Chris Duncan and Katrina Lindsay wrote the British Virgin Islands (BVI) chapter of the sixth edition of Global Legal Insight’s Blockchain and Cryptocurrency Regulatory Guide. The chapter covers legal requirements in the BVI related to cryptocurrencies and blockchain, including government attitudes and definitions, taxation, money transmission laws and anti-money laundering requirements, mining and licensing requirements.
1. Government attitude and definition
The British Virgin Islands has become a leading offshore financial center, with advantages such as resilience, flexibility and innovation in the face of regulatory changes, economic challenges and natural disasters. Companies, institutions and individuals, including those doing business in the fields of cryptocurrency, blockchain technology and Web3, use British Virgin Islands vehicles to support their international business activities in order to benefit from the familiarity and stability of the British Virgin Islands' legal system based on English common law, tax neutrality, and the business-friendly and flexible regulatory and judicial systems of the British Virgin Islands.
The BVI Government works closely with industry leaders on the islands, from lawyers and accountants to insolvency practitioners and regulators, recognising that a collaborative industry will be better able to meet the needs of those doing business there, while ensuring that the jurisdiction is equipped to identify and mitigate any associated risks.
This is evident in the approach taken by the BVI government to regulating virtual assets. The recently introduced Virtual Asset Service Providers Act, 2022 (the “VASP Act”) is designed to ensure that the BVI continues to adhere to international standards and comply with the Financial Action Task Force’s specific recommendations on the following, which are the result of a public consultation process by the BVI Financial Services Commission seeking feedback, input and comments from all stakeholders.
This key feature of the VASP Act will be discussed in more detail in this chapter. 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 activities are considered to be higher risk to end users and are therefore subject to a higher level of regulation, while other activities, such as projects based on innovative technologies and token issuance (an activity that has historically been carried out by entities registered in the British Virgin Islands), generally do not fall within the scope of the VASP Act.
Under the VASP Act, a "virtual asset" is defined as a digital representation of value that can be traded or transferred digitally and can be used for payment or investment purposes. Specifically excluded are digital representations of fiat currencies and digital records of the credit of a financial institution against fiat currencies, securities, or other financial assets that can be transferred digitally.
2. Cryptocurrency Regulation
The VASP Act comes into effect on February 2023, 2. Any entity wishing to provide virtual asset services or act as a VASP in or from the BVI must register with the Commission. VASPs already operating when the VASP Act comes into effect must submit an application to the Commission by July 1, 2023 (enabling them to continue to provide virtual asset services while their application is under review), and any new entity must register with the Commission before commencing any activity under the VASP Act.
An application to register as a VASP must be made on a form approved by the Commission, specifying the category of VASP registration being sought and accompanied by (a) a business plan setting out the nature and scale of the virtual asset activities; (b) details of the proposed directors, senior management and compliance officers, including documentation demonstrating that they meet the Commission’s fit and proper standards; (c) the policies and procedures adopted by the applicant to implement its obligations under the VASP Act and the AML/CTF/PF Legislative Regime Committee; and (d) the applicable application fee.
When the Commission approves a VASP application, it will register the applicant, issue a certificate of qualification to practice, and impose such conditions on the registration as it considers appropriate (including a requirement to obtain professional indemnity insurance).
- The bill defines a “VASP” as a virtual asset service provider that provides virtual asset services in the form of an enterprise and is registered as a virtual asset service provider for or on behalf of another person to perform one or more of the following activities or operations:
- Conversion between virtual assets and legal tender;
- The exchange of one or more forms of virtual assets;
- The transfer of a virtual asset, where the transfer involves a transaction on behalf of another person to transfer the virtual asset from one virtual asset address or account to another virtual asset address or account;
- Safekeeping or management of virtual assets or tools capable of controlling virtual assets;
- Participating in and providing financial services related to the issuance or sale of virtual assets by issuers;
- Perform other activities or operations specified in the VASP Act or prescribed by the 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 providing virtual asset services:
- Hosting a wallet or keeping or controlling another person’s virtual assets, wallet or private keys;
- Providing financial services related to the issuance, offer or sale of virtual assets;
- Providing equipment, such as ATMs, Bitcoin ATMs, or vending machines, that facilitates virtual asset activity through an electronic terminal that enables its owner or operator to actively facilitate the exchange of virtual assets with fiat currencies
- or other virtual currency exchange;
- Engaging in activities that constitute providing virtual asset services, issuing virtual assets, or participating in virtual asset activities according to the Guidelines.
Whether an entity carries out virtual asset services will depend on whether the relevant assets constitute “virtual assets.” For example, derivative products based on cryptocurrencies require more careful consideration and may be subject to either or both the VASP Act or the BVI Securities and Investment Business Act (“SIBA”).
Likewise, consideration should be given to a list of activities that would exclude companies from the scope of the VASP Act, namely providing auxiliary infrastructure to allow others to provide services, such as cloud data storage providers or integrity service providers responsible for verifying the accuracy of signatures.
