Regulation of Financial Firm Business and Virtual Asset Service Providers

PART Iii – VASPS

In our previous article (which can be found here), the different parts of the LCF Law were discussed. This article will focus on Part III, section 17 of the LCF Law: Virtual Asset Services Providers (VASPs).

One of the outcomes of the new licensing regimes is that any VASP that is in scope will now also fall under Guernsey’s AML/CFT regime. Whilst the LCF Law is a welcome development in terms of formal steps to regulate the virtual asset marketplace, the activities which are licensable remain reasonably tightly controlled.

Virtual Asset Services Providers

The LFC Law provides that it is prohibited to provide, offer or carry out any activities by way of business in relation to virtual assets without having obtained a Part III Licence. These activities are targeted at the institutional/wholesale market; it is prohibited to target individual (or “retail”) consumers.

It is also prohibited to carry out activities which aim to obscure ownership or the flow of assets (in other words, discouraging mixers and tumblers). The LCF Law captures both on and off-chain transfers, the focus being on control of the asset.

Developers are excluded (I.e. the creation of a virtual asset is excluded, but those engaging in transfers of control/ownership are captured).

‘Virtual Assets’ are defined as a digital representation of value that can be digitally tracked or transferred and can be digitally traded, or transferred and can be used for payment or investment purposes, but virtual assets do not include representations of fiat currencies (i.e. cash) or general securities or derivatives (e.g. Shares, Debentures, bonds, loans etc.) and other financial assets.

‘By way of business’ means any person who provides any service or carries on any activity where in turn a person receives any income, fee, emolument or other consideration in money or money’s worth for doing so.

The following constitute as activities by way of business:

• Exchange between virtual assets and fiat currencies. (For example, businesses using Stable coins – virtual assets that are backed by a fixed exchange rate (i.e. a fiat currency) and are held as collateral by the original creator. However, note that central bank digital currencies are excluded.).
• Exchange between one or more virtual assets. (General trading of virtual assets on a centralised platform (a block chain ledger) such as Bitcoin).
• Transfer of virtual assets.
• Safekeeping and / or administration of virtual assets or instruments enabling control over virtual assets. (For example, a custodian wallet provider – a business who provides, or facilitates the control of virtual assets or governing the use of the virtual assets, this includes but not limited to administrative activities such as balance checks and fee/transaction confirmations).
• Participation in and provision of final services relating to the trading of virtual assets such as initial coin offering (ICOs) and market making. (Business activities which entails a person offering crypto assets, tokens, to raise capital and creating a market of virtual assets).
• Any other service or activity or class or description in respect of virtual assets specified by the regulations.

A VASP that is already, or planning to conduct the above-mentioned activities, is required to obtain a licence. Further information on how to apply for a licence and the application form can be found here.

In addition to providing information about the business activities themselves, VASPs are required to provide the following:

• An Environmental Assessment – undertaken by the VASP as well an independent expert regarding the environmental impact from their use of consensus mechanisms. Details of their findings must be disclosed to the public annually. This involves information such as carbon emission and use of electrical power.
• Information in relation to any external sources of finance, i.e. a loan.
• Information regarding financial commitments to the business itself and others.

The Guernsey Financial Services Commission (GFSC) may grant or refuse the application for a licence depending if the VASP has fulfilled the minimum criteria of licencing, provisions set out in the LFC law has been met and the prescribed fee has been provided.

The GFSC on granting the licence, may impose certain conditions which a VASP will have to comply with. Examples of such conditions could include any of the following:

• A VASP will have to take certain steps to refrain from adopting or pursuing a particular course of action or to restrict the scope of its business in a particular way.
• Limitations relating to the acceptance of business.
• Prohibit the licensee from soliciting (whether at all or in any specified manner) business, either generally or from particular persons or class of persons.
• Prohibit the licensee from entering into any other transaction or class or description of transactions.
• Require the removal of any person who is the holder of a supervised role in respect of or who is an officer or auditor of the licensee.
• Specify requirements as to capitalisation and liquidity or margin of solvency of the business of the licensee.
• Provide the GFSC with information and documents required at particular times.
• Require the licensee to obtain professional indemnity insurance.
• Prohibit or impose limitations on the carrying on of the business regulated by the LFC law or any class or description of such business in or from within any place or any particular place, outside the Bailiwick by the licence itself, by any undertaking established by the licensee.
• Any provision in whatever form and manner and whatever time the GFSC may reasonably determine of evidence of compliance with the provisions of this Law or regulatory laws.
• A licensee which contravenes any condition of a Part III licence is guilty of an offence.

A VASP is also allowed to surrender its licence should it wish to. This has to be done by writing to the GFSC, however the surrender would be subject to GFSC consent and they may refuse their consent to the surrender of a Part III licence if:

• in the opinion of the GFSC, the liabilities of the licensee have not been discharged or transferred;
• the GFSC believes that the surrender would not be in the interests of the public or the reputation of the Bailiwick as a finance centre, etc.;
• the licensee would not, immediately after the surrender, comply with the requirements of section 49 of the Enforcement Powers Law.

Upon the surrender of a Part III licence no fee paid or payable by the licensee concerned pursuant to regulations under section 37 shall be refunded, remitted or waived.

If a VASP believes it should be exempt from having to apply for a licence (the list of exemptions can be found here) but is unable to use any of the exemptions provided, a discretionary exemption may be sought from the GFSC (see the ‘Discretionary Exemption Form’).

A VASP which fails to obtain a licence (and is otherwise required to do so) will be in breach of the LCF Law and therefore guilty of an offence. This may result in a fine or imprisonment and removal of directors or officers, depending on the nature of the breach.

The future

A consultation paper has been issued on the proposed additional rules and guidance for virtual asset service providers (VASPs) and specified businesses with a connection to, or involvement with, virtual assets, on how to meet the requirements of Schedule 3 to the Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) Law 1999 (POC Law) and rules in the Handbook on Countering Financial Crime and Terrorist Financing (Handbook).

The consultation paper also seeks comments on proposed additional rules and guidance for trustees of trusts and partners (excluding limited partners) of partnerships and limited partnerships without legal personality to hold information on the identity of other regulated agents and service providers to a trust or partnership, and disclose their status as trustee or partner.

The consultation paper and associated draft legislation and Handbook changes can be found on the Commission’s Consultation Hub.​ It closed on 3 July 2023.  We await the results of the consultation in due course.

Please do reach out to your usual Appleby contact if you have any particular queries.