Embracing the Shift: The BVI and the Digital Movement

The Digital Financial Services Era

The use of computer programs and other technology to support or enable financial services is now one of the fastest growing industries in the world. As online financial transactions occur more quickly, more efficiently and more cost effectively, more and more clients are readily embracing these on-line based products. Cryptocurrencies and digital tokens have maintained their energetic movement through the world’s investment markets, and FinTech will also continue to expand its reach. The BVI aims to keep step with these developments with the view of attracting and servicing clients who call upon the strong financial services community in the BVI to structure these innovative digital products. We discuss some of these areas below in more detail.

Regulatory Sandboxing

A plethora of technological entrepreneurs have already expressed direct interest in the BVI’s ability to allow them to test their new digital business models by conducting live experiments in a controlled environment, which is operated under the supervision of the BVI regulator, the Financial Services Commission.

Regulatory sandboxes are gaining popularity in most developed financial markets and the BVI Government is currently engaged in discussions across industries and countries to assess how a BVI regulatory sandbox can help innovators create more affordable products and services and foster financial inclusion. The BVI regulator recently made a public statement on its commitment to help financial services firms to innovate through regulatory and financial technology.

In addition to the sandbox, a proposal to expand the BVI Financing and Money Services Act, 2009 to allow for P2B (including P2B and B2B) lending platforms to operate from, or within the BVI, without the need to obtain a licence is under review

Guidance to Clients Structuring Cryptocurrency Funds and ICOs

We have seen a staggering level of interest and requests to structure initial coin offerings (ICOs) in the BVI, thereby raising third party capital by issuing tokens of some form via a blockchain network. We have been advising, and continue to advise on structuring some of the world’s leading ICOs through BVI companies.

Crypto-currency funds

Crypto-asset focused funds have been a primary agenda item in the BVI financial services transactional space more recently.  Many new start-up and emerging managers wish to gain access to this market and they correctly identify the BVI as a jurisdiction with a very natural fit for that purpose, given the innovative fund products on offer.   

Whilst crypto-assets may be seen by many as simply the ‘in vogue’ asset class, there are three important areas that must be focused on when structuring a crypto-fund as opposed to, for example, a long/short equity fund:

1. Risk Factors: The risks involved in investing in crypto-assets are likely to be different from investing in other asset classes. As such, additional care needs to be taken in crafting specific risk factors that are both appropriate and relevant. It is also important to ensure that potential investors are appropriately informed of the challenges (both actual and potential) in this niche area.
2. Custody: Despite the growth in the number of managers trading crypto-assets over the past few years, there is still a lack of premier custodians willing and, more importantly, able to service the industry. For this reason, self-custody is currently the norm. As the market matures and best practices are developed, this position is likely to change. However, for the time being, the BVI regulator has, in principle, no objection to granting custodian exemptions to ‘private’ or ‘professional’ funds on a case-by-case basis to allow a fund the flexibility it needs in this regard.
3. Subscriptions in-kind: Many clients come to us wanting to accept crypto-asset subscriptions into a fund. There are two issues that need to be addressed here; first, the number of fund administrators who have a sophisticated enough system to cater for this sector is currently limited; and, second, the question as to how a fund can satisfy its anti-money laundering and countering the financing of terrorism obligations (AML/CFT) in circumstances where obtaining details on the source of funds to originally acquire the crypto-assets can also be opaque.. Whilst the first issue is clearly a practical problem, the second issue has legal ramifications and is something on which we are regularly asked to advise. The concern is that it is very difficult to verify that the crypto-currency transferred to the fund’s wallet actually belongs to the subscriber (unlike circumstances where the subscriber subscribes in FIAT currency. In this case the fund knows that the relevant regulated financial institution has conducted its own KYC/CFT checks and will confirm in the relevant wire details that subscriptions monies are from an account in the name of the subscriber). There is no silver bullet in these situations, and, as we have previously pointed out, there may be a number of interesting ways to reduce the risks involved. We discuss these risks in more detail on Harneys Offshore Funds Blog[1].

ICOs

For clients seeking to structure ICOs in the BVI, perhaps the most important guidance that we can provide is that clients retain the advice of lead onshore counsel who are well-versed in ICO and crypto matters and are able to give distil the full spectrum of relevant regulatory concerns in all of the jurisdictions in which they wish to operate and market into.

Also, as every transaction is different, the analysis of the launch of each ICO will be different. BVI legal counsel will therefore also need to review the White Paper produced by the client associated with the relevant ICO in order to assess whether the platform operation, tokens to be issued, or the underlying transactions related to any of them will trigger regulation under BVI law.

From experience, the vast majority of clients in this space use their selected onshore legal counsel to draft the key transaction documents (token pre-sale agreements, private offering memoranda, ICO sale agreements, and technology licensing /assignment agreements).   The BVI legal counsel then reviews this information for the purposes of complying with BVI law and drafts the necessary corporate approvals. A regulatory and tax review and analysis should also be carried out by qualified lawyers/tax experts in any jurisdictions where the tokens are to be offered or sold.

As for cryptocurrency funds mentioned above, issuers of crypto-tokens are expected to adhere to best practices in relation to customer due diligence and know your customer policies and procedures on investors. Therefore, clients will also need to obtain legal advice on BVI AML/CFT requirements to deal with the issue of allowing investors in their ICO to subscribe in kind. As we mentioned above, the question as to how a cryptocurrency fund or a digital token issuer might satisfy its AML/CFT obligations when accepting subscriptions from investors is one of the main issues for regulators and service providers to wrestle with, but ICOs have additional issues on the basis that they are likely to want to provide a secondary market for the trading of their tokens. Any new holders of those tokens will also need to first provide the relevant documents to meet the AML/CFT obligations of the issuer. For further discussion as to how risks associated with crypto-subscriptions can be minimised, please visit Harneys Offshore Fund Blog.

As regards the tax position in relation to ICOs, tax analysis under BVI law is relatively straightforward as BVI companies are (save for a few exceptions) tax exempt. The tax analysis will be driven by factors such as where the company conducts its operations, shareholding and control (controlled foreign company analysis), as well as the tax residency of the investors. Tax experts will therefore need to be consulted in those relevant jurisdictions, as opposed to in the BVI.

Conclusion

The BVI has always been successful in delivering quality financial services at an appropriate level of cost. There is now an ever-increasing fast-pace attitude shift in the conduct of financial services, and financial services experts have all agreed that the future is hard to predict.

However, the BVI must, and is well positioned to respond to this paradigm. The jurisdiction remains engaged in the conversation, is cognizant of the shift in its marketplace and is fundamentally ready to adapt to its new environment.  The BVI is therefore committed to embracing the idea of innovation and competition so that it can continue to deliver products on client demand in order to continuously strengthen the strong, vibrant and successful financial services eco-system that has been the jurisdiction’s true foundation for many years.

[1] http://offshorefundsblog.com

Ayana Hull
Counsel

Harneys
British Virgin Islands, Cayman Islands Anguilla, Cyprus, London, Luxembourg, Hong Kong, Shanghai, Singapore, Montevideo, São Paulo and Vancouver.