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19/02/24

Jersey: Regulation Of The Virtual Assets Industry

Jersey

Tshogofatso Dhlamini

Jersey established itself as a crypto-friendly jurisdiction early on, when the island's regulator, the Jersey Financial Services Commission (JFSC), approved the launch of the world's first regulated Bitcoin investment fund, GABI Plc. Whilst the JFSC has a forward-thinking attitude towards the digital assets industry in Jersey, the island is not a ‘crypto free-for-all’ jurisdiction.

Navigating The Perils Of The V…

Jersey Virtual Assets Market Trends In 2023

Following the FTX crash in November 2022, the digital assets industry started 2023 on shaky ground, coupled with the Securities Exchange Commission filing suits against some of the world's biggest crypto exchanges, i.e. Binance, Coinbase, and Kraken.

Despite the negative trends that affected the digital assets industry on a global scale, Jersey continues to be open to crypto and continues to establish itself as an autonomous and pro-business jurisdiction. In 2023, Jersey has seen an increase in digital asset exchange trade products (ETPs) programmes. In May 2023, Jersey welcomed the ETP programme for digital asset manager Valour, and in July 2023, the JFSC approved the first digital assets investment business licence for digital assets trading firm, Elwood.

Virtual Asset Businesses That Require Regulation In Jersey

Other than introducing the Virtual Asset Service Provider (VASP) regime in Jersey's Anti-money Laundering / Combatting Financial Crime / Countering Proliferation Financing (AML/CFT/CPF) regime (see below), Jersey has deliberately chosen not to introduce crypto specific legislation; instead, crypto is treated as another asset class within Jersey's existing financial services legislation and Jersey's AML/CFT/CPF regime. Below is a summary of the key financial services legislation in Jersey which applies to the issuing and exchange of cryptocurrencies:

(a) 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 crypto businesses which fall within the FSJL perimeter are most commonly:

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

(b) Proceeds of Crime (Jersey) Law 1999 (POCJL): POCJL sets the Island's AML/CFT/CPF perimeter; any business within this perimeter is required to carry out due diligence on its customers, and maintain policies and procedures to detect and prevent money laundering.

(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/CPF processes, background, and quality of the promoter.

(d) 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.

 

Notable Amendments to Jersey's Financial Services Legislation

POCJL: Requirements Relating To Activity

Jersey's POCJL was amended in January 2023, and as part of the amendments, introduced and brought VASPs in scope of Jersey's AML/CFT/CPF regime. Prior to the VASP regime, virtual currency exchanges were only required to register with the JFSC if they were exchanging crypto to fiat or vice versa. Jersey's virtual assets and VASP regime has been aligned with the Financial Action Task Force Recommendations. The amendments represent a consolidation of the existing AML/CFT/CPF regime relating to virtual assets.

VASPs are defined as persons carrying on the following activities for or on behalf of other persons:

  • Exchange between virtual assets and fiat currencies.
  • Exchange between forms of virtual assets.
  • Transfer of virtual assets.
  • 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 and/or sale of virtual assets.

As part of the POCJL amendments, existing entities that were already conducting VASP activities were given a transitional period of six months to register with the JFSC as VASPs. The transitional period expired on 30 June 2023.

Whilst VASPS are now is scope for Jersey's AML/CFT/CPF legislation, it must be distinctly understood that registration as a VASP does not give the VASP a regulatory badge; the activities of a VASP are unregulated in Jersey unless they fall within certain categories of the FSJL (eg investment business).

Further Requirements To Be Met

Whilst a person may be carrying on any of the VASP activities listed above, that person needs to do so from or within Jersey ‘by way of business’ in order to be caught under Jersey's AML/CFT/CPF regime.

(a) Jurisdiction Test

The VASP activities need to be conducted by a Jersey entity or individual from or within Jersey. A non-Jersey entity can only satisfy the jurisdiction test if:

  • It is managed and controlled in Jersey; or
  • It has physical presence in Jersey (ie office space); or
  • It has employees or agents operating in Jersey with a degree of permanence, and undertaking the VASP activities in Jersey.

