FinTech 2019

Last Updated June 06, 2019

British Virgin Islands

Law and Practice

Authors



Walkers (Road Town) is a leading international firm that provides legal, corporate and fiduciary services to global corporations, financial institutions, capital markets participants and investment fund managers. Clients are Fortune 100 and FTSE 100 companies as well as 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, which consists of 14 partners and 17 other qualified lawyers globally, 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 of advising businesses specialising in blockchain, digital assets and alternative model finance. *Walkers works in exclusive association with Kevin Taylor, trading as 'Walkers Bermuda', a full-service commercial law firm providing advice on all aspects of Bermuda law.

The FinTech market in the British Virgin Islands (BVI) has developed over the last 12 months in a rather interesting way. Neither the BVI Government nor the BVI Financial Services Commission (FSC) – the BVI's financial services regulator – has issued any official statements on the FinTech market. The approach taken to regulation of the industry has been cautious but commercially sensitive. Whilst there is an acknowledgment that some regulation will eventually be required, BVI has not been eager to take the initiative to regulate this space but, rather, to continue to monitor international trends and developments whilst informing themselves about blockchain, smart contracts and crypto-currencies. In spite of the lack of Fintech-specific regulation, BVI's global reputation as a premier company formation jurisdiction continues to hold true in the FinTech space where BVI continues to be the jurisdiction of choice for companies providing various FinTech services. According to CoinShares survey of 15 of the largest crypto-currency exchanges, BVI ranks as the second largest crypto-currency market in the world with a trading volume at mid-2018 of USD78.5 billion, second to the USA's USD83.8 billion in trading volume.

BVI has existing legislation which can be beneficial in the FinTech space. This includes the Electronic Transactions Act, 2001 (recognising electronic signatures), and the new Trade Marks Act 2013 (which updated the existing trade marks law and now references the Nice Classification system and permits direct registration of trade marks in the BVI rather than via the UK). More recently, cautious steps have been taken to support more directly the FinTech space by amending the BVI's Anti-Money and Terrorist Financing Code (the AML Code) in 2018 to permit the employment of digital verifiers in onboarding clients. Also, this year, the 2018 amendment to the Financing and Money Services Act, 2009 (FSMA) was brought into effect, therefore making it clear that transmission services conducted in the BVI or using a BVI entity and involving digital currency now falls to be regulated under the FMSA.

The BVI regulators are continuing their focus on blockchain and digital assets and have established a working group to get up to speed with understanding digital assets and how best to regulate these assets.

Many BVI companies which held large portions of their worth in crypto assets may become unable to meet their liabilities as they fall due and fulfil the promises they made to investors (token purchasers and otherwise). When this happens, and consequent disputes arise, creditors, contributories and other interested parties will need to evaluate their options and the recourse available to them from a dispute resolution and insolvency perspective. Fortunately, the BVI has a robust and predictable legal regime that can assist such parties in enforcing rights they may have against the company, although this new asset class demands service-providers who truly understand the technology which underpins the operation of such assets to provide effective advice and services.

With respect to our selected vertical of blockchain, BVI vehicles' involvement in blockchain are typically as crypto funds, funds investing in blockchain projects, token issuers in the context of STOs or ICOs, joint-venture vehicles developing blockchain projects and as intellectual property-holding vehicles. There are no legacy players as such, as this is a relatively new industry.

The financial services sector in the BVI is regulated by the FSC. The FSC receives its supervisory powers from the Financial Services Act (FSCA). In summary, the regulatory laws provide for a licensing process whereby entities and individuals conducting regulated activity are required to obtain a licence or be registered with the FSC to conduct the regulated activities.

The supervisory oversight of the FSC includes both desk-based supervision and on-site inspection. The FSC also has supervisory oversight over the anti-money laundering practices of entities within scope of the BVI anti-money laundering regime.

There are a number of legislative obligations that are required to be considered alongside the regulatory laws – these include the beneficial ownership regime (privately filed) and automatic exchange of information.

The BVI does not currently have legislation or regulation specific to digital assets, payments and products such as digital currencies, blockchain-based tokens and blockchain coins per se (together, digital assets). However, as mentioned above in 2.1 Predominant Business Models, a recent amendment to the FMSA makes it clear that transmission services conducted in the BVI or using a BVI entity and involving digital currency now also falls to be regulated under the FMSA as a money transmission service.

