2024 Blockchain Guide – British Virgin Islands

This guide to Blockchain in the BVI covers the following topics:

Blockchain Market and Business Model Overview

DIGITAL ASSETS

Smart Contracts

BlockCHAIN regulation

disputes

tax

sustainability

Data Privacy and Protection

Digital Assets

2.1 Ownership

In Philip Smith and Jason Kardachi (in their capacity as joint liquidators) v Torque Group Holdings Limited, Justice Wallbank in the BVI Commercial Court, following decisions from numerous other courts in Commonwealth jurisdictions, held that crypto-assets should be treated as “assets or property”.

As to the ownership of crypto-assets in the case, Justice Wallbank recognised that the test for ownership of crypto-assets should be decided on the basis of who holds the private key that facilitates dealing with those assets. He found in the case that the crypto-assets in the “User Trading Wallets” were assets that belonged to the owner of the wallets who held the private key.

While the authors of this guide are not aware of this being tested in the BVI courts, subject to contractual terms, transfers likely would be considered final once they have reached finality on the blockchain and are credited to the wallet of the recipient to which they hold a key (regardless of whether these can be transferred).

Where digital assets represent shares in a BVI company, the register of members is prima facie evidence of ownership of the shares, and, therefore, legal title to the underlying shares represented by the token will be determined (in the absence of fraud, manifest error, or other extraordinary circumstances) by reference to the company’s register of members (which can be maintained in a digital format). A BVI company’s constitutional documents will usually oblige the company to treat the holder entered on the register of members as the sole person entitled to the shares, including any voting rights and dividend payments in respect thereof.

2.2 Categorisation

The Securities and Investment Business Act (SIBA) (see 4.1.1 Regulatory Overview for an outline of the legislation) sets out an exhaustive list of financial instruments that constitute “investments”. Cryptographic tokens are not expressly included in that list. However, whether the characteristics of a token or other digital asset could nevertheless render it an “investment” under SIBA is a fact-specific enquiry dependent on the unique functionalities exhibited by the token or asset. If a token qualifies as an “investment”, the issuer of the token will be either dealing in, or arranging deals in, securities, although the issuer’s activities may fall within a list of excluded activities or safe harbours under SIBA.

For example, shares in a company or interests in a partnership are considered “investments” under SIBA. Where tokens grant rights to the holder equivalent to partnership interests, equity or share rights (eg. a right to vote or a right to receive dividends or a share of the profit), these characteristics will be relevant where considering whether or not the token is an “investment” under SIBA.

Virtual assets which represent “investments” under SIBA may result in issuers, custodians and other service providers being required to be licensed (please see 4.1.1 Regulatory Overview).

2.3 Tokenised Securities

Please refer to 4.1.1 Regulatory Overview.

2.4 Stablecoins

There are no legislative distinctions between the different types of stablecoins. As outlined under 2.2 Categorisation, an analysis of the coin’s characteristics will be required on a case-by-case basis. That being said, there are a number of factors that can assist with the analysis.

Stablecoins are not expressly included under the definition of “investments” in SIBA, and it is unlikely that a fiat backed or “algorithmic” stablecoin would fall within the definition of an “investment”. The BVI Financial Services Commission (FSC) has also confirmed in its recently updated Guidance on Regulation of Virtual Assets in the Virgin Islands that “virtual assets and virtual assets-related products 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 by financial services legislation”.

Stablecoins would not fall within the definitions of either “money” or “coin” as defined as follows.

• “Money” is defined in the Regulatory Code, 2009 as including notes and coins; postal orders; cheques of any kind, including travellers’ cheques; bankers’ drafts and other payable orders; and money deposited in an account; in each case, in any currency.
• “Coin” is defined as any coin that is legally current in the Territory (see section 2 (1) of the Interpretation Act, (CAP. 136)).

A stablecoin will likely fall within the definition of a “virtual asset” under the VASP Act. A BVI company involved in the issuance (including oversight of a treasury backing the stablecoin), transfer, exchange, or custody of stablecoins will need to review their activities to determine whether registration will be required under the VASP Act.

2.5 Other Digital Assets

The FATF in its Guidance made clear that NFTs are generally not considered to be virtual assets under the FATF definition. This is on the basis that NFTs are not used for payment or investment purposes and therefore would not meet the definition of a “virtual asset” under the VASP Act. However, as with all tokens, each project will turn on its own facts and so consideration should be given to the qualities of each NFT before a determination is made.

