2024 British Virgin Islands Blockchain and Cryptocurrency Regulatory Guide

Author: Katrina Lindsay Compiled by: Chris Duncan Chris Duncan and Katrina Lindsay authored the British Virgin Islands (BVI) chapter of the Global Legal Insight Sixth Edition Blockchain and Cryptocurrency Regulatory Guide. This chapter covers the legal requirements related to cryptocurrency and blockchain in the British Virgin Islands, including government attitudes and definitions, taxation, money transmission laws, and anti-money laundering requirements, as well as mining and licensing requirements.

1. Government Attitudes and Definitions

The British Virgin Islands has become a leading offshore financial center, characterized by resilience, flexibility, and innovation in the face of regulatory changes, economic challenges, and natural disasters. Companies, institutions, and individuals engaged in cryptocurrency, blockchain technology, and Web3 use BVI tools to support their international business activities, benefiting from the familiarity and stability of the BVI's common law legal system, tax neutrality, and the business-friendly and flexible nature of the BVI's regulatory and judicial systems. The BVI government works closely with industry leaders on the island (from lawyers and accountants to bankruptcy practitioners and regulators), recognizing that a collaborative industry will be better able to meet the needs of those doing business there while ensuring that the jurisdiction has the capacity to identify and mitigate any associated risks. This is evident in the BVI government's approach to regulating virtual assets. The recently enacted Virtual Asset Service Providers Act 2022 ("VASP Act") aims to ensure that the BVI continues to comply with international standards and adheres to the specific recommendations of the Financial Action Task Force regarding the following aspects, which resulted from a public consultation process where the BVI Financial Services Commission sought feedback, opinions, and comments from all stakeholders. This chapter will discuss this key feature of the VASP Act in more detail. However, at a higher level, the VASP Act can be described as a balanced piece of legislation that is both proportionate and relevant. Companies engaged in custody and trading activities are considered to pose a higher risk to end users and are therefore subject to a higher level of regulation, while other activities, such as projects based on innovative technology and token issuance (which have traditionally been conducted by entities registered in the BVI), are generally not within the regulatory scope of the VASP Act. Under the VASP Act, "virtual assets" are defined as a digital representation of value that can be digitally traded or transferred and can be used for payment or investment purposes. Specifically excluded are digital representations of fiat currency, as well as credit digital records of financial institutions related to fiat currency, securities, or other financial assets that can be digitally transferred.

2. Cryptocurrency Regulation

The VASP Act came into effect on February 1, 2023. Any entity wishing to provide virtual asset services or act as a VASP within or from the British Virgin Islands must register with the Commission. Existing VASPs operating at the time the VASP Act came into effect must submit an application to the Commission by July 31, 2023 (allowing them to continue providing virtual asset services during the application review period), while any new entities must contact the Commission before commencing any activities regulated by the VASP Act. Applications for registration as a VASP must be made in a form approved by the Commission, specifying the category of VASP registration being applied for, and must include (a) a business plan outlining the nature and scale of virtual asset activities; (b) details of proposed directors, senior management, and compliance officers, including documentation demonstrating that they meet the Commission's fit and proper criteria; (c) policies and procedures the applicant has implemented to comply with the obligations set out in the VASP Act and AML/CTF/PF legislative framework; (d) the applicable application fee. When the Commission approves a VASP application, it will register the applicant, issue a certificate of registration, and impose conditions on the registration that it deems appropriate (including a requirement to obtain professional indemnity insurance). The Act defines "VASP" as a virtual asset service provider that provides virtual asset services in the course of business and is registered to conduct one or more of the following activities or operations on behalf of others or for others:

• Exchange between virtual assets and fiat currency;
• Exchange between one or more forms of virtual assets;
• Transfer of virtual assets, where the transfer involves conducting transactions on behalf of another person, transferring virtual assets from one virtual asset address or account to another virtual asset address or account;
• Custody or management of virtual assets or tools that can control virtual assets;
• Participation in and provision of financial services related to the issuance or sale of virtual assets;
• Conducting other activities or operations as specified in the VASP Act or regulations.

