Fintech 2020 Comparisons

Last Updated March 02, 2020

Contributed By Walkers

Law and Practice

Authors



Walkers is a leading international firm that provides legal, corporate and fiduciary services to global corporations, financial institutions, capital markets participants and investment fund managers. Its clients are Fortune 100 and FTSE 100 companies as well as some of the most innovative firms and institutions across the financial markets. The firm has ten offices, in Bermuda, the British Virgin Islands, the Cayman Islands, Dubai, Guernsey, Hong Kong, Ireland, Jersey, London and Singapore. It advises businesses partnering with or investing in fintech firms as well as financial institutions and asset managers developing their own fintech products and services. The fintech group, comprising over 60 lawyers, also works closely with policymakers, regulators and governments to facilitate appropriate legislation and regulation that keeps pace with innovation. Walkers covers fintech's core financial industry sectors – asset management, investment, banking, finance, insurance and payments – with particular expertise in advising businesses specialising in blockchain, digital assets and alternative model finance.

The government of the British Virgin Islands (BVI) and the BVI Financial Services Commission (FSC) – the BVI's financial services regulator – have progressed important initiatives in 2019 that demonstrate the BVI's unequivocal commitment to digital transformation and fintech innovation.

The BVI government introduced a suite of "e-Bills" in the House of Assembly in December 2019 that are designed to support a digital environment in the BVI and provide the means for the operation of e-Government services. The Bills include, among others, the Electronic Transactions Bill 2019 and the Electronic Filing Bill 2019. When these become law, the BVI legal system will be enhanced to legally recognise the filing, creation, or retention of official documents with or by a government body by electronic means. It will also legally recognise the provision, deliverance, retention, or access to information or documents by electronic means, where the law requires access be given to information or documents or for the same to be retained, delivered, or presented in original form. 

Previously, the Electronic Transactions Act 2001 had recognised electronic signatures legally. Furthermore, in 2018, the BVI permitted the use of "appropriate digital and electronic means" to carry out identification and verification for purposes of compliance with anti-money laundering and counter-terrorist financing rules and regulations. In addition, the 2018 amendment to the Financing and Money Services Act 2009 that came into force in March 2019 expanded the definition of "money services business" beyond money transmission to include "electronic money", "mobile money", "payments of money" and other alternative methods of money and payment transmission. References to "money" or "electronic money", in the context of BVI legislation concerning legal tender, ought to be construed as references to fiat money and do not include a reference to cryptocurrencies. The 2018 amendment to the Financing and Money Services Act 2009 also introduced a new licence (Class F), which permits the holder to carry on the business of international financing and lending in the peer-to-peer (P2P) fintech market, including peer-to-business (P2B) and business-to-business (B2B) markets.

The December 2019 suite of e-Bills includes the Data Protection Bill 2019, which will impose data protection obligations on "data users" who process, or have control over the processing of, personal data. In essence, the data user may not process personal data unless it satisfies one of the conditions specified in the Bill and must protect the personal data when processing it. The data subject will have certain access and other rights. Sensitive personal data will be subject to stricter rules.

Importantly, the FSC introduced a "regulatory sandbox" in 2019 that has been open to applications since the beginning of October 2019. The objectives of the BVI's regulatory sandbox are to align regulation and innovation by providing a defined test environment and develop a tailored and focused supervisory framework, while protecting market participants. The goal is to permit the generation of new fintech-related business models in the BVI. 

The fintech business models in the BVI involve blockchain (distributed ledger) technology and predominantly concern funds investing in cryptocurrencies, funds investing in blockchain projects, token issuers in the context of initial token offerings (ITOs) or initial coin offerings (ICOs), joint-venture vehicles developing blockchain projects, and intellectual property-holding vehicles. The fintech-related fund initiatives are driven by new players.

The competent financial services regulator is the FSC. Entities and individuals conducting regulated financial services activities are required to obtain a licence or be registered with the FSC to conduct the regulated activities. Financial services activities are regulated under the Securities and Investment Business Act, the Banks and Trust Companies Act, and the Financing and Money Services Act 2009. The supervisory powers of the FSC are based on the Financial Services Commission Act.