 

(b) By Way Of Business Test

Whether a VASP activity is conducted by way of business is a qualitative matter and requires subjective judgement. The JFSC published guidelines on the interpretation of Schedule 2 POCJL (the Guidelines). In terms of the Guidelines, the following are indicators that a VASP activity is conducted by way of business:

  • The person holds or publicly offers to conduct the activity for other persons.
  • The activity is conducted with the aim of making a profit through receipt of compensation.
  • The level of financial compensation received is significant.
  • The person conducts the activities for more than one person.
  • The activities are not conducted in a manner that they would be described as a hobby.

There are no hard-wired rules as to whether or not an activity is conducted by way of business; this must be determined on a case-by-case basis bearing in mind the factors listed above and other factual circumstances.

FSJL

The FSJL amendments came into force on 31 October 2023. The Financial Services (Amendment of Law) (No.6) (Jersey) Regulations 2023 (Amended FSJL) introduced amongst others, the new categories of investment business to include the operation of an investment exchange, that is, the provision of a facility (whether by electronic means or otherwise) for the trading of investments, or the listing of investments for trading, by members of the investment exchange.

It is open to debate whether any given virtual asset constitutes an "investment" for the purposes of the FSJL. However, the position in Jersey is that cryptocurrencies are not an "investment" for the purposes of the FSJL. Accordingly, the provisions relating to the facilitation of an investment exchange under the Amended FSJL do not apply to cryptocurrency businesses in Jersey, and such businesses are not required to apply for an investment business licence.

Compliance With Jersey's AML/CFT/CPF Regime

VASPs are required to maintain policies and procedures to prevent and detect money laundering in respect of their VASP activities pursuant to the Money Laundering (Jersey) Order 2008 (the Order). VASPs are required to maintain appropriate policies and procedures relating to:

  • Customer due diligence (CDD) measures.
  • Reporting knowledge or suspicion of money laundering or the financing of terrorism.
  • Keeping records that may be accessed on a timely basis.
  • Adequately screening employees and providing training.
  • Internal control.
  • Risk management.
  • The monitoring and management of compliance with, and the internal communication of, such policies and procedures.

Money Laundering Reporting Officer (MLRO) / Money Laundering Compliance Officer (MLCO)

VASPs are required to appoint an MLCO whose function is to monitor whether Jersey's AML/CFT/CPF requirements are complied with in the conduct of the VASP activities, and an MLRO whose function is to receive and consider internal suspicious activity reports in accordance with internal reporting procedures.

CDD Measures

Identification Measures: VASPs are required to apply CDD measures, which comprise identification measures and ongoing monitoring. The identification measures must:

  • be applied: (i) before the establishment of a business relationship or before carrying out a one-off transaction; (ii) where money laundering is suspected; and (iii) where there are doubts about the veracity of documents, data or information previously obtained;
  • include (i) identifying the customer and persons acting on behalf of the customer including any third parties; (i) obtaining evidence of identity from reliable sources; (iii) understanding the ownership and control of the customer and third parties; and (iv) identifying the beneficial owners and controllers of the customer and third parties; and
  • must include a risk assessment.

 

Ongoing Monitoring

Ongoing monitoring must involve scrutinising transactions and keeping documents, date or information up to date by undertaking periodic reviews.

Despite the challenges faced by the digital asset industry in 2023, we are seeing a rise in digital asset enquiries. As a long-established, well-regulated international finance centre, Jersey boasts a host of industry experience and local expertise, making it an ideal jurisdiction to launch new digital assets initiatives.

About the Author

Tshogofatso Dhlamini
Tshogofatso is a crypto and funds associate in the corporate and funds practice of Carey Olsen in Jersey. She assists in advising on funds and cryptocurrency matters. Tshogofatso joined Carey Olsen in July 2022, having trained with GlaxoSmithKline as a Legal Graduate and White and Case LLP as a Candidate Attorney. She obtained her LLB (Law) and LLM (Commercial Law) degrees from the University of Johannesburg.

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