The Regulation Of Crypto And The Wider Virtual Asset Industry In Jersey

Jersey's Crypto Evolution

Back in 2014, Jersey saw the establishment of the world's first regulated Bitcoin investment fund, GABI Plc (GABI). Since that time, Jersey has continued to see the launch of numerous crypto focused investment funds – see "Crypto Funds" below.

In 2015, Jersey introduced its "virtual currency exchange" regulations to bring any crypto/fiat exchange business within the scope of Jersey's Anti-money laundering/Combatting financial crime (AML/CFT) regime.

December 2017 saw the launch of Jersey's first token, ARC Reserve Currency, an asset backed stablecoin which was, in retrospect, years ahead of its time. Following the launch of ARC and several other tokens, the JFSC published its "ICO Guidance Note" in 2018 (see below) to provide a framework within which to issue tokens from Jersey. Most recently, Radix, the DeFi protocol, utilised this framework to launch its native token XRD from Jersey.

Government Attitude And Regulation

For the most part, Jersey has chosen not to introduce crypto specific legislation and instead decided to treat crypto as another asset class and to regulate crypto businesses within Jersey's existing financial services regulation and AML/CFT regime. The key financial services laws and regulation in Jersey are:

(a) Jersey Private Funds and Jersey Expert Funds

Jersey has two principal fund regulatory regimes, the Jersey private fund and the regulated Jersey expert fund, each of which has its own Guide published by the JFSC. A key distinction between the two is that a Jersey private fund may not have more than 50 investors or make more than 50 formal offers to investors (the so-called “50 or fewer test”).

By contrast, a Jersey expert fund can make an unlimited number of offers and have an unlimited number of “expert investors”,  but is subject to a formal regulatory approval process (there are several categories of "expert investor" the most commonly used being the requirement to invest a minimum of US$100,000 or currency equivalent).  

The most popular regulatory regime for fund managers launching their crypto funds has been the Jersey private fund. Indeed, recent experience has shown that a manager wishing to launch a fund out of Jersey should start the fund’s life as a Jersey private fund and, if the manager builds a track record, then subsequently upgrade to a Jersey expert fund. The key features of a Jersey private fund are:

• Maximum of 50 investors at any time and a maximum of 50 initial offers;
• Must not be listed on a stock exchange. It may be open or closed for redemptions by investors;
• Investors must qualify as professional investors and/or subscribe for interests with a value of at least GBP250,000 (US$300,000);
• No limit on fund size, no investment or borrowing restriction (other than those that are agreed with investors);
• A simple consent is required from the JFSC under local legislation;
• A non-Jersey administrator can be appointed;
• Must have a Jersey designated services provider, or DSP (i.e., a Jersey regulated administrator);
• No audit requirement (although this is generally expected for a digital asset fund);
• No custodian requirement (although generally expected for a digital asset fund); and
• No requirement for any functionary of the fund (e.g., investment manager or adviser) to be regulated in Jersey.

Some additional requirements apply if the fund is actively marketed into the EU or European Economic Area (EEA), but it is possible to “upgrade” a Jersey private fund so that it may be marketed into the EU or EEA at a later stage, and that process is a relatively straightforward and well-trodden path.

Activities In Jersey That Require Regulatory Oversight

Those activities which are specifically subject to formal ongoing JFSC regulation under Jersey's fund regime and the FSJL are as follows:

• crypto focused investment funds and their Jersey based managers; and
• crypto custody (in most circumstances).

Where a crypto business does not strictly speaking fall within the ambit of the FSJL (and therefore not subject to formal JFSC regulatory oversight), that business will nevertheless be caught by the SBPP (as described above) and with the introduction of the VASP regime in early 2023 (see below), any crypto business will almost certainly be within Jersey's AML/CFT perimeter.

(b) Financial Services (Jersey) Law 1998 (FSJL)

Where a crypto business involves the provision of a "financial services business" it will fall within the ambit of the FSJL (unless an exemption is applicable) and would need to apply for the relevant regulatory approval. The FSJL defines a "financial services business" as an investment business, trust company business, general insurance mediation, money services business, fund services business or alternative investment fund services business.

The crypto businesses which fall within the FSJL perimeter are most commonly:

• crypto funds managers/investment managers;
• trading any crypto asset which constitutes an "investment" (i.e. security tokens) on behalf of a third party, clients, providing discretionary investment management or giving investment advice in relation to "investments"; or
• crypto custody (although such custody services would need to either be in relation to funds or where the custodian is expressly acting as trustee).