Anyone engaging in any of the following activities or operations on behalf of others or for others will be considered to be providing virtual asset services:

• Custody wallets or holding or controlling another person's virtual assets, wallets, or private keys;
• Providing financial services related to the issuance, offer, or sale of virtual assets;
• Providing devices such as ATMs, Bitcoin kiosks, or vending machines to facilitate virtual asset activities through electronic terminals, enabling their owners or operators to actively facilitate the exchange of virtual assets for fiat currency or other virtual currencies;
• Engaging in activities that constitute providing virtual asset services, issuing virtual assets, or participating in virtual asset activities as defined by the Guidelines.

Whether an entity is engaged in virtual asset services will depend on whether the relevant assets constitute "virtual assets." For example, cryptocurrency-based derivatives require closer consideration and may be subject to either the VASP Act or the Securities and Investment Business Act of the British Virgin Islands ("SIBA"), or both. Similarly, consideration should also be given to the list of activities excluded from the scope of the VASP Act, namely providing ancillary infrastructure to allow others to provide services, such as cloud data storage providers or integrity service providers responsible for verifying the accuracy of signatures. While it is not intended to specifically regulate cryptocurrencies, BVI entities operating in the cryptocurrency, blockchain technology, and Web3 space may also be subject to existing BVI regulatory frameworks, including:

• The BVI Business Companies Act 2004 (Revised);
• SIBA;
• The Financing and Money Services Act 2009 ("FMSA");
• The Anti-Money Laundering Regulations 2008 (Revised);
• The Anti-Money Laundering and Terrorist Financing Code of Practice;
• The Economic Substance (Companies and Limited Partnerships) Act 2018 (Revised) - particularly important if a BVI company intends to hold any intellectual property related to the underlying technology.

To avoid duplicate regulation, the VASP Act explicitly states that individuals registered under the Act and solely engaged in providing virtual asset services do not need to obtain SIBA or FMSA licenses.

3. Sales Regulations

3.1 VASP Act

Under the VASP Act, while there is no explicit exclusion, it is generally understood that the mere act of issuing or selling virtual assets within the British Virgin Islands is not an activity regulated by the VASP Act. However, if an entity in the British Virgin Islands provides financial services related to the issuance of virtual assets and the transfer of virtual assets on behalf of another party, this may constitute virtual asset services and require that entity to register with the Commission under the VASP Act.

3.2 SIBA

SIBA regulates matters related to the provision of investment services within the British Virgin Islands. SIBA stipulates that anyone engaging in or claiming to engage in any type of investment business within or from the British Virgin Islands must do so through an entity regulated and licensed by the Commission. The definition of investment business is broad and encompasses: (i) investment dealing; (ii) arranging investment deals; (iii) investment management; (iv) investment advice; (v) investment custody; (vi) investment operation; (vii) operating an investment exchange. The definition of "investment" is also broad and may include: (i) shares, partnership interests, or fund interests; (ii) bonds; (iii) documents conferring rights to shares, interests, or bonds; (iv) certificates representing investments; (v) options; (vi) futures; (vii) contracts for difference; (viii) long-term insurance contracts. Whether virtual assets fall under the SIBA regime will depend on whether they exhibit characteristics similar to those of stocks as defined in the investment definition. Furthermore, it is advisable for any collective investment vehicle investing in virtual assets or accepting virtual assets through subscriptions and then investing in more traditional asset classes to seek legal advice in the British Virgin Islands regarding whether such activities require registration as a fund.

4. Taxation

The British Virgin Islands International Tax Authority has not issued any formal statements regarding the taxation of virtual assets. However, the British Virgin Islands is a tax-neutral jurisdiction with a zero percent income tax rate, meaning that the BVI government does not impose income tax. Consequently, BVI entities are not required to file income tax returns but must submit annual economic substance declarations. Additionally, the British Virgin Islands does not impose capital gains tax, gift tax, profits tax, estate tax, or inheritance tax. For tax purposes, BVI entities may become residents of any jurisdiction based on tests such as "management and control." All BVI entities are exempt from taxation in the British Virgin Islands and can obtain proof from BVI registered agents or the tax authority. Furthermore, the British Virgin Islands operates a source-based taxation system, under which BVI entities are taxed on their net income after deducting all BVI expenses. Therefore, BVI entities operating outside the British Virgin Islands, if they are tax residents of the British Virgin Islands, should not be taxed on their foreign-source income. In the case of initial coin offerings, exchange operators need to be aware of the implications of the Foreign Account Tax Compliance Act ("FATCA") and the Common Reporting Standard ("CRS").