NFTs should also be considered in the context of SIBA to analyse whether the NFT is an “investment”, and, as such, the issuer is required to be licensed.

2.6 Use of Digital Assets in Payment

There are currently no restrictions on use of digital assets in payment, subject to AML compliance. See 2.4 Stablecoins regarding confirmation from the FSC as to the use of digital assets as a means of payment for goods and services.

2.7 Use of Digital Assets in Collateral Arrangements

There are currently no restrictions on use of digital assets in collateral arrangements.

Blockchain Regulation

4.1 Regulatory Regime

4.1.1 Regulatory Overview

The VASP Act

The VASP Act came into force on 1 February 2023. Importantly, the VASP Act derives from recommendations made by the Financial Action Task Force (FATF) in 2019 as further updated or supplemented. As the BVI is committed to meeting international standards with regard to anti-money laundering and countering financing of terrorism (AML/CFT) measures, the VASP Act provides for the regulation of virtual asset service providers and for the registration and licensing of persons who are providing virtual asset services.

Under the VASP Act a “virtual asset” is defined as a digital representation of value that can be digitally traded or transferred and used for payment or investment purposes, but does not include digital representations of fiat currencies.

“Virtual asset services providers” (VASPs) are businesses providing one or more of the following services:

• exchange between virtual assets and fiat currencies;
• exchange between one or more other forms of convertible virtual assets;
• transfer of virtual assets;
• safekeeping or administration of virtual assets or instruments enabling control over virtual assets; or
• the participation in, and provision of, financial services related to an issuer’s offer or sale of a virtual asset.

In addition to the VASP activities described above, certain other virtual asset services which could fall under one of the VASP limbs above are separately defined in the VASP Act and include:

• providing kiosks (such as bitcoin teller machines); and
• hosting wallets or maintaining control over a wallet or private key.

For entities that have already been approved to sit in the regulatory sandbox, the VASP Act also provides a route for those entities to register as VASPs.

For entities which are not existing VASP operators or in the regulatory sandbox, they will need to apply to register with the FSC.

The VASP Act provides for various exceptions including:

• the provision of ancillary infrastructure to enable others to offer a service – such as cloud storage;
• the development, sale or offering of software or hardware;
• the provision of an “unhosted” wallet service where the customer retains control of their own private keys; and
• the acceptance by a merchant of virtual assets as payment for goods and services.

Under the VASP Act, VASPs are subject to a number of general obligations including:

• anti-money laundering obligations;
• strict data protection and cyber security obligations in connection with the personal data they process;
• the filing of annual accounts with the FSC and ongoing financial reporting;
• the requirement for senior officers and beneficial owners to be fit and proper persons;
• the prior approval of senior officer appointments by the FSC; and
• having a dedicated compliance officer.

The Securities Investment Business Act

SIBA is the primary piece of legislation regarding securities and investment businesses in the BVI. SIBA provides for the licensing and control of persons engaged in investment businesses in or from within the BVI.

SIBA sets out an exhaustive list of financial instruments that constitute “investments”. Cryptographic tokens are not expressly included in that list. However, whether the characteristics of a token or other digital asset could nevertheless render it an investment under SIBA is a fact-specific enquiry dependent on the unique functionalities exhibited by the token or asset. If a token qualifies as an investment, the issuer of the token will be either dealing in, or arranging deals in, securities, although the issuer’s activities may fall within a list of excluded activities or safe harbours under SIBA.

A person who is not carrying on an investment business under SIBA may still bring themselves within the licensing requirements where they hold themselves out as carrying out an investment business. Care should be taken that, among other things, no words are used, in any language, which connote a securities investment business in the description or title of the business in question and that no representation is made in any document or in any other manner that a person is carrying on investment business.

4.1.2 Licensing

Please see 4.1.1 Regulatory Overview.

4.1.3 Marketing

There are no specific requirements in respect of marketing. However, all marketing should be complete, correct and not misleading in any way.

4.1.4 Anti-money Laundering and Counter-Terrorism Financing (AML/CTF) Requirements

Please see 4.4 International Standards.

4.1.5 Change in Control

A person owning or holding a significant interest or a controlling interest in a VASP is not permitted to, whether directly or indirectly, sell, transfer, charge or otherwise dispose of their interest in the VASP, or any part of their interest, unless the prior written approval of the FSC has been obtained.