There are a number of additional regulatory rules and regulations that may apply to firms that engage in fintech businesses, including anti-money laundering requirements, sanctions rules, beneficial ownership disclosure requirements, reporting requirements in the context of international exchange of tax information, and economic substance requirements.

To date, the FSC has not designated ICOs or ITOs, nor any resulting crypto assets, as "investments" or "investment business" within the meaning of the Securities and Investment Business Act. However, there is room for the FSC, based on the definition of "investment", in particular the reference to "interests" in partnerships or funds, to consider certain types of tokens that result from an ITO as an "investment", depending on the entitlements attached to that token. Nevertheless, neither the FSC nor the BVI government have given any indication that they are considering doing this in the near future. 

The definition of "money services business" in the Financing and Money Services Act 2009, includes references to "electronic money", "mobile money", payments of money and other alternative methods of money and payment transmission. "Money" and "electronic money" are not defined in the Financing and Money Services Act 2009, but references to "money" or "electronic money", in the context of BVI legislation concerning legal tender, ought to be construed as references to fiat money. Neither the FSC nor the BVI government have given any indication that they consider the references to "electronic money" or "mobile money" to include a reference to virtual currencies in the form of cryptocurrencies, or that they are considering changing their position on this matter.

There are no restrictions in the BVI on compensation models that industry participants are allowed to use to charge customers.

The FSC does not differentiate between new fintech participants and legacy participants, but note the comments in 2.5 Regulatory Sandbox and the comments in 2.12 Conjunction of Unregulated and Regulated Products and Services, relating to incumbent players who wish to extend their business model to a new activity, whether regulated or not.

The FSC introduced a regulatory sandbox in 2019 and has been open to applications since the beginning of October 2019. The objectives of the BVI's regulatory sandbox are to align regulation and innovation by providing a defined test environment and to develop a tailored and focused supervisory framework, while protecting market participants. The goal is to permit the generation of new business models within the BVI. 

Sandbox participants will have the benefit of exemptions from specific provisions of the regulatory legislation and rules that might otherwise be applicable, although anti-money laundering rules and regulations will apply. Application is open to BVI business companies, foreign companies, limited partnerships, BVI microbusiness companies, and BVI licensees. A sandbox applicant must submit a business proposal that sets out an innovative product or service that is a regulated activity or has a nexus to financial services, and which includes details of test scenarios, projected outcomes, and an exit strategy that permits either the winding down of operations or the transition of the sandbox participant to authorised licensee. Applicants must be fit and proper and to that end, must demonstrate competence, integrity and financial soundness. 

Successful applicants will be subject to the following governance requirements:

  • a duty to pay a fee;
  • a duty to submit regular interim progress reports; and
  • duties to maintain adequate and transparent records, risk management policies and controls, and to conduct an independent review of IT systems.

Any material interim changes to the business plan will need prior FSC approval. In addition, successful applicants will be subject to a restriction on the number of clients and a requirement to disclose certain potential risks to each client. The mandatory disclosures concern the fact that the sandbox participant does not hold a licence issued by the FSC for the particular (sandboxed) activity, that the business model is being tested within the regulatory sandbox, and that the duration of the sandbox participation is limited to 18 months, with a potential extension of up to six months. 

The FSC has indicated that it expects to issue specific regulations under the Financial Services Commission Act in the second quarter of 2020 that will govern regulatory sandbox operations.

As the regulator of the financial services industry in the BVI, the FSC's functions include responsibility for the regulation, supervision and monitoring of financial services licensees, the enforcement of financial services laws, the monitoring of licensees' compliance with anti-money laundering laws, the issuance of guidance to licensees, and the issuance of advisories to licensees and the public. As a financial services regulator, it also performs a co-operative function in facilitating requests for regulator-to-regulator assistance.

In carrying out its functions, the FSC must have regard to:

  • the protection of the public against financial loss arising out of dishonesty, incompetence, malpractice or insolvency of persons engaged in financial services in or from the BVI;
  • the protection and enhancement of the reputation of the BVI as a financial services jurisdiction; and
  • the reduction of crime and other unlawful activities related to financial services business. 

