In December 2022, the British Virgin Islands (BVI) enacted the Virtual Assets Service Providers Act, 2022 (the Act) which came into force on February 1, 2023. The Act introduces a formal supervisory framework for virtual assets service providers.
The Act defines key terms relevant to this fintech space, prescribes requirements for registration under the Act, and details ongoing obligations, among other matters.
Key Definition – Virtual Asset
Under the Act, a virtual asset is defined as a digital representation of value that can be digitally traded or transferred, and can be used for payment or investment purposes, but does not include (a) digital representations of fiat currencies and other assets or matters specified in guidelines; or (b) a digital record of a credit against a financial institution of fiat currency, securities or other financial assets that can be transferred digitally.
Who is a Virtual Asset Service Provider (VASP)?
Pursuant to the Act, a VASP is a virtual asset service provider who provides, as a business, a virtual assets service and is registered under the Act to conduct one or more of the following activities or operations for or on behalf of another person:
(a) exchange between virtual assets and fiat currencies;
(b) exchange between one or more forms of virtual assets;
(c) transfer of virtual assets, where the transfer relates to conducting a transaction on behalf of another person that moves a virtual asset from one virtual asset address or account to another;
(d) safekeeping or administration of virtual assets or instruments enabling control over virtual assets;
(e) participation in, and provision of, financial services related to an issuer’s offer or sale of a virtual asset; or
(f) perform such other activity or operation as may be specified in the Act or as may be prescribed by regulations made under the Act.
It should be noted, however, that a person who engages in or performs any of the following activities shall not qualify or be treated as a VASP:
(a) providing ancillary infrastructure to allow another person to offer a service, such as cloud data storage provider or integrity service provider responsible for verifying the accuracy of signatures;
(b) providing service as a software developer or provider of unhosted wallets whose function is only to develop or sell software or hardware;
(c) solely creating or selling a software application or virtual asset platform;
(d) providing ancillary services or products to a virtual asset network, including the provision of services like hardware wallet manufacturer or provider of unhosted wallets, to the extent that such services do not extend to engaging in or actively facilitating as a business any of those services for or on behalf of another person;
(e) solely engaging in the operation of a virtual asset network without engaging or facilitating any of the activities or operations of a VASP on behalf of customers;
(f) providing closed-loop items that are non-transferable, non-exchangeable, and which cannot be used for payment or investment purposes; and
(g) accepting virtual assets as payment for goods and services (such as the acceptance of virtual assets by a merchant when effecting the purchase of goods).
Registration as a VASP
A person who wishes to carry on in or from within the BVI the business of providing a virtual asset service may apply to the BVI Financial Services Commission (the Commission) for registration as a VASP to undertake such business in one or more of the following categories:
(a) to carry on the business of providing a virtual assets service;
(b) to engage in the business of providing a virtual assets custody service; and
(c) to operate a virtual assets exchange.
These key categories are further defined below:
“Virtual Assets Service” means the business of engaging, on behalf of another person, in any VASP activity or operation (as outlined in the definition of “VASP”), and includes:
(a) hosting wallets or maintaining custody or control over another person’s virtual asset, wallet or private key;
(b) providing financial services relating to the issuance, offer or sale of a virtual asset;
(c) providing kiosks (such as automatic teller machines, bitcoin teller machines or vending machines) 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; or
(d) engaging in any other activity that, under guidelines issued, constitutes the carrying on of the business of providing virtual asset service or issuing virtual assets or being involved in virtual asset activity.
“Virtual Assets Custody Service” means the acceptance for safekeeping of virtual assets or instruments that enable a VASP to exercise control over the virtual assets or instruments.
An entity seeking to perform this activity will be required, in addition to other obligations imposed on a VASP, to undertake the following functions:
(a) enter into safekeeping arrangements with the owner of the virtual asset and related instruments, with respect to matters such as the duration of the arrangement, manner in which the virtual asset and related instruments s are to be held and maintained, fees payable, client access to the virtual assets, security, remedies available in the event of theft or loss, etc.;
(b) source and adopt best practices in relation to information technology to be applied to the safekeeping of virtual assets and related instruments the VASP maintains on behalf of the owner;
(c) ensure that any ancillary or subsidiary proceeds relating to virtual assets and related instruments accrue to the benefit of the owner of the virtual assets, unless otherwise agreed between the parties; and
(d) take such other measures as may be necessary to safeguard the virtual assets and related instruments held on behalf of third parties.
“Virtual Assets Exchange” means a trading platform that is operated for the purpose of allowing an offer or invitation to be made to buy or sell any virtual asset in exchange for money or any virtual asset and which comes into custody, control, power, or possession of, or over, any money or any virtual asset at any point in time during its course of business.
An entity operating a virtual assets exchange may be subject to certain restrictions and prohibitions, which may include conditions relating to:
- the geographic area in which the virtual assets exchange may carry on its business;
- the nature of the access of the users of the virtual assets exchange;
- the types of clients that the virtual assets exchange may market its services to;
- the types of virtual assets that may be traded on the exchange;
- disclosures to be made to clients in relation to the operation of the virtual assets exchange, including disclosures relating to theft or loss of assets and any related insurance obligations;
- identifying and managing conflicts;
- price discovery mechanisms designed to detect and prevent price manipulation and unfair trading activities;
- supervision of trading activities, including actions concerning the freezing and suspension of trading of virtual assets;
- financing in relation to the purchase of virtual assets; and
- any other necessary control measures to safeguard the integrity of the virtual assets exchange and protect the interests of persons investing on the exchange.