While it is not intended to regulate cryptocurrencies specifically, BVI entities operating in the cryptocurrency, blockchain technology and Web3 sectors may also be subject to the BVI’s existing regulatory regime, including:
- The British Virgin Islands Business Companies Act 2004 (as amended);
- SIBA;
- the Financing and Money Services Act 2009 (“FMSA”);
- Anti-Money Laundering Regulations (Amendment) 2008;
- Code of Conduct on Anti-Money Laundering and Terrorist Financing;
- The Economic Entities (Companies and Limited Liability Partnerships) Act 2018 (Amendment) – This Act is particularly relevant if the BVI company intends to hold any intellectual property rights relating to the underlying technology.
To avoid duplication of regulation, VASPs explicitly provide that persons registered under the Act and solely engaged in the business of providing virtual asset services do not need to obtain a SIBA or FMSA license.
3. Sales regulations
3.1 VASP Act
Under the VASP Act, although not expressly excluded, it is generally accepted that the single act of issuing or selling virtual assets within the British Virgin Islands is not, in itself, an activity regulated by the VASP Act. However, if a British Virgin Islands entity provides financial services related to the issuance of virtual assets and the transfer of virtual assets on behalf of another party, it may constitute virtual asset services and require the entity to register with the Commission under the VASP Act.
3.2 SIBA
SIBA regulates, among other things, the provision of investment services in the BVI. SIBA requires that anyone carrying on or holding themselves out as carrying on any type of investment business in or from the BVI must do so through an entity that is regulated and licensed by the Commission. Investment business is defined broadly to include: (i) dealing in investments; (ii) arranging investment transactions; (iii) managing investments; (iv) advising on investments; (v) custody of investments; (vi) operating an investment exchange; and (vii) operating an investment exchange.
The definition of “investment” is also broad and may include: (i) shares, partnership interests or fund interests; (ii) bonds; (iii) instruments conferring rights to 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 similar characteristics to, for example, shares in the definition of investment.
Furthermore, any pooled vehicle investing in the virtual asset space or accepting virtual assets by way of subscription and then investing in more traditional asset classes is advised to seek BVI legal advice as to whether such activities require registration as a fund.
4. Taxation
The British Virgin Islands International Taxation Authority has not yet issued any official statement regarding the taxation of virtual assets. However, the British Virgin Islands is a tax-neutral jurisdiction with an income tax set at 0%, which means that the British Virgin Islands government actually does not levy income tax. Therefore, BVI entities do not need to file income tax returns, but must file an annual economic entity declaration. In addition, there are no capital gains taxes, gift taxes, profit taxes, inheritance taxes, or estate taxes in the British Virgin Islands.
For tax purposes, a BVI entity may be resident in any jurisdiction, subject to tests such as “management and control”. All BVI entities are exempt from tax in the BVI and a certificate of this can be obtained from the BVI registration authority or the Inland Revenue. In addition, the BVI operates a source-based taxation system under which BVI entities are taxed on net income after deducting all BVI expenses. Therefore, a BVI entity operating outside the BVI, which is a BVI tax resident, should not be taxed in the BVI on its foreign source income.
In the context of an ICO, exchange operators need to be cognizant of the impact of the Foreign Account Tax Compliance Act (“FATCA”) and the Common Reporting Standard (“CRS”).
5. Money Transmission Laws and Anti-Money Laundering Requirements
The relevant money transmission law in the BVI is the FMSA, which regulates money services businesses. The FMSA defines money services businesses as including:
- ATM services;
- Remittance services;
- Check cashing services;
- Currency exchange services;
- The issuance, sale or redemption of money orders or traveler's checks.
While it is agreed that “money” and “currency” refer to fiat currencies rather than cryptocurrencies, as noted above, the explicit exclusion in the VASP Act that businesses registered under the Act solely engaged in the provision of virtual asset services will not be subject to the FMSA will be of particular relevance and help provide certainty for many virtual asset service providers (e.g., those involved in the transfer of virtual assets from one account to another). However, caution is required if a company is deemed to be carrying on any activities that are not within the scope of the VASP Act, as the above exemption will not apply in those circumstances.
Also applicable to VASPs are the Anti-Money Laundering (Amendment) Regulations 2022 and the Anti-Money Laundering and Terrorist Financing (Amendment) Code of Practice 2022, which will bring VASPs into the BVI AML/CTF regime from December 2022, 12 and apply to transactions involving virtual assets valued at US$1 or more.
While it is beyond the scope of this Chapter to consider in detail the specific requirements of the BVI AML/CTF regime, any person subject to the regime will generally be required to do the following:
- Appoint a designated individual as an AML compliance officer to monitor its compliance with AML laws and liaise with regulators (under the VASP Act, VASPs must have such an officer approved by CIMA);
- Designate a person as a Money Laundering Reporting Officer to act as a reporting line within the business;
- Implement procedures to ensure counterparties are properly identified, risk-based monitoring is conducted (taking into account the nature of the counterparties, geographic region of operation, and any risks associated with new technologies such as virtual assets), appropriate record retention, and appropriate training of employees.
In addition, the Committee also issued the "Guidelines for Virtual Asset Service Providers to Prevent Money Laundering, Terrorist Financing and Proliferation Financing" and established new regulatory requirements to ensure that intermediaries receive adequate information related to the transfer of virtual assets.