The International Tax Authority (ITA) is the BVI's competent authority for the purposes of international assistance in tax matters and compliance with the BVI's rules and regulations on disclosure of beneficial ownership and maintenance of economic substance.

It is responsible for:

  • negotiating and administering requests under tax information exchange agreements and similar agreements in relation to tax matters;
  • continuing to develop the BVI tax information exchange mechanisms in accordance with international standards; and
  • supervision of legal entities and registered agents that are subject to the BVI's beneficial ownership disclosure regime and the economic substance regime.

The BVI Financial Investigation Agency (FIA) was established under the Financial Investigation Agency Act 2003. The FIA is responsible for receiving, obtaining, investigating, analysing and disseminating information which relates to a financial offence (money laundering and/or drug-money laundering), proceeds of crime, or a request for legal assistance.

The FSC provides guidance to licensees on the establishment of outsourcing arrangements and the outsourcing of material functions or activities, and such guidance can be found in the Regulatory Code made by the FSC under the Financial Services Commission Act. A licensee's board remains ultimately responsible for all outsourced decisions and activities. The Regulatory Code also requires the licensee to establish and maintain appropriate and adequate systems and controls to manage its outsourcing risk. Before entering into an outsourcing agreement, the licensee must undertake due diligence on the potential risks, as well as on the proposed service provider and its capacity and ability to undertake the outsourced activities.

Under the provisions of the Regulatory Code, a licensee is not permitted to outsource:

  • a compliance function;
  • a core management function; or
  • any activity which would impair the FSC's ability to supervise the licensee or that would affect the rights of a customer against the licensee (including the right to obtain legal redress).

The Regulatory Code requires the licensee to have in place a comprehensive outsourcing policy which is to be approved by its board and regularly reviewed. In addition, any outsourced activity must be the subject of a written contract that clearly sets out the scope of the activities to be outsourced, the rights and responsibilities of the respective parties, and the protection by the outsourced person of confidential information relating to the licensee's clients. The written agreement must also give the licensee and its auditor access at all times to any relevant documents and information. The licensee is also required to establish and maintain a contingency plan for each outsourcing agreement that it enters into.

As the FSC does not consider activities relating to ICOs, ITOs and resulting crypto tokens to be regulated activities, it has not taken any enforcement action against any participants in such businesses. The FSC has not indicated that it is considering changing its position on these matters. 

The BVI has anti-money laundering and counter-terrorist financing legislation in place requiring entities that conduct "relevant business" to comply with the anti-money laundering requirements. This legislation does not differentiate between legacy participants and new fintech participants. However, fintech business as such is not a "relevant business", unless the business includes components of prescribed relevant businesses as part of the business model, which would require some careful consideration by each firm.

Entities conducting "relevant business" are required to comply with certain anti-money laundering and counter-terrorist financing requirements pursuant to the Proceeds of Criminal Conduct Act, the Anti-Money Laundering Regulations and the AML Code (known together as the AML laws).

The AML laws require that a "relevant business" should:

  • develop, maintain, monitor, assess and test anti-money laundering compliance systems and controls, including designating an anti-money laundering compliance officer; and
  • report suspicious activity, including designating an anti-moneylaundering reporting officer.

The persons appointed to these roles must be appropriately fit, proper, experienced and qualified in accordance with the AML laws.

An entity within scope of the AML laws is required to maintain:

  • identification and verification procedures;
  • record-keeping procedures;
  • internal reporting procedures; and
  • internal controls and communications procedures which are appropriate for forestalling and preventing money laundering.

As noted in 1.1 Evolution of the Fintech Market, the BVI has introduced draft data protection legislation. It is expected that the draft Data Protection Bill will become law in 2020. It will impose data protection obligations in the BVI on "data users" who process, or have control over the processing of, personal data. In essence, the data user may not process personal data unless it satisfies one of the conditions specified in the Bill and it must protect the personal data when processing it. The data subject will have certain access and other rights. Sensitive personal data will be subject to stricter rules. The BVI government suite of e-Bills, as described in 1.1 Evolution of the Fintech Market, permits digital processing of personal data and compliance with consent requirements and data access requests.