5. Money Transmission Laws and Anti-Money Laundering Requirements

The relevant money transmission law in the British Virgin Islands is the FMSA, which regulates money services businesses. The FMSA defines money services businesses to include:

• ATM services;
• Remittance services;
• Check cashing services;
• Currency exchange services;
• Issuance, sale, or redemption of money orders or traveler's checks.

While it is generally agreed that "money" and "currency" refer to fiat currency rather than cryptocurrencies, as noted above, the explicit exclusion in the VASP Act for entities registered under the Act solely engaged in providing virtual asset services will have particular relevance and help provide certainty for many virtual asset service providers (for example, those involved in transferring virtual assets from one account to another). However, caution is needed if a company is deemed to be engaging in any activities outside the scope of the VASP Act, as the above exemption does not apply in those cases. The 2022 Anti-Money Laundering (Amendment) Regulations and the 2022 Anti-Money Laundering and Terrorist Financing (Amendment) Code of Practice, which came into effect on December 1, 2022, also apply to VASPs, bringing them under the BVI AML/CTF regime for transactions involving virtual assets valued at $1,000 or more. While a detailed consideration of the specific requirements of the BVI AML/CTF regime is beyond the scope of this chapter, anyone subject to this regime generally needs to perform the following actions:

• Appoint a designated individual as the anti-money laundering compliance officer to oversee compliance with anti-money laundering laws and liaise with regulators (under the VASP Act, VASPs must have such officers approved by CIMA);
• Designate a person as the money laundering reporting officer to act as a reporting line within the business;
• Implement procedures to ensure proper identification of counterparties, conduct risk-based monitoring (specifically considering the nature of counterparties, geographical areas of operation, and any risks associated with new technologies such as virtual assets), maintain appropriate records, and provide adequate training to employees.

Additionally, the Commission has issued the "Guidance for Virtual Asset Service Providers on Preventing Money Laundering, Terrorist Financing, and Proliferation Financing" and established new regulatory requirements to ensure that intermediaries obtain sufficient information related to virtual asset transfers. Based on our experience, it is generally advisable for most parties to consult professional third-party providers to assist in completing this process.

6. Promotion and Testing

The British Virgin Islands has launched the "Financial Services (Regulatory Sandbox) Regulations 2020" ("Sandbox Regulations") to encourage fintech companies to innovate under a relaxed regulatory framework. The purpose of the Sandbox Regulations is to: l Encourage startups wishing to provide new financial service solutions that involve fintech business models not currently covered by existing BVI legislation (whether explicitly or implicitly); l Enable startups wishing to test innovative technologies to provide licensable financial services; l Allow entities that have obtained Commission approval and wish to test innovative technologies as part of their approved financial service products. Those approved as sandbox participants under the Sandbox Regulations before the VASP Act came into effect can notify the Commission in writing of their intention to provide innovative fintech related to virtual assets (such notifications will be treated as applications for registration as virtual asset service providers). VASPs not registered under the VASP Act or not approved under the Sandbox Regulations wishing to conduct virtual asset services and provide innovative fintech can apply to the Commission under the Sandbox Regulations, indicating their intention to engage in providing virtual asset services and applying innovative fintech.

7. Ownership and Licensing Requirements

The British Virgin Islands imposes no restrictions on holding cryptocurrencies for investment purposes. While currently untested, it is anticipated that investment managers may need to apply for registration under the VASP Act to hold these virtual assets (if it is determined that the investment manager is holding these virtual assets on behalf of a third party). Whether investment managers licensed under the approved manager regime also need to register separately under the VASP Act remains uncertain. Similarly, while untested, investment funds registered or established in the British Virgin Islands that intend to trade virtual assets as part of their investment strategy may not need to register with the Commission under the VASP Act to do so, provided they are dealing with these virtual assets on a proprietary basis.

