise or forecast,

which the VASP knows is false or misleading or contains an incorrect statement of fact.

In addition, a VASP is prohibited from being reckless as to whether an advertisement, brochure, document, statement, promise or forecast, in a material particular, is false or misleading, contains an incorrect statement of fact or dishonestly conceals a material fact.

If the FSC is of the opinion that an advertisement, brochure or other similar document issued, or to be issued, or a statement, promise or forecast made, or to be made, by or on behalf of a VASP contravenes these prohibitions or is contrary to the public interest, it may:

• direct the VASP not to issue the document, or not to make the statement, promise or forecast, or to withdraw it; or
• grant approval to the VASP to issue the document, or make the statement, promise or forecast, with such changes as the FSC may specify.

Failure to comply with any of the prohibitions or a FSC directive not to issue a document or make a statement, promise or forecast is an offence, with the penalty for legal and natural persons being up to US$75,000 fine and/or five years’ imprisonment.

There is provision in the VASP Act for the Regulatory Code, Revised Edition 2020 (as amended) (“Regulatory Code”) to be amended to:

• prohibit the issue of advertisements, brochures or similar documents relating to virtual assets activities of a particular type or description, whether as to the contents of the advertisement, brochure or other document or the persons for whom they are intended; and
• provide for the issue, form and content of advertisements, brochures or similar documents and the making of statements, promises and forecasts relating to virtual assets business.

To date, the Regulatory Code has not yet been amended to account for the VASP Act, although an amendment is expected to be published in due course.  The VASP Act also prescribes those sections of the Regulatory Code that apply to VASPs.

At the time of writing (June 2024), no significant disruptions have emerged from the development of Fintech in the BVI.  Although the BVI’s VASP regime is still new, given it implements the FATF standards, we can expect the BVI to interpret it in line with the FATF’s guidance for virtual assets.

Cross-border business

As other jurisdictions develop their Fintech regimes, Fintech businesses are seeking to leverage regulatory arbitrage where possible.  For example, the VASP Act does not regulate the proprietary issuance of virtual assets, and crypto lending is typically not in scope of the VASP Act, unlike certain other jurisdictions.  These differences are currently being, and will continue to be, important for the purposes of efficient global structuring of Fintech businesses.

Given the BVI is cognisant of global standards and international market practice, the BVI will no doubt have regard to the International Organization of Securities Commissions’ Final Reports setting out its Policy Recommendations for Crypto and Digital Asset Markets, and Decentralized Finance, published in November 2023 and December 2023 respectively, when mapping the jurisdiction’s future regulatory path.

 

This chapter was originally published in Global Legal Insights FinTech 2024.