There are a number of additional regulatory rules and regulations that may apply to firms that engage in fintech businesses, including sanctions rules, beneficial ownership disclosure requirements, reporting requirements in the context of international exchange of tax information, and economic substance requirements.

The use of social media and similar tools is currently not regulated in the BVI.

Other industry participants, such as accountants and auditors, are not regulated or supervised in the BVI.

In general, activities relating to ICOs, ITOs and crypto tokens are not considered to be regulated activities. Incumbent participants who are licensees may lawfully offer unregulated products and services in addition to their regulated products and services. However, an extension of the business offering would need to be disclosed to the FSC by way of an amended business plan, and the FSC is likely to question the extension of the products and services. Therefore, in practice, an incumbent regulated player may elect to establish a separate entity in the group to offer the new, unregulated product or service.

BVI financial services legislation does not specifically contemplate robo-advisers. However, should a BVI legal entity hold and operate the algorithm or software that provides a robo-adviser's function, depending on the structure and nature of the business, it may be required to be licensed under the Securities and Investment Business Act.

No BVI service providers appear to be introducing robo-advisers at this stage.

This is not applicable in the BVI.

The business of loans is regulated either under the Banks and Trust Companies Act or the Financing and Money Services Act (as financing). The provision of loans is also within the scope of the AML laws as set out in 2.9 Implications of Additional Regulation and The Economic Substance (Companies and Limited Partnership) Act 2018. Neither the AML laws nor The Economic Substance (Companies and Limited Partnership) Act 2018 distinguish between the recipients of the loans.

Underwriting business is not a regulated activity in the BVI. Underwriting activity typically takes place onshore and the FSC will require a lender engaging in it to be in compliance with the laws of the jurisdiction in which the underwriting is taking place.

Retail lending to BVI residents is primarily conducted by branches of a few major banks that are licensed under the Banks and Trust Companies Act and that do not hold a restricted banking licence.

The 2018 amendment to the Financing and Money Services Act 2009 that came into force in March 2019 introduced a new licence (Class F), which permits the holder to carry on the business of international financing and lending in the peer-to-peer (P2P) fintech market, including peer-to-business (P2B) and business-to-business (B2B) markets.

The syndication of loans takes place onshore rather than in the BVI. Accordingly, to the extent that the BVI lending vehicle is involved in a syndication, it must be in compliance with the laws of such onshore jurisdiction.

Payment processors must use existing payment rails at this stage.

Money services are regulated activities under the Financing and Money Services Act 2009 (FMSA). Money transmission includes electronic money, mobile money, payments of money and other alternative methods of money and payment transmission. Cross-border payments are not independently regulated but are supervised if they constitute a money service under the FMSA.

BVI-based administrators must hold a licence in accordance with the Securities and Investment Business Act (SIBA). SIBA requires a BVI-licensed mutual fund administrator to satisfy itself as to various criteria regarding the business and operation of a mutual fund and its service providers before it provides fund administration to such mutual fund.

A number of provisions are being incorporated into fund administration documents. Many of these provisions stem from regulatory obligations. Essentially, fund administration agreements include provisions requiring the administrator to provide information and documentation relevant to the AML laws to either the regulated fund itself or the FSC. The BVI's AML laws also require the fund administrator to maintain records of AML documentation for at least five years after conclusion of the transaction. These agreements also require the administrator to report any suspicions it may have relating to money laundering potentially occurring through the fund, to the fund's money laundering-reporting officer.

In addition to the AML requirements, the fund administration agreement will often have provisions requiring the administrator to safeguard and treat personal data in accordance with certain prescribed standards.

