Practical Considerations For Blockchain Businesses In The BVI

Structuring And Commercial Considerations

One of the first questions that will need to be considered by a blockchain business is its proposed legal structure. Whilst the analysis will typically be driven by onshore tax considerations and regulatory concerns (see below), other factors also merit consideration from the outset. For example:

i. Banking solutions: What kind of banking solutions does the business need and where? A BVI company does not need to have a bank account in the BVI, but it may prefer to do so. Structuring is relevant in this context because many financial institutions are averse to shareholders and directors that are incorporated or resident in, or nationals of, certain jurisdictions. In this case, or as a further confidentiality safeguard, it may be appropriate to appoint nominee shareholder(s) and/or director(s) such that the de facto controllers of the company are not identified on its statutory registers.

ii. Relationship between the shareholders: The benefit of having a shareholders’ agreement between the shareholders of the relevant company and the company itself is that the relationship between such parties is regulated as regards any matters that are agreed between them. Whilst the provisions of a shareholders’ agreement are ultimately a commercial matter for the parties to agree upon, typical terms include ‘drag and tag’ rights, rights of first refusal and pre-emption, restrictions on share transfers, board and shareholder reserved matters, non-compete clauses and more. Market practice is to amend and restate the memorandum and articles of association of a BVI company to include the relevant provisions of a shareholders’ agreement to avoid a conflict between their terms, and to protect the interests of the parties.

iii. Incentivising key stakeholders: A blockchain business will most likely need to consider how to incentivise key stakeholders to optimise operational performance. For example, will there be bonus payments, a share incentive plan and/or tailormade incentives? Subject to relevant commercial and tax considerations, the creation of multiple share classes and/or the appointment of a trustee or a nominee may be necessary or helpful to facilitate the implementation of these incentives and should be carefully considered.

iv. Protecting material business interests: To the extent that multiple stakeholders are involved in advising and/or driving growth at a blockchain business, it is important to protect material business interests (including intellectual property), and to ensure that relevant stakeholders are bound by customary post-termination restrictions including non-compete and non-solicitation covenants. These types of provisions are typically contained in one or more agreements between the relevant stakeholder and the company and there is no ‘one size fits all’ approach. In particular, it should be noted that protection of intellectual property in the BVI is based upon the laws of the United Kingdom. Although the BVI is not a party to the Paris Convention, it has significant intellectual property protections.

Applicable Regulation, Licencing And Registration

One of the most important considerations for any blockchain business will be whether it needs to be registered with the BVI Financial Services Commission (BVI FSC). This will in turn principally depend on whether its proposed activities fall within the scope of the Virtual Assets Service Providers Act, 2022 (the VASP Act2) and/or any other applicable financial services legislation in the BVI. It is worth noting that the penalties for conducting regulated business without an appropriate licence are severe, and many financial institutions now require a legal opinion on the legality of an unregulated blockchain business as part of its onboarding requirements in light of the reputational and other consequences that may arise from non-compliance.  

Although there are still certain jurisdictions where it is possible to operate a virtual assets business without any regulatory scrutiny, the number of such jurisdictions is shrinking due to international pressure and calls for risk mitigation. The BVI has benefitted from taking a commercial and balanced approach to regulation and has continued to attract high-quality market participants in the virtual assets sector. The latest edition of the Guidance on Regulation of Virtual Assets in the BVI (the Guidance on VASPs) issued by the BVI FSC is illustrative of the balanced approach that has been taken.

For example, the Guidance on VASPs makes a clear distinction between the issuance of utility tokens and securities tokens which, as noted further below, is material to the regulatory analysis. Other jurisdictions do not draw this distinction, or have broad definitions of ‘security tokens’ rendering any distinction meaningless in practice. Clarity and commerciality have continued to make the BVI a jurisdiction of choice for issuers of utility tokens, whilst also remaining attractive to market participants who understand the need to regulate securities offerings and other higher risk activities. It is anticipated that the rules and regulations pertaining to VASPs will continue to evolve in the BVI in a commercial yet risk-based manner to align with international standards and requirements and the macroeconomic environment in which such businesses operate. This approach to regulation will continue to drive blockchain businesses to the BVI.