In our experience, most parties are best served by consulting a professional third-party provider to assist with this process.
6. Promotion and testing
The British Virgin Islands has introduced the Financial Services (Regulatory Sandbox) Regulations 2020 (the “Sandbox Regulations”) to encourage fintech companies to innovate in technology under a light-touch regulatory regime. The Sandbox Regulations are designed to:
Start-ups wishing to provide new financial services solutions involving fintech business models that are not currently covered (either explicitly or implicitly) by current BVI legislation;
Start-ups looking to test innovative technologies to provide licensable financial services;
Entities licensed by the Commission that wish to test innovative technologies as part of their approved financial services products.
A person who was approved as a sandbox participant under the Sandbox Regulations before the VASP Act came into effect may notify the Commission in writing of its intention to offer innovative financial technology related to virtual assets (such notification is deemed to be an application for registration as a virtual asset).
A VASP that is not registered under the VASP Act or approved under the Sandbox Regulations and wishes to engage in virtual asset services and provide innovative financial technology under the Sandbox Regulations may apply to the Commission in accordance with the Sandbox Regulations and indicate in the application that it intends to engage in the business of providing virtual asset services and applying innovative financial technology.
7. Ownership and licensing requirements
The British Virgin Islands has no restrictions on holding cryptocurrencies for investment purposes. Although currently untested, 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 to hold these virtual assets (if it is determined that the investment manager is holding these virtual assets on behalf of a third party). It has not yet been determined whether investment managers licensed under the approved manager regime will also need to register separately under the VASP Act.
Similarly, although it has not been tested, an investment fund domiciled or established in the British Virgin Islands that intends to trade in virtual assets as part of its investment strategy may be able to do so without registering with the Commission under the VASP Act, provided that it is dealing with those virtual assets on a proprietary basis.
8. Mining
Cryptocurrency mining does not fall under the scope of the VASP Act, so from the BVI perspective, mining remains an unregulated activity, whether conducted within the BVI or by companies outside the BVI. The cost of electricity in the BVI is high, so mining within the BVI, especially large-scale cryptocurrency mining, is unlikely to be efficient.
9. Border restrictions and declarations
The BVI does not impose any general border restrictions on the ownership or importation of virtual assets.
As part of the BVI’s commitment to combating money laundering and terrorist financing, the Customs Administration and Tariff Act 2010 requires that any person entering or departing the BVI declare any items in excess of $10,000 in their baggage or on their person, 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 statute relating to money laundering, terrorist financing and proliferation financing be interpreted to include virtual assets, there is a conceptual question as to what would constitute the importation or transportation of such assets given the nature of these assets, particularly those based on or recorded on a distributed ledger. Accordingly, 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, a BVI company providing virtual asset services in connection with transactions involving virtual assets valued at $1000 or more will be deemed to be carrying on a “relevant business” and will be required to comply with the BVI AML/CTF/financial crime legislative regime, including compliance with the “travel rule” and reporting suspicions of money laundering or other criminal activity to the Commission and/or the BVI Financial Investigation Agency (if applicable).
The OECD also released the final version of the Crypto-Asset Reporting Framework (“CARF”) and the 2023 update of the CRS, creating a cross-border reporting framework that provides for the exchange of standardized information on crypto-asset transactions. Therefore, this article expects that the British Virgin Islands will revise the CRS legislative framework to implement the recommendations of the CARF.
11. Estate Planning and Succession
Cryptocurrencies and other virtual assets are not yet widely used in estate planning and probate under BVI law.
Neither the VASP Act nor any other specific regime under BVI law specifically addresses the treatment of a virtual asset holder upon death. This means that, in principle, assuming that BVI law governs the succession to the estate of a deceased person, virtual assets will be treated in the same manner as any other assets. As is the case in many jurisdictions outside the BVI, there may be some uncertainty as to the situs of virtual assets. If the assets can be analyzed under the traditional conflict of laws rules of the BVI, then the virtual assets of a deceased person cannot validly be 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 a deceased person, a person needs to be appointed as the legal personal representative of the deceased by obtaining appropriate authorization from the Registry. Two types of grants are available:
- Grant of Probate (where the deceased left a will expressly covering BVI fictitious assets);
- Grant of Letters of Administration (where the deceased did not leave a will which specifically covers BVI fictitious assets).
In terms of the latter, the deceased will be deemed to have died “intestate” with respect to the BVI domicile of virtual assets – even if they had a valid will covering assets in other jurisdictions. The main potential difficulties that may arise are practical. That is, anyone who inherits a virtual asset will, on the face of it, generally only be able to access it if the deceased or the personal representative of the beneficiary (as the case may be) possesses or is able to obtain the information necessary to access and control that virtual asset (e.g., the private key to the wallet in which the virtual asset is stored). Most exchanges have policies for transferring virtual assets to next of kin, but these policies and transfer requirements vary from exchange to exchange, and due to the risk of hacking and bankruptcy, it is generally considered prudent to avoid leaving significant amounts of value on an exchange for any period of time.