A BVI-licensed mutual fund administrator has certain internal reporting obligations to the Money Laundering Reporting Officer of the Fund (MLRO), including the reporting of a suspicious activity or transaction. The MLRO (usually a director) would then be required to determine whether a suspicious activity report to the FIA under the Proceeds of Criminal Conduct Act and the AML Code is warranted. If the MLRO knows or has reason to believe that a mutual fund for which it provides services:

  • is, or is likely to become, unable to meet its obligations as they fall due;
  • is carrying on business other than in accordance with any laws; or
  • is carrying on business in a manner that is, or is likely to be, prejudicial to investors or creditors of the fund;

it must immediately provide the FIA with written notice of its knowledge or belief giving its reasons for that knowledge or belief, and any MLRO that contravenes these requirements and the requirements under the AML Code is liable for a fine not exceeding USD150,000 or to a term of imprisonment not exceeding two years (or both).

Exchanges in virtual currencies or other crypto assets are not regulated in the BVI, as crypto assets are not considered to be an "investment" under SIBA. SIBA would require any person who provides a facility for the trading or listing of "investments" to be licensed under SIBA.

As noted in 2.2 Regulatory Regime, virtual currencies are not considered to be "electronic money", and ITOs, ICOs and resulting crypto and similar assets are not considered to be "investments". Prima facie, activities relating to these asset classes are, therefore, not considered to be within the scope of the financial services regime.

Crypto asset exchanges are presently not regulated in the BVI, as mentioned in 7.1 Permissible Trading Platforms.

Crypto asset exchanges are presently not regulated in the BVI, see 7.1 Permissible Trading Platforms.

BVI investment business licensees under SIBA must comply with certain dealing and managing rules, including order handling rules, in accordance with the Regulatory Code made by the FSC under the Financial Services Commission Act. 

With the 2018 amendment to the Financing and Money Services Act 2009, a new category of financing licence has been provided to cover P2P and B2B lending when done through a BVI company, see 1.1 Evolution of the Fintech Market. No further detailed regulations have yet been published.

BVI investment business licensees under SIBA must comply with certain dealing and managing rules, including best execution rules, in accordance with the Regulatory Code.

This is not applicable in the BVI.

There is currently no specific regulation pertaining to high-frequency or algorithmic trading. However, if the underlying digital, crypto or related assets fall within the definition of "investment" under SIBA, the dealing, arranging, advising or managing of such investments could fall within the regulatory scope of SIBA.

There is currently no specific regulation in the BVI pertaining to high-frequency or algorithmic trading.

If an entity functions in a principal capacity and performs a market-maker role, it will be required either to be licensed or registered under SIBA (eg, as an investment dealer or broker) only where the underlying digital or crypto or related asset falls within the definition of "investment" under SIBA.

There are no rules or regulations in the BVI relating to the execution of trades.

BVI-domiciled investment funds that invest in ICOs, ITOs or crypto assets will need to be licensed as mutual funds under SIBA, if they are open-end funds, or approved if they are closed-end funds. BVI-domiciled investment managers for such funds will also need to be licensed under SIBA. Dealers in crypto assets are not considered to be engaging in an investment service under SIBA.

This is not applicable in the BVI.

The BVI-domiciled operators of research platforms are currently not subject to registration unless such platforms also provide investment advice, in which case, the operator of the platform will need to be licensed under SIBA.

SIBA provides for a market-abuse regime that, in general terms, makes it a criminal offence for a person who has material price-sensitive information about "securities", within the meaning of SIBA, to deal in, encourage another person to deal in, or to disclose such information inappropriately. In addition, SIBA market-abuse regime makes it an offence, in summary, for a person to engage in market manipulation or make misleading statements relating to "investments" within the meaning of SIBA. As noted, ICOs, ITOs, or the resulting crypto assets, are not considered by the FSC to be either "securities" or "investments" under SIBA, and as a result, dealings or statements relating to crypto assets do not fall within SIBA's market-abuse regime.

See 9.2 Regulation of Unverified Information.

BVI-based service providers are required to comply with BVI law. If any person who is resident in the BVI has a suspicion that a payment to a BVI entity (by way of subscription or otherwise) contains the proceeds of criminal conduct, that person is required to report such suspicion under the Proceeds of Criminal Conduct Act (as amended).