A person is not permitted, whether directly or indirectly, to acquire a significant interest or controlling interest in a VASP unless the prior written approval of the FSC has been obtained.

A VASP is not permitted, unless the prior written approval of the FSC has been obtained, to cause, permit or acquiesce in a sale, transfer, charge or other disposition or issue or allot any shares or cause, permit or acquiesce in any other reorganisation of its shares that results in a person acquiring a significant interest or controlling interest in the VASP, or a person who already owns or holds a significant interest or controlling interest in the VASP increasing or decreasing the size of their interest.

An application to the FSC for approval is to be made by the VASP, and any fees payable for the application and any approval of the application in that regard shall be paid by the VASP. The FSC shall not grant approval unless it is satisfied that, following the acquisition or disposition, any person who will acquire a significant interest or controlling interest in the VASP satisfies the fitness and propriety criteria outlined in the Regulatory Code (Regulatory Code).

The preceding paragraphs do not apply to a VASP that is listed on a recognised exchange.

A “significant interest”, in relation to an entity, means a holding or interest in the entity or any holding company of the entity held or owned by a person, either alone or with any other person and whether legally or equitably, that entitles or enables the person, directly or indirectly to:

(a) control ten percent or more of the voting rights of that entity at a meeting of the entity or of its members;

(b) a share of ten percent or more in any distribution (if applicable) made by the entity;

(c) a share of ten percent or more in any distribution (if applicable) of the surplus assets of the entity; or

(d) appoint or remove one or more directors of the entity.

A “controlling interest” means interest in an entity whereby:

(a) the person holding the interest has an influence over the activities of any undertaking of the entity without having a significant interest in the undertaking; or

(b) a director or senior officer of the entity is accustomed to acting on the instructions of the person.

4.1.6 Resolution or Insolvency Regimes

There are no specific resolution or insolvency requirements/regimes specific to digital asset firms and the provisions of the Insolvency Act (Revised 2020) will apply.

4.1.7 Other Regulatory Requirements

Not applicable.

4.2 Regulated Firms/Funds With Exposure to Digital Assets

There is no separate framework for the regulation of investment funds that invest in virtual assets in the BVI.

The primary piece of legislation in the BVI regulating funds is SIBA, which is supplemented by regulations including the Mutual Fund Regulations, the Financial Services Commission (Securities and Investment Business Fees) Regulations 2010 and the Securities and Investment Business (Incubator and Approved Funds) Regulations 2015, and is regulated by the FSC. The legislation only captures open-ended investment funds, being those which collect and pool investor funds and issue fund interests (such as tokens in a tokenised fund structure) that entitle the holder to receive on demand, or within a specified period thereafter, an amount calculated by reference to the net asset value of the fund. Such open-ended funds are categorised in the BVI as either public funds, professional funds (with only professional investors with a minimum initial investment), private funds (with no more than fifty investors), recognised foreign funds (being open-ended funds incorporated outside the BVI but who wish to offer inside the BVI), approved funds (aimed at family offices) or incubator funds (for start-up funds). Such open-ended funds must be approved or recognised by the FSC.

Closed-ended funds, being funds where the investor or token holder is not entitled to redeem on demand their interests at a sum calculated with reference to the fund’s net asset value, were not traditionally caught by fund regulations within the BVI. The BVI enacted the SIBA Amendment Act and the Private Investment Funds Regulations, 2019 (the PIF Regulations), which came into force on 31 December 2019 and which legislation introduces a new regulatory regime for close-ended funds. Such closed-ended private investment funds are required to apply for recognition as a private investment fund within 14 days of commencing business. The fund’s constitutional documents must specify that:

• the fund is not authorised to have more than 50 investors;
• an invitation to subscribe for or purchase, fund interests issued by the fund must be made on a private basis only; or
• the fund interest shall be issued only to professional investors, with an initial investment of each professional investor, other than an exempted investor, not being less than USD100,000.

4.3 Regulatory Sandbox

In August 2020, the FSC launched a regulatory sandbox for companies whose proposed business model involves 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 sandbox is designed to encourage technological innovation in financial services under a lighter-touch regulatory regime.

