Seychelles: Regulatory Sandbox Exemption

As per the Regulations, the regulatory sandbox (Sandbox) allows for small-scale testing  of innovative eligible financial services or products within a regulated environment with defined conditions and restrictions, and may obtain exemptions from licensing, disclosure and reporting requirements under the Securities Act, 2007 (Act). As interest continues to grow in virtual currencies and blockchain technology, governments, regulatory authorities and standard setting bodies are evaluating the benefits and potential risks of these innovations while considering numerous regulatory issues. Sandbox announcements by the Authority go some way toward clarifying its position relative to a digital asset’s possible designation and exemption as a security, the obligations of issuers and inter­mediaries, and the responsibilities required of trading platforms.

Eligibility

An ‘eligible person’ is defined under the Regulations as a person who may, but not necessarily be, a permanent resident of Seychelles who offers the following eligible financial services outside of Seychelles:

(a) providing a financial product advice in relation to a particular kind of financial product; or

(b) applying for or acquiring a particular kind of financial product; or

(c) issuing, varying or disposing of a non-cash payment facility; or

(d) arranging for the issuing, varying or disposing of a particular kind of financial product.

The applicant is also required to satisfy and/or comply with the conditions under the Second and Third Schedules to the Regulations and in particular to the following:

(a) each retail client of the eligible person:

• insures no more than US$85,000 for eligible general insurance products that are general insurance products issued by an insurance company that is either authorised by the Authority or are general insurance products authorised by the Authority for the purposes of the Regulations;
• insures no more than US$300,000 for eligible life risk insurance products that are products issued by an insurance company that is either authorised by the Authority or are life risks insurance products authorised by the Authority for the purposes of the Regulations;
• may contribute a maximum of US$40,000 in eligible superannuation products that are superannuation products offered from a jurisdiction that has the approval of the Authority for the purposes of the Regulations,

as the result of (i) the provision of the eligible financial service during the testing period of that service; or (ii) the provision of any other eligible financial service, for which the eligible person has or has had an exemption under the Regulations during the testing period of the other service.

It is to be noted that the Authority has the discretion under the Regulations to limit the total amount that each retail client of the eligible person may invest in certain financial products as the result of (i) the provision of the eligible financial service during that service’s testing period; or (ii) the provision of any other eligible financial service, for which the eligible person has or had had an exemption under the Regulations during the other service’s testing period.

In addition to the above, the applicant is required to comply with certain conditions and these relate to the conditions for notifying the retail and wholesale clients before providing an eligible financial service; the conditions for notifying the retail clients before providing an eligible financial service; the conditions for notifying the retail clients and wholesale clients while providing an eligible financial service; and conditions for maintaining certain procedures, memberships and arrangements.

Further, the Authority has to be satisfied of the integrity, competence, and financial standing to conduct business of the applicant and its key personnel being the directors, key management personnel, shareholders and beneficial owners. In accordance with the guidelines (Guidelines) issued by the Authority in respect of the Regulations, a key person is a director (or other person acting in the role of director); controller (any person with a direct or indirect interest of 10 per cent or more of the shares in the applicant or who, in the opinion of the Authority has the ability to influence the applicant); the CEO, the compliance officer and any person who provides advice to or investment management for a client.

The Authority conducts a review of the application made and assesses the following key attributes of the application:

• Integrity of the applicant and key persons

In order to determine the integrity of the applicant and of the key persons, the Authority may conduct checks with the relevant authorities, investigation bodies, banks or any other entities and may also request for any third party confirmations and/or further clarifications from the applicant for such purposes. 

• Financial Capability and Professional Indemnity Insurance

The applicant is required to provide evidence of a professional indemnity insurance (PII) cover to the Authority at the stage where the application for exemption is made.  For such purposes, a quotation for the PII shall suffice and as soon as the approval in principle is obtained at the end of the application stage, and before the approval is received at the end of the preparing stage, the applicant is required to submit a proof of the policy to the Authority.  Where the applicant is an existing entity, its audited financial statements are also reviewed by the Authority and where, in the opinion of the Authority, the applicant does not have adequate capital, the applicant shall be informed of the same and invited to review its financial capability. In the event the applicant fails to respond within one month of the notification made to it of such review, the application for exemption shall be rejected.

• Key Risks and Mitigation Actions

The applicant is required to detail its corporate governance structure and to identify how risks such as, but not limited to, credit risk, market risk, liquidity risk, operational risk, and reputation risk are overseen.

• Client Safeguard Measures

As part of the application process, the application is further required to identify safeguard measures and these include data privacy controls, client money and assets protection, client risk profile, prevention of conflicts of interest, notifications to clients, and dispute resolution mechanism, to the extent applicable to their proposed product and/or service.

In the exercise of its role under the Regulations and in order to ensure a smooth regulatory process throughout the Sandbox, the Authority is empowered to, inter alia, issue directions, request information or documents from the applicant, and impose, vary or withdraw conditions and restrictions on the applicant.

Mode Of Application

An application for exemption has to be made in the prescribed form with the Authority.  The applicant is required to fill in an application form and needs to satisfy the Authority of such conditions and/or requirements as are specified in the Regulations.

