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03/10/23
BVI: Exploring New Developments In Fund Structuring
The British Virgin Islands (BVI) has long been recognised as a leading jurisdiction for fund structuring, thanks to its favourable legal framework, tax advantages, and flexible regulatory environment. Last year, the BVI took a significant stride towards embracing the digital asset landscape by introducing the Virtual Assets Service Providers Act, 2022 (the BVI VASP Act), which came into force earlier this year.
The BVI VASP Act regulates virtual asset service providers (VASPs) and requires that VASPs be registered with the BVI Financial Services Commission (the Commission). This ground-breaking piece of legislation has opened new possibilities for fund managers and investors in the realm of virtual assets. In this article, we explore the key features and implications of the BVI VASP Act.
The legal framework applicable to digital assets was completed by the Guidance on the Application for Registration of a Virtual Assets Service (the Guidelines) and the Virtual Assets Service Providers Guide to the Prevention of Money Laundering, Terrorist Financing and Proliferation Financing published by the Commission.
What Is A VASP And What Is Not
The BVI VASP Act defines a VASP as a virtual asset service provider whose business provides a virtual assets service and is registered to conduct one or more of the following activities:
- Exchange between virtual assets and fiat currencies.
- Exchange between one or more forms of virtual assets.
- Transfer of virtual assets 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.
- Perform such other activity or operation as may be specified in the VASP Act or as may be prescribed by regulations.
A person engaged in any of the following activities will be deemed to be carrying on a virtual assets service:
- 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 for the purpose of facilitating virtual assets 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.
- Engaging in any other activity that, under the Guidelines, constitutes the carrying on of the business of providing virtual asset service or issuing virtual assets or being involved in virtual asset activity.
The above notwithstanding, the BVI VASP Act does not regulate the technology that underlies virtual assets or VASP activities, nor does it regulate the actual issuance of virtual assets in or from within the territory. Issuance of a token may be caught by the BVI VASP Act only if the virtual asset is considered an ‘investment’ under the Securities and Investment Business Act, 2010 (as amended).
Regulatory Clarity And Consumer Protection.
As mentioned above, the BVI VISTA Act aims to establish a comprehensive regulatory framework for VASPs operating within the BVI. By implementing clear rules and guidelines, the act enhances consumer protection, mitigates risks associated with virtual assets, and fosters investor confidence. It sets out licensing requirements, capital adequacy provisions, and robust anti-money laundering (AML) and know-your-customer (KYC) measures to ensure compliance with international standards.
The remit of the Commission, which has always been the regulatory body responsible for the regulation and supervision of financial services conducted in or from within the BVI, has been expanded by the BVI VASP Act to include the supervision and regulation of VASPs operating in or from within the BVI.
Licensing And Supervision.
Under the BVI VASP Act, VASPs are required to register with the Commission. The licensing process involves a thorough assessment of the VASP's operational and security measures, compliance procedures, and corporate governance. This regulatory oversight, which is very similar to that applicable to investment funds, investment managers and other providers of financial services, promotes transparency, accountability, and of course, the adoption of best practices.
VASPs that were active when the BVIU VASP Act came into force (1 February 2023) had until very recently (31 July 2023) to apply to the Commission, or alternatively to cease carrying out VASP related activities.
When the Commission approves a VASP application, it will register the applicant, issue a certificate of registration, and impose such conditions (if any) on the registration as it considers appropriate (including a requirement to obtain professional indemnity insurance).
A VASP willing to be licensed in the BVI must have certain functionaries always appointed. These functionaries include directors and senior officers, an authorised representative, auditors (unless an exemption is granted), and a compliance officer (also unless an exemption applies).
Any entity carrying on virtual asset services without being registered under the BVI VASP Act is liable on conviction to a fine of up to one hundred thousand dollars (US$100,000) and/or five (5) years imprisonment (for any director, partner or senior officer who knowingly authorised, permitted, or acquiesced in the commission of the relevant offence).