8. Mining

Cryptocurrency mining is not within the scope of the VASP Act, and therefore, from the perspective of the British Virgin Islands, mining activities remain unregulated, whether conducted within the British Virgin Islands or by companies outside the British Virgin Islands. The high cost of electricity in the British Virgin Islands makes large-scale cryptocurrency mining unlikely to be efficient.

9. Border Restrictions and Declarations

The British Virgin Islands does not impose any general border restrictions on the ownership or importation of virtual assets. As part of the British Virgin Islands' commitment to combat money laundering and terrorist financing, the Customs Management and Duties Act 2010 stipulates that anyone entering or leaving the British Virgin Islands must declare any items in their luggage or carried on their person exceeding $10,000, including coins, banknotes, traveler's checks, and negotiable instruments. While the VASP Act does require that any value-based provisions contained in financial services legislation or any other regulations related to money laundering, terrorist financing, and proliferation financing be interpreted to include virtual assets, there is a conceptual issue regarding what would constitute the import or transport of such assets, given the nature of these assets, particularly those based on or recorded on distributed ledgers. Therefore, we do not expect such requirements to apply to virtual assets.

10. Reporting Requirements

As noted above, for AML regulations, British Virgin Islands companies providing virtual asset services related to transactions involving virtual assets valued at $1,000 or more will be considered to be conducting "relevant business" and will need to comply with the British Virgin Islands' anti-money laundering/anti-terrorist financing/financial crime legislative framework, including adhering to the "travel rule" and reporting any suspicions of money laundering or other criminal activities to the Commission and/or the British Virgin Islands Financial Investigation Agency (if applicable). The OECD has also released the final version of the Crypto-Asset Reporting Framework ("CARF") and the 2023 update of the CRS, creating a cross-border reporting framework that facilitates the standardized exchange of crypto-asset transaction information. Therefore, it is anticipated that the British Virgin Islands will amend its CRS legislative framework to implement the recommendations of CARF.

11. Estate Planning and Inheritance

Under British Virgin Islands law, cryptocurrencies and other virtual assets have not yet been widely used for estate planning and inheritance. Neither the VASP Act nor any other specific regime under British Virgin Islands law addresses the handling of virtual assets upon the death of their holders. This means that, in principle, assuming that British Virgin Islands law governs the inheritance of the deceased's estate, virtual assets will be treated in the same manner as any other asset. Similar to many jurisdictions outside the British Virgin Islands, there may be some uncertainty regarding the location of virtual assets. If the assets can be analyzed under the traditional conflict of laws rules of the British Virgin Islands, the deceased's virtual assets cannot be effectively transferred to his or her heirs or beneficiaries until an application is made to the High Court of the British Virgin Islands for probate registration. To handle the deceased's virtual assets, an individual must be designated as the deceased's legal personal representative through obtaining the appropriate authorization from the registry. Two types of grants can be obtained:

• A grant of probate (where the deceased left a will explicitly involving virtual assets in the British Virgin Islands);
• A grant of letters of administration (where the deceased did not leave a will explicitly covering virtual assets in the British Virgin Islands).

In the latter case, the deceased will be treated as having died "intestate" concerning virtual assets located in the British Virgin Islands—even if they have a valid will covering assets in other jurisdictions. The main potential difficulty that may arise is practical. That is, any heir to virtual assets will generally only be able to access those virtual assets if the deceased's or beneficiary's personal representative (as applicable) possesses or can obtain the information necessary to access and control the virtual assets (e.g., the private keys to the wallet storing the virtual assets). Most exchanges have policies for transferring virtual assets to close relatives, but these policies and transfer requirements vary by exchange, and it is generally considered prudent to avoid leaving significant value on exchanges at any time due to the risks of hacking and bankruptcy.