(c) Sound Business Practice Policy (SBPP)

The purpose of the SBPP is to protect Jersey's reputation as a financial services jurisdiction. Accordingly, the SBPP sets out activities which the JFSC considers "sensitive" and which are subject to greater scrutiny from the JFSC.

The JFSC treats involvement by a Jersey company in token issuances or crypto exchanges or providing services relating to cryptocurrencies as a "sensitive activity". The consequences of this are that the JFSC exercises scrutiny on such activities, and focuses on AML/CFT processes, background, and quality of the promoter.

(d) Proceeds of Crime (Jersey) Law 1999 (POCJL)

POCJL sets the Island's AML/CFT perimeter; any business within this perimeter is required to carry out due diligence (i.e. identify and verify) on its customers and maintain policies and procedures to detect money laundering.

Currently, a "virtual currency exchange" (i.e. a business which converts crypto to fiat (or vice versa)) is currently within the scope of POCJL, and Binance obtained a VCE registration in Jersey in 2018.

(e) The JFSC's ICO Guidance Note

The JFSC issued the ICO Guidance Note in August 2018 following the boom in initial coin offerings in 2017. The Guidance was carefully constructed and sets out clearly the JFSC's position in relation to token offerings. In essence, the JFSC welcomes properly thought out token launches with a robust governance structure, while the regulator's two principal concerns are (a) consumer protection and (b) AML/CFT/proceeds of crime.

To address these issues, the JFSC imposes on a Jersey company which issues a utility token or security token (the Jersey Issuer) a set of conditions which are summarised below (which Carey Olsen helped to write). The conditions are imposed on the consent issued to the Jersey Issuer (a so called COBO consent) under the (oddly named) Control of Borrowing (Jersey) Order 1958, the Island's principal regulation controlling the raising of capital by Jersey entities.

The JFSC do not like tokens or Jersey companies which issue the tokens to be described as “regulated”. However, the JFSC agreed that certain language may be included in any marketing material to give potential token purchasers the comfort that a Jersey issuer has been scrutinised by the JFSC (and which might not be available in other jurisdictions).

A token issuer will need to show the JFSC that the risks of mis-selling are mitigated – this is usually achieved by bolstering risk warnings in the white paper which purchasers have to specifically acknowledge (usually by checking a box on the token portal) prior to purchase.

In addition to obtaining a COBO Consent from the JFSC, the other major item on the critical path is for the Jersey Issuer to appoint a Jersey regulated corporate service provider/administrator to provide certain services. In essence, if things go wrong with the token issuance, the JFSC will be able to hold the administrator accountable.

The JFSC imposes the following conditions on a Jersey Issuer:

• To appoint and maintain a Jersey resident director on the board of the Jersey Issuer.
• To appoint a Jersey regulated administrator to act as administrator to the Jersey Issuer.
• Not to change either the Jersey Issuer's administrator or Jersey resident director without the JFSC's prior approval.
• To prepare and file annual audited accounts with the Jersey Companies Registry irrespective of whether the Jersey Issuer is a public or private company.
• To maintain and adopt systems, controls, policies and procedures for the customer take-on, profiling and transaction monitoring at enhanced levels ensuring reporting of suspicions and money-laundering and financing of terrorism activities (this obligation effectively falls on the Jersey licensed administrator).
• To prepare and issue an information memorandum which complies with certain content requirements required of a prospectus issued by a company under the Jersey Companies Law.
• To include in any marketing material (including the information memorandum) clear consumer warnings highlighting that the token is unregulated (although the ICO Guidance Note includes some wording which has been agreed with the JFSC to give potential token purchasers a degree of comfort).
• If and to the extent that any crypto to fiat exchange (or vice-versa) takes place in Jersey, to require the Jersey Issuer to register as a "virtual currency exchange" pursuant to POCJL (see above), which imposes certain additional AML/CFT obligations on the exchange.

Future Regulatory Developments - Introduction Of The Financial Action Task Force's (FATF) VASP Guidelines

In 2023, Jersey will introduce the FATF Virtual Asset Service Provider Guidelines (VASP Guidelines), which will bring VASPs formally within the scope of Jersey' AML/CFT perimeter.

Unlike other jurisdictions which have sought to create different classes of VASP and regulatory capital requirements, Jersey's VASP regime will reflect the purposes of the FATF guidelines and will simply add VASP to the list of activities which are subject to Jersey's AML/CFT requirements.