It should also be noted that a VASP that is registered to operate a virtual assets exchange shall not:
- provide financing to its clients for the purchase of virtual assets, unless (i) it obtains permission from the Commission, and (ii) it makes disclosures to its clients regarding the terms of, and the risk associated with, the financing;
- engage in trading or marketing activities in relation to any virtual assets for its own benefit which may be detrimental to the interests of its clients, unless such activities (i) are necessary for the operation of the virtual assets exchange, and (ii) have been disclosed to its clients prior to engaging in the trading or marketing activities;
- permit the trading of a virtual asset on its virtual assets exchange in a manner that is misleading or deceptive, or designed to defraud persons who subscribe for, or purchase, the virtual asset;
- permit a client to trade in or purchase a virtual asset on its virtual assets exchange without first satisfying itself that the client is aware of the risks involved in trading in, subscribing for, or purchasing, the virtual asset and making the appropriate disclosures to the client;
- provide fiat currency-to-fiat currency exchange services to users of its virtual assets exchange without the written approval of the Commission; or
- engage in any other activity which has the potential to compromise the integrity of the virtual assets exchange or erode public confidence in the exchange.
VASP Licence Application
The application for an entity applying to the Commission to be licensed as a VASP must include the following information:
(a) the names and addresses of the persons proposed as directors and senior officers of the VASP (and at least two of the directors must be individuals);
(b) the names and addresses of the persons who hold shares, including their level of shareholding in the VASP;
(c) the names and addresses of the persons who have a ‘controlling interest’ in the VASP (which term refers to a person with control over the VASP, but who is not a shareholder or director);
(d) the physical address in the BVI of the VASP;
(e) the name and address of the auditor of the VASP including the auditor’s consent to act as such;
(f) the name and address of the proposed authorised representative of the VASP (whose main function is to be the intermediary between the VASP and the Commission);
(g) a detailed business plan in relation to the VASP which will need to include information relating to knowledge and expertise, size scope and complexity of the VASP, how the VASP will be marketed, human resource capacity, outsourcing arrangements, initial capital and financial projections, among other things;
(h) a written risk assessment of the VASP, outlining the risks the VASP will or may be exposed to and specifying how those risks are to be identified, measured, assessed, monitored, controlled and reported;
(i) a written manual showing how the applicant, if granted registration, intends to comply with the requirements of the Act and any regulations made thereunder, including how the applicant intends to safeguard against the activities of money laundering, terrorist financing and proliferation financing;
(j) the internal safeguards and data protection (including cyber security) systems intended to be utilised; and
(k) the system to be put in place on how the VASP will handle client assets, custodian relationships and complaints.
The Commission has the power to request additional information as it may consider appropriate in support of the application, in addition to that specified above. In addition, each director, senior officer, and person with a significant or controlling interest in the VASP must meet the “fit and proper” criteria as outlined in the BVI Regulatory Code. In making the fit and proper determination, the Commission will have regard to the (a) honesty, integrity, and reputation, (b) competence and capability, and (c) financial soundness of each of those individuals.
Functionaries and Ongoing Obligations of a VASP
A VASP must at all times have the following functionaries:
(a) an authorised representative;
(b) an auditor for the purpose of auditing its financial statements; and
(c) an individual approved by the Commission who acts as compliance officer, to ensure compliance by the VASP with the provisions of the Act and related legislation.
A VASP will also be subject to a number of ongoing obligations, including the following:
(a) to notify the Commission of any changes in the information submitted as part of its application;
(b) to submit a copy of its auditor’s report on an annual basis;
(c) to file a return containing various details relating to the financial position of the VASP, information on its client base including level of exposure and geographical location, key performance indicators, and complaints received from clients and how they have or are being resolved;
(d) to ensure that client assets are identified or identifiable, and appropriately segregated and accounted for, and to immediately notify any client and the Commission in the event that an asset has in any way been unlawfully interfered with or otherwise compromised (including details of the steps the VASP has taken or is taking to restore the client’s assets and protect the assets from any further unlawful interference or from otherwise being compromised); and
(e) to perform customer due diligence, comply with laws relating to money laundering, terrorist financing and proliferation financing, and maintain relevant records (which includes an obligation on the VASP to adopt measures to assist it in tracing and collecting the IP addresses of its customers, including their associated dates, stamps, geographical data, device indicators, virtual asset wallet addresses and transaction hashes).
In addition to the above, unless the VASP is listed on a recognised exchange, the consent of the Commission must be obtained prior to any person who owns or holds a significant or controlling interest in a VASP directly or indirectly selling, transferring, charging, or otherwise disposing of that interest in whole or part.
The Act provides that any person who is carrying on the business of providing a virtual assets service on the date the Act comes in to force must apply to be licensed as a VASP within six (6) months of that date, but may continue providing the service if an application has been submitted to the Commission and is awaiting approval or refusal.
The BVI has taken a bold step in prescribing rules for the regulation of virtual assets service providers, but it is a necessary step as the fintech space continues to grow significantly. The Act provides clarity on a number of areas and it is expected that further guidelines will enhance understanding of the Act and how it applies to various types of businesses and ideas in this evolving environment.