There do not appear to be any specific and material insurtech underwriting initiatives or developments in the BVI.

Regulation of insurance business conducted in and from within the BVI includes, but is not limited to, ensuring that any prospective licensees, including domestic or captive insurers, insurance managers, insurance intermediaries (namely insurance agents or insurance brokers) and loss adjusters, meet the required standards to be licensed. Various categories of insurance licences are provided, depending on where the applicant is incorporated and whether it intends to carry on domestic business.

Regtech providers are not regulated, as a consequence of their technology developments, products and services. However, if regtech providers were to perform activities within the scope of the regulatory laws, they would be required to comply with the regulatory laws.

A number of provisions are being incorporated into contracts with technology providers. The key provisions generally relate to protection of IP rights and confidentiality. The contracts often have provisions requiring the technology providers to safeguard and treat personal data in accordance with certain prescribed standards under data protection laws.

If any person who is resident in the BVI has a suspicion that a payment to a BVI entity (by way of subscription or otherwise) contains the proceeds of criminal conduct, that person is required to report such suspicion under the Proceeds of Criminal Conduct Act (as amended).

To date, implementation and thought leadership relating to blockchain in the financial services industry in the BVI have predominantly been driven by new players, and a few incumbent service providers.

The BVI government and the FSC progressed important initiatives in 2019 that demonstrate the BVI's unequivocal commitment to digital transformation and fintech innovation, as mentioned in 1.1 Evolution of the Fintech Market.

See 2.2 Regulatory Regime.

See 2.2 Regulatory Regime.

See 7.1 Permissible Trading Platforms.

The intended asset class does not determine whether a scheme that collects and pools investor funds for the purpose of collective investment requires registration or approval under SIBA. Accordingly, a mutual fund or a private investment fund, within the meaning of SIBA, that invests in blockchain assets needs to be registered with, or approved by, the FSC.

The mutual fund open-end structure is more common for those managers looking to pursue an investment strategy which focuses on trading in virtual currencies. These strategies tend to be more liquid in nature and investors are able to redeem their investment on their own initiative.

The private investment fund closed-end structure is more common for those managers looking to pursue an investment strategy which focuses on long-term investments in blockchain start-ups or projects. These strategies tend to be illiquid in nature and investors are unable to redeem their investment without the manager's consent.

See 2.2 Regulatory Regime and 7.1 Permissible Trading Platforms.

See 2.9 Implications of Additional Regulation.

Open-banking services are not a regulated activity as such, unless the activity constitutes a payment service within the meaning of the Financing and Money Services Act 2009. Unlike the second EU Payment Services Directive, the BVI Financing and Money Services Act 2009 does not provide for a separate legal framework that regulates open-banking fintech service providers.

As noted in 1.1 Evolution of the Fintech Market, the suite of e-Bills introduced in December 2019 include the Data Protection Bill 2019, which will introduce data protection obligations in the BVI on "data users" who process, or have control over the processing of, personal data. In essence, the data user may not process personal data unless it satisfies one of the conditions specified in the Bill and it must protect the personal data when processing it. The data subject will have certain access and other rights. Sensitive personal data will be subject to stricter rules.

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Law and Practice in British Virgin Islands

Authors



Walkers is a leading international firm that provides legal, corporate and fiduciary services to global corporations, financial institutions, capital markets participants and investment fund managers. Its clients are Fortune 100 and FTSE 100 companies as well as some of the most innovative firms and institutions across the financial markets. The firm has ten offices, in Bermuda, the British Virgin Islands, the Cayman Islands, Dubai, Guernsey, Hong Kong, Ireland, Jersey, London and Singapore. It advises businesses partnering with or investing in fintech firms as well as financial institutions and asset managers developing their own fintech products and services. The fintech group, comprising over 60 lawyers, also works closely with policymakers, regulators and governments to facilitate appropriate legislation and regulation that keeps pace with innovation. Walkers covers fintech's core financial industry sectors – asset management, investment, banking, finance, insurance and payments – with particular expertise in advising businesses specialising in blockchain, digital assets and alternative model finance.