The FSC does not differentiate between FinTech participants and legacy participants. The FSC's licensing structure applicability centres on the activities conducted by the participant. A FinTech participant shall fall within the authority's regulatory scope if it conducts a licensed activity.

BVI does not have a regulatory sandbox.

The FSC regulates the financial services industry in the BVI. Its 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 (whether within or outside the BVI) against financial loss arising out of dishonesty, incompetence, malpractice or insolvency of persons engaged in financial services in 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 regulatory authority for the purposes of international assistance in tax matters and one of the competent authorities of the BVI. 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.

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. 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 ;
  • 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 kept under regular review. 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 digital assets are currently not regulated, the FSC therefore does not have enforcement powers over such assets unless they fall within a regulated activity. To date, the FSC has not taken any enforcement actions in the digital assets space.

The BVI has anti-money laundering legislation in place requiring entities that conduct 'relevant financial business' to comply with the anti-money laundering requirements. This legislation does not differ between legacy participants and FinTech participants.

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 (together, the AML laws).

The AML laws require that a 'relevant business':

  • 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 a money laundering reporting officer.

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

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.

The BVI does not have data protection legislation. However, BVI service-providers will need to comply with international data protection 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, the offering of digital assets is not regulated unless the activity falls within the definition of financial services business that is currently regulated. Industry participants who are regulated may therefore lawfully offer an unregulated product. In practice, however, this would be extremely rare as the extension of the business offering would need to be disclosed in an amended business plan provided to the FSC and the FSC is likely to question the extension of services. Therefore, it would be more usual for a separate entity in the group to be established to provide the unregulated product/service.

BVI legislation does not expressly contemplate robo-advisers. To the extent that a legal entity holds the algorithm or software that provides the robo-advisers function and that legal entity is a BVI entity, it may be required to be licensed under the Securities and Investment Business Act.

We are not aware of any BVI service-providers 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 scope of the anti-money laundering legislation. The anti-money laundering legislation does not distinguish between the recipients of the loans.

The underwriting process is currently not regulated in the BVI. Instead, the FSC will require the lenders to be in compliance with the laws of the jurisdiction in which the underwriting is taking place (which is typically onshore).

BVI is a small banking jurisdiction; 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. As such, the source of funds would more typically be the taking of deposits.

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 processing is not regulated in the BVI. Payment processors must use existing payment rails at this stage.

BVI-based administrators must hold a licence pursuant to the Securities and Investment Business Act (the 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 a mutual fund.

There are a number of provisions 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 AML laws to either the regulated fund itself or the FSC. 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 (the 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 otherwise 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 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). 

Crypto exchanges are presently not regulated in the BVI, as crypto is not considered an 'investment' under SIBA. Otherwise, SIBA requires any person who provides a facility for the trading or listing of investments to be licensed under SIBA.

The scope of the regulatory framework is dependent on the activity conducted. Currently, digital, crypto and similar assets are not within scope of regulated activity.

Crypto exchanges are presently not regulated in the BVI as crypto is not considered an 'investment' under SIBA.

There are no listing standard under SIBA. There are also to date no exchanges licensed under SIBA so we are unaware of any policy standards that the FSC may choose to develop in this regard.

This is not applicable in BVI.

With the recent amendment to the FSMA, a new category of financing licence has been provided to cover P2P and B2B lending when done through a BVI company. No regulations have yet been published on how this will work, the procedures, or on any proposed restrictions and prohibitions.

This is not applicable in BVI.

This is not applicable in BVI.

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

There is currently no specific regulation pertaining to high frequency or algorithmic trading.

If an entity functions in a principal capacity and performs a market-maker role, it shall be required either to be licensed or registered under the 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 regulation relating to the execution of trades.

BVI-domiciled investment funds that engage in these activities will need to be licensed as mutual funds under SIBA, if they are open-ended funds. BVI-domiciled investment managers for such funds will also need to be licensed under SIBA.

This is not applicable in the BVI.

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

There are no securities laws in the BVI. Accordingly, the spreading of rumours and other unverified information is currently not regulated in the BVI. The FSC would require the BVI-domiciled operator of such a platform to comply with the laws of the jurisdiction in which the platform is operating.