The VASP Act

Under the VASP Act, a virtual asset service provider that provides a virtual assets service as a business, and conducts one or more of the following activities or operations for or on behalf of another person, will need to register as a VASP with the BVI FSC:

i. Exchange between virtual assets and fiat currencies.

ii. Exchange between one or more forms of virtual assets.

iii. 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.

iv. Safekeeping or administration of virtual assets or instruments enabling control over virtual assets.

v. Participation in, and provision of, financial services related to an issuer’s offer or sale of a virtual asset.

vi. Perform such other activity or operation as may be specified in the VASP Act or as may be prescribed by applicable regulations (noting that we are not currently aware of any such activity or operation).

For these purposes, the VASP Act defines a ‘virtual asset’ as a “a digital representation of value that can be digitally traded or transferred, and can be used for payment or investment purposes”. The definition expressly excludes “digital representations of fiat currencies and other assets or matters specified in the Guidelines”, and “a digital record of a credit against a financial institution of fiat currency, securities or other financial assets that can be transferred digitally”.

In this respect, it should be noted that the Guidance on VASPs sets out the BVI FSC’s position that “virtual assets and its related products have value, exhibit the attributes of property, and meet the definition of intangible property”. Digital assets which do not meet these criteria will therefore not be a “virtual asset” for the purposes of the VASP Act.

Helpfully, the VASP Act expressly identifies certain virtual assets services that fall within its scope, and others which are excluded. It is important to note that these inclusions and exclusions are not exhaustive and merely illustrative. For example, the business of conducting any of the following activities on behalf of another person will be regulated under the VASP Act:

i. Hosting wallets or maintaining custody or control over another person’s virtual asset, wallet or private key.

ii. Providing financial services relating to the issuance, offer or sale of a virtual asset.

iii. 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.

iv. Engaging in any other activity that, by enactment or guidelines, constitutes the carrying on of the business of providing virtual asset services or issuing virtual assets or being involved in virtual asset activity.

On the other hand, a person who solely engages in or performs any of the following activities will not qualify or be treated as a VASP:

i. Providing ancillary infrastructure to allow another person to offer a service, such as a cloud data storage provider or integrity service provider responsible for verifying the accuracy of signatures.

ii. Providing service as a software developer or provider of unhosted wallets whose function is only to develop or sell software or hardware.

iii. Solely creating or selling a software application or virtual asset platform.

iv. 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.

v. 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.

vi. Providing closed-loop items that are non-transferable, non-exchangeable, and which cannot be used for payment or investment purposes.

vii. 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).

Whilst not expressly excluded, it is generally accepted that the sole act of issuing and/or selling virtual assets is not regulated by the VASP Act in and of itself. A careful analysis will nevertheless need to be completed. As noted above, the provision of financial services related to an issuer’s offer or sale of a virtual asset, as well as a transfer of virtual assets, if being carried out by a BVI company as a business on behalf of another party, will likely constitute ‘virtual asset services’ and therefore require that company to be registered with the BVI FSC under the VASP Act.

Other Financial Services Legislation

Whilst not intended to regulate blockchain businesses specifically, a BVI company operating in the digital assets sector may nevertheless fall within the scope of the mainstream financial services legislation in the BVI. This legislation includes the Securities and Investment Business Act, 2010 (SIBA), the Financing and Money Services Act, 2009 (FSMA) and the Banks and Trust Companies Act, 1990 (BTCA). Helpfully, the VASP Act expressly states that a person registered as a VASP is not required to be licenced under SIBA or FMSA to the extent that such person only carries on the business of providing a virtual assets service.

The SIBA Regime

In high level terms, SIBA regulates the provision of investment services by any BVI company and by any other entity from in and within the BVI. Specifically, any such person carrying on ‘investment business’ must only do so if licenced by the BVI FSC. ‘Investment business’ is widely defined for these purposes and captures: (i) dealing, arranging deals in, or managing investments, (ii) providing investment advice, (iii) custodian and/or administration services with respect to investments, and (iv) operating an investment exchange. ‘Investments’ is also broadly defined and includes: (i) shares, interests in a partnership or fund interests, (ii) debentures, (iii) instruments giving entitlements to shares, interests or debentures, (iv) certificates representing investments, (v) options, (vi) futures, (vii) contracts for differences, and (viii) long-term insurance contracts.