The documents required to be submitted are:

• the application form completed in full;
• the application fee as prescribed;
• business plan (if applicable);
• risk management (if applicable);
• corporate governance structure of the applicant (if applicable);
• organisation structure of the applicant (if applicable);
• certified true copy of current valid licence or other authorisation to conduct such business under the laws of a recognised jurisdiction if the applicant is operating outside of Seychelles (if applicable);
• exit strategy / plan (if applicable).

The application form and underlying supporting documents are to be submitted to the Authority by mail.

Granting Of Exemption

The exemption is granted for a maximum period of 24 months from the date on which the Authority grants the approval and may be extended by the Authority following a written request for such extension from an eligible person under the Regulations.  An extension may be granted for an additional maximum period of 12 months pursuant to the terms of the Regulations.  

No eligible person shall be allowed to test the same type of financial service or the same kind of financial product on more than one occasion, and also, only one member of a group of related body corporate can obtain exemptions under the Regulations at any one time.

Ceasing Of Exemption

The exemption under the Regulations ceases automatically when the testing period of the eligible person has ended or otherwise ceases to be an eligible person for the eligible financial service. 

The Authority also has the power to cancel the exemption where:

(a) the conditions or restrictions imposed under the Regulations are not complied with by:

(i) the eligible financial service; or

(ii) any other eligible financial service for which the eligible person has or has had an exemption under the Regulations; or

(b) the Authority reasonably believes that:

(i) in the case of a natural eligible person, such person is not of good character or reputation or financial integrity or reliability;

(ii) where the eligible person is a corporate body, one or more of the eligible person’s officers are not of good reputation or character or financial integrity or reliability; or

(c) the Authority reasonably believes that the eligible person has failed to act fairly, efficiently or honestly in providing eligible financial services; or

(d) the Authority reasonably believes that the purpose for obtaining exemption was to continue or recommence an exemption granted and that was earlier obtained by another person.

The exemption equally ceases where the eligible person makes a request for a cancellation of the exemption with the Authority under the Regulations.

Sandbox Exit Stage

At the end of the Sandbox testing period or in the event there is a revocation of the exemptions, the applicant can either choose to:

(a) transit to licensing or deployment, that is, the applicant’s business will undertake the formal licensing or deployment process to be launched outside of the Sandbox via a dedicated Sandbox mailbox and shall notify the Case Officer of such decision one month prior to the end of the Sandbox testing period in accordance with the Guidelines; or

(b) discontinue service, that is, the end of regulatory exemptions and cessation of the applicant’s product or service and shall notify the Case Officer of such decision three months prior to the end of the Sandbox testing period in accordance with the Guidelines.

In the event there is a forced exit, that is, a revocation of the Sandbox exemptions prior to the end of the Sandbox testing period, the Case Officer shall inform the applicant of the decision of the Authority to revoke the exemption via a dedicated Sandbox mailbox and by mail.  The applicant would then be required to start the procedures to cease its Sandbox product and/or service and to also notify its clients within 10 business days of the exit in accordance with the Guidelines.

Conclusion

The introduction of the Sandbox exemption to the Seychelles business landscape marks the ambition of Seychelles to position itself as a serious and innovative nation in the pursuit of establishing itself as a reputable financial centre as well as an international hub for blockchain start-ups.

The vast majority of blockchain technology or ICOs, up until now, has typically involved fundraising for blockchain-related technology in which the concept of ownership or profit sharing, for example, and there­fore the security nature of tokens, is not always clear. Despite the nascent nature and relatively insignificant size of the ICO market at present (to put ICO funding in perspective, the total amount that raised through ICO in 2020 to date is growing with increasing interest globally), it is possible that ICOs and cryptocurrencies may become a promi­nent method of raising funds for issuers in any type of industry. Accordingly, it has become increasingly apparent that regu­latory bodies around the world, including the Authority, will need to understand the implications of digital token offerings under existing regulatory regimes, and will need to decide how to adapt (if at all) such regulatory regimes in order to ensure that adequate protections exist for investors and participants, while simultaneously supporting innovation in a sector with significant potential to shape future economics and finance. This raises some interesting questions including as to whether (i) the characteristics of digital tokens and the ICO market are sufficiently different or malleable to justify a distinct or inde­pendent body of law or new definition within an existing body of law, or (ii) a better approach would be to adapt or inter­pret the traditional existing body of law in order to sufficiently address the relevant issues that regulators, issuers, and inves­tors alike have identified when dealing with this type of tech­nology. Simply put, will the use of digital tokens reshape law or will the law reshape the use of digital tokens? The answer to this question may largely depend on how resistant the current law that applies in a particular jurisdiction remains to technologi­cal change. In Seychelles, the Authority appears to be taking a relatively measured approach in this regard, recognising that the traditional nature of its securi­ties laws may require amendment in the future without impos­ing upon itself any binding obligations to do so.

The Authority will continue to monitor the developments of such offers, and con­sider more targeted legislation if necessary. Sandbox dem­onstrates the Authority’s willingness to support innovation in this sector. Dr Steve Fanny, CEO of the Authority, indi­cated that there has been some encouragement of movement of certain players into the regulatory “Sandbox”, as has been the case with some other applications of blockchain technology in Seychelles to date. Thus, the implementation of Sandbox regime could enable blockchain technology on an experimental basis within the “Sandbox’s” regulated environment, helping the Authority and third parties better understand and develop blockchain technology related activity while limit­ing consumer exposure.