An application for entry into the sandbox will consist principally of a business proposal to cover, among other things, the following:

• the proposed product or service, and how this encompasses innovation to improve accessibility, efficiency, effectiveness, security, quality in the provision of, or addresses shortcomings or opens up new opportunities in, financial services or the regulation thereof;
• the testing already carried out on the proposed product (with the expectation that testing, to the extent permitted by legislation, will be carried out prior to entry into the sandbox);
• details on the proposed customers (including estimated numbers, investment experience and geographical reach);
• an analysis of the risk profile of the proposals and the measures to be taken to manage those risks;
• an indication of the resources (whether financial, technological, human or otherwise) available to the application; and
• a strategy for exiting the sandbox.

4.4 International Standards

The BVI has long been committed to implementing best international practices and is compliant with the anti-money laundering and anti-terrorist financing requirements of the OECD and FATF. As a member of the Caribbean FATF, the BVI implements recommendations promulgated by the FATF.

All BVI-incorporated entities are subject to the BVI Proceeds of Criminal Conduct Act, 1997 (as amended), which sets out the principal money laundering offences. Certain “relevant” businesses (which would include, for instance, entities caught within BVI financial services regulations and other entities thought to be at a higher risk of money laundering) are further subject to the BVI Anti-Money Laundering Regulations, 2008 (the AML Regulations), and the Anti-Money Laundering and Terrorist Financing Code of Practice 2008 (the AML Code) (each as amended), which prescribe certain identification, record-keeping and internal control procedures for such businesses.

In August 2018, changes were made to the AML Code to permit entities in the BVI to digitally verify identities and receive electronic copies of documents instead of traditional “wet ink” paper-based processes. The amendments are further evidence of regulators in the BVI embracing the blockchain revolution and will set a new standard for AML verification in the region.

Following amendments to the AML Code which took effect from 1 December 2022, certain virtual asset services will satisfy the definition of “relevant business” under the AML Code which may result in certain virtual asset service providers being treated as a “relevant person” for the purposes of the AML Regulations. Such entities which satisfy the definition of “relevant person” and “relevant business” will be subjected to a reduced threshold of USD1,000 for a one-off transaction.

4.5 Regulatory Bodies

The FSC provides oversight for investment funds, entities caught by SIBA and also oversees the VASP Act. The FSC has not changed its approach but has maintained its supervision, in particular, in relation to products offered to retail investors.

4.6 Self-Regulatory Organisations

BVI Finance, a group that represents the BVI’s financial services sector, engages with the financial services industry, regulators, the government and the media to promote the development and use of new technologies in the BVI.

4.7 Other Government Initiatives

To date, there have been no other state-backed regulatory programmes.

Tax

6.1 Tax Regime

The BVI is a tax-neutral jurisdiction. A registered BVI entity is not subject to any direct taxes. There may, however, be tax implications for beneficial owners in their own jurisdiction.

Data Privacy and Protection

8.1 Data Privacy

The BVI Data Protection Act (DPA) came into full force on 9 July 2021. Drafted around a set of EU-style data protection principles to which data controllers must adhere, it mandates that personal data must be collected in a fair and transparent manner and only be used and disclosed for purposes properly understood and agreed to by data subjects. Any personal data collected must be adequate and kept up-to-date and should not be retained for longer than is necessary to fulfil the collection purposes.

Importantly, the DPA provides a standard framework for both public and private entities in the management of the personal data they use. Internationally active organisations will find many similarities between the DPA and data protection laws of other jurisdictions where they are active but there are some key differences. The DPA provides for a lighter touch approach to data protection regulation than other jurisdictions in the region.

BVI courts recognise and subscribe to the common law duties of confidentiality and privacy, and English common law is persuasive, although not binding, in the BVI. As a result, all entities that manage and maintain personal data will be subject to the common law duty of confidentiality described above.

The duty of confidentiality has also been codified in various aspects of BVI legislation, in particular the Banks and Trust Companies Act, 1990 (as amended), which regulates all banking and trust/fiduciary-related activities in the BVI. Licensed operators of such businesses, regulated by the FSC, are under a general obligation to maintain the confidentiality of a client’s personal data unless the individual has granted specific permission for its release or disclosure to third parties. This obligation may be limited where the licensee is required to deal with anti-money laundering and similar legislation.

For corporate entities, the Registrar of Corporate Affairs is currently permitted to release only limited information regarding the particulars of any registered company, which would include the name, type of company, date of registration/incorporation, registered office address and status of the company. Details of individual shareholders, directors and officers of the company are not available for public inspection and shall only be made available by the Registrar to competent authorities (for tax compliance or other law enforcement purposes) on written request.