The Financial Services Authority (FSA) has concluded its consultations regarding the Draft Virtual Asset Service Providers (VASP) Regulations and is moving forward with a series of legislative updates aimed at enhancing operational standards while fostering innovation in the virtual asset sector. Below are the key updates and implications for businesses operating in this space.
Key Proposed Changes and Client Guidance:
1. Capital Requirements:
Overview: The minimum paid-up capital requirement for VASPs is set to decrease from 25% to 2.5% of annual turnover. This reduction facilitates greater accessibility for new VASPs while allowing existing operators to allocate resources more effectively.
Client Impact: Clients should be aware that this change may promote a more competitive environment within the virtual asset industry, potentially leading to improved service offerings and cost efficiencies from service providers. Clients should remain vigilant about the financial health of the VASP they choose to engage with.
2. Client Asset Management:
Overview: The introduction of omnibus arrangements will enable VASPs to manage multiple clients’ assets collectively, improving efficiency and transparency in operations.
Client Impact: Clients can expect enhanced protection and streamlined handling of their assets. However, it is essential to clarify how the VASP will account for individual holdings within these arrangements to ensure transparency and trust.
3. Cybersecurity Audits:
Overview: New provisions allow VASPs to engage independent auditors (approved by FSA) to assess their cybersecurity measures and ensure compliance with best practices.
Client Impact: Clients should seek VASPs that conduct regular independent audits as a sign of commitment to protecting client data and maintaining high-security standards. Inquire about audit results and any improvements made as a result of these assessments.
4. Insurance Flexibility:
Overview: VASPs will gain the ability to procure insurance from international providers (subject to FSA’s authorisation), thus increasing access to varied insurance products tailored to their operational risks.
Client Impact: This flexibility could lead to improved risk management strategies among VASPs, positively impacting clients’ overall experience and security of their investments. Clients should assess the adequacy of the insurance coverage provided by their service providers.
5. Enhanced Consumer Protection:
Overview: Stricter advertising regulations will be enforced, ensuring clarity and preventing misleading claims related to virtual assets.
Client Impact: Clients are advised to remain cautious and discerning when examining marketing materials from VASPs and securities dealers. It is crucial that firms adhere to the new guidelines to avoid exaggerating the benefits or making unrealistic promises about virtual asset investments.
5. AML/CFT Obligations:
There will be no transition period for AML/CFT obligations; compliance will take effect immediately upon the issuance of the commencement notice under the VASP Act and the publication of the regulations. This notice is intended to be published simultaneously.
Reliance on Regulated Persons (AML/CFT Amendment) Regulations: No comments were received on the proposed draft regulations, indicating further advancements in regulation without public opposition.
5. Code for Fit and Proper:
Overview: The Code for Fit and Proper establishes standards for assessing the suitability of individuals operating within the virtual asset sector. Notably, existing licensees, such as securities dealers, who have appointed a Compliance Officer under the FSA Act, 2013, and AML/CFT Act, 2020, may continue to utilize the same officer for VASP licensing, provided the individual meets the necessary requirements. This provision also applies to company directors.
Client Impact: Clients should verify that firms adhere to the Fit and Proper requirements, ensuring they are managed by qualified professionals who understand compliance obligations and the complexities of the virtual asset landscape.
6. Taxation:
Overview: The proposed legislative changes will also introduce clear tax guidelines for transactions involving virtual assets. The Ministry of Finance is expected to provide announcements on tax policy in the coming weeks.
Client Impact: Clients engaged in virtual asset trading should stay informed about the forthcoming tax policies and consult with tax professionals to clarify their obligations under the new framework. Clear guidance on tax treatment will be invaluable in planning investments and managing financial strategies effectively.
Next Steps for Clients:
We encourage all clients to keep abreast of these regulatory developments and consider how they affect your engagement with VASPs and securities dealers.
Should you have any questions or need further clarification regarding these updates and their implications, please feel free to reach out to our office.