See 9.2 Regulation of Unverified Information, above.

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 pursuant to the Proceeds of Criminal Conduct Act (as amended).

We are not aware of any specific and material InsurTech underwriting initiatives or developments.

Regulation of insurance business conducted in and from within the BVI includes, but is not limited to, ensuring that any prospective licensees, which would include 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 for depending on where the applicant is incorporated, and whether it intends to carry on domestic business. In addition, an insurance licence may be issued for an applicant to carry on both life and health and property and casualty business if the FSC is satisfied that the applicant has proper resources.

RegTech providers are not regulated as a consequence of their technology developments, products or services. However, if RegTech providers provide activities within scope of the regulatory laws, they would be required to comply with the regulatory laws.

There are a number of provisions being incorporated into contracts with technology providers. The key provisions generally relate to protection of IP rights and confidentiality. The contracts will 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 pursuant to the Proceeds of Criminal Conduct Act (as amended).

There are no legacy players in the BVI and therefore the implementation and thought leadership relating to blockchain in the financial services industry is being driven by new players and certain existing service-providers. Despite the lack of legacy players and the fact that BVI does not, as yet, have a dedicated blockchain statutory and regulatory regime, the jurisdiction is at the forefront of the FinTech revolution. (As mentioned above in section 1 FinTech Market, BVI currently ranks as the second largest crypto-currency market in the world with a trading volume at mid-2018 of USD78.5 billion.)

To date, there is no legislation nor guidance issued with respect to blockchain by the FSC.

There is no formal guidance on whether the FSC consider blockchain assets to be a form of regulated financial instrument. Is it not currently possible to say definitively how potential blockchain assets will be regulated in the BVI.

To the extent that a blockchain asset is characterised as a security under BVI law, the issuer will need to conduct AML due diligence on all holders of the blockchain asset. BVI laws have not been developed sufficiently at this point to be able to state definitely that there would also be a requirement to conduct due diligence on all subsequent transferees of the blockchain asset. The AML standards to be applied must be the BVI AML standards, unless the issuer delegates the AML due diligence to a regulated third-party AML provider situated in a BVI-approved equivalent jurisdiction applying the AML standards of such 'equivalent jurisdiction'.

If such blockchain assets are characterised as securities, the entity which runs the platform may possibly be engaging in securities investment business under SIBA by providing a platform for the trading of securities and would require a licence under SIBA if it is a BVI company or if it purports to operate the platform in the BVI.

If the fund is structured as an open-ended fund, usually as a BVI business company, it needs to be registered with the FSC. This 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 at their own initiative. These structures are therefore open-ended and similar to a traditional hedge fund. To the extent that the equity interests of the fund are to be tokenised, FSC would consider the fund still to be offering equity interests and therefore FSC registration will be required.

If the fund is structured as a close-ended fund, usually as a BVI limited partnership, there is no FSC registration required. This 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. These types of funds are akin to a private equity or venture capitalist fund.

In BVI there is no formal legislation or guidance on either virtual currencies or blockchain assets.

There is no data protection legislation in BVI. However, BVI service-providers will need to comply with international data protection requirements.

BVI regulatory laws do not specifically address open banking, but such services would fall either as financing under the FMSA or banking under the Banks and Trust Companies Act, so all open banking products and services will be required to comply with BVI's AML laws.

There is no data protection legislation in BVI. However, BVI service-providers will need to comply with international data protection requirements.

Walkers

171 Main Street
PO Box 92, Road Town
Tortola VG1110
British Virgin Islands

+1 284 494 2204

+1 284 494 5535

info@walkersbvi.com www.walkersglobal.com
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Law and Practice

Authors



Walkers (Road Town) is a leading international firm that provides legal, corporate and fiduciary services to global corporations, financial institutions, capital markets participants and investment fund managers. Clients are Fortune 100 and FTSE 100 companies as well as 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, which consists of 14 partners and 17 other qualified lawyers globally, 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 of advising businesses specialising in blockchain, digital assets and alternative model finance. *Walkers works in exclusive association with Kevin Taylor, trading as 'Walkers Bermuda', a full-service commercial law firm providing advice on all aspects of Bermuda law.

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