Post Licensing Obligations
The BVI VASP Act sets out several on-going obligations for VASPs which include:
- Maintaining records that (i) are sufficient to show and explain its transactions; (ii) enable its financial position to be determined with reasonable accuracy; (iii) enable it to prepare all necessary financial returns and statements; (iv) enable its financial statements to be audited; (v) show any complaints made by clients; and (vi) show the steps it takes to guard against money laundering, terrorist financing and proliferation financing.
- Submitting a copy of its auditor’s report to the Commission within six (6) months of the end of its financial year.
- Ensuring that client assets are identified, or identifiable, and appropriately segregated and accounted for.
- Cooperating with the Commission to ensure compliance with the BVI VASP Act, and providing the Commission with any documents or information it may require discharging its functions.
- Obtaining the Commission’s prior written approval to any proposed change of name, disposal of any significant interest in the VASP or changes to its functionaries.
Virtual Asset Custody And Administration.
The BVI VASP Act recognises the importance of secure custody and administration of virtual assets. It establishes specific requirements for VASPs engaged in custody services, ensuring adequate safeguards for clients' digital assets. By setting standards for secure storage, encryption, and access controls, the act aims to protect investors' funds and enhance the overall integrity of the virtual asset ecosystem.
Anti-Money Laundering and Counter-Terrorist Financing Measures.
The VASP Act places a strong emphasis on combating money laundering and the financing of terrorism. VASPs are required to implement robust AML and KYC procedures, including customer due diligence, transaction monitoring, and suspicious activity reporting. Compliance with these measures not only safeguards the reputation of the BVI but also promotes global efforts to prevent financial crime associated with virtual assets.
In the case of transactions in the amount of US$1,000 or bigger involving virtual assets, the Anti-money Laundering (Amendment) Regulations, 2022 and the Anti-money Laundering and Terrorist Financing (Amendment) Code of Practice, 2022 shall also apply.
Embracing The Digital Revolution
The introduction of the BVI VASP Act demonstrates the BVI's commitment to fostering innovation and embracing emerging technologies. By providing regulatory clarity and a supportive environment, the BVI aims to attract virtual asset businesses, including fund managers and investment vehicles focused on digital assets. This forward-thinking approach positions the BVI as a hub for blockchain and cryptocurrency-related activities, driving economic growth and diversification.
The BVI VASP Act marks a significant milestone in the BVI's journey towards embracing the digital asset revolution. By establishing a comprehensive regulatory framework, the BVI is paving the way for innovative fund structuring opportunities in the realm of virtual assets. The act's focus on regulatory clarity, consumer protection, and AML measures ensures that the BVI remains at the forefront of global efforts to shape a secure and compliant virtual asset industry. Fund managers and investors seeking to explore the potential of digital assets can leverage the BVI’s supportive environment and robust regulatory framework to unlock new avenues for growth and diversification in fund structuring.
Martín A. Litwak
Lawyer specialised in wealth structuring and investment funds.
Martín has focused on providing advice to high net worth (HNW), ultra-high net worth (UHNW) and institutional families domiciled in Latin America.
His expertise in setting up and/or managing fiduciary structures designed to tackle issues related to the lack of rule of law, the lack of privacy and the fiscal voracity of the countries in which they reside and/or conduct their business activities, as well as his experience in resolving succession issues and/or to ensure that the family assets are well protected makes him one of the foremost lawyers in this field.
He has also assisted several Latin American based fund managers with the establishment and licensing of hundreds of investment funds, the majority of them in the British Virgin Islands and the Cayman Islands.
Finally, Martín has been very active in multi-jurisdictional mergers and acquisitions, international financial transactions of several types (i.e. private equity/venture capital deals, project financing, structured finance, IPOs, etc.), tax amnesties and the provision of advice in transactions involving crypto-assets and Blockchain (ICOs, STOs, etc.)