Pursuant to the Guidance on VASPs issued by the BVI FSC, whether a virtual asset falls within the scope of the SIBA regime will depend on whether it has characteristics akin to any investment. As a result, virtual assets and virtual assets-related products that are used as a means of payment for goods and services, which only provide the purchaser with an ability to purchase goods and services (such as utility tokens), will not generally be captured by SIBA. Careful consideration will need to be given if any other rights or benefits attach to a virtual asset as this will determine whether the asset comprises an ‘investment’.

The FSMA Regime

The law which regulates money transmittal and currency exchange business in the BVI is FMSA. While the consensus now appears to be that ‘money’ and ‘currency’ refer to fiat currencies rather than cryptocurrencies, and the BVI FSC appears to have accepted this position, the distinction remains untested in the BVI courts. In this respect, it is worth noting again that a person registered as a VASP is not required to be licenced under FMSA to the extent that such person only carries on the business of providing a virtual assets service. This will be of comfort to many VASPs, but care will need to be taken if a VASP performs activities that fall outside the scope of the VASP Act as the carveout noted above may not apply in those circumstances.

The BTCA Regime

The BTCA regulates ‘banking business’ which is “the business of accepting deposits of money which may be withdrawn or repaid on demand or after a fixed period, or after notice”. With reference to the distinction noted above between money and currency on the one hand and cryptocurrencies on the other, a blockchain business that deals in or holds fiat currencies should seek legal advice to ensure it is not inadvertently conducting ‘banking business’ under the BTCA.

There are significant criminal and civil penalties for conducting business under each of SIBA, FSMA and BTCA without the appropriate licence, and a blockchain business should therefore ensure there is sufficient clarity on its regulatory status prior to commencing any business activities.

Prevention Of Money Laundering, Terrorist Financing And Proliferation Financing

Regulated blockchain businesses should be mindful that VASPs (like other licenced businesses) are subject to express obligations under BVI law with respect to the prevention of money laundering (AML), terrorist financing (TF) and proliferation financing (PF). The applicable regulations adopt the recommendations of the Financial Action Task Force (FATF) in this respect, and are also guided by a risk-based approach to virtual assets and virtual asset service providers. Blockchain businesses that do not fall within the scope of the VASP Act and/or any other financial services legislation in the BVI are unlikely to be required to comply with the express obligations that apply to VASPs and other regulated businesses with respect to AML, TF and PF. They should nevertheless be vigilant and consider implementing appropriate safeguards as a matter of good corporate governance and a means of future-proofing the business.

The key steps that VASPs need to take with respect to their AML/TF/PF obligations are as follows:

i. Appointing a compliance officer.

ii. Appointing a money laundering reporting officer.

iii. Maintaining records that are sufficient to show and explain transactions and fiscal positions, and ensuring that such records are maintained in a manner that allows for retrieval without undue delay.

iv. Ensuring that all customer due diligence records are obtained and maintained in accordance with the AML/TF/PF framework and establishing and maintaining policies, procedures and internal controls in relation thereto.

v. Establishing and maintaining policies, procedures and internal controls to facilitate the reporting of suspicious activities internally and to the BVI Financial Investigation Agency where appropriate.

vi. Conducting employee screening and training.

vii. Where appropriate, complying with the ‘travel rule’, which requires originating and beneficiary VASPs to obtain, verify, and maintain complete information on the originator and beneficiary of each transfer of virtual assets of a value of US$1,000 or more, before the transaction is executed, or accepted, and which requires intermediary VASPs (if any) to ensure that all such information is complete and to detect missing or incomplete information.

The BVI FSC has helpfully published the Virtual Assets Service Providers Guide to the Prevention of Money Laundering, Terrorist Financing and Proliferation Financing, which elaborates on the expectations of VASPs with respect to the prevention of AML/TF/PF and best practices in relation thereto. This guidance underscores that there is no ‘one size fits all’ approach and that “measures must be holistic and integrate prudent governance and modern risk management strategies with a robust compliance framework”.

It is worth noting that there are significant criminal and civil penalties for failing to comply with the AML/TF/PF framework in the BVI where required.

Economic Substance Regulations

Whilst a full overview of the economic substance regulations is outside the scope of this practice note, a blockchain business is well-advised to conduct an economic substance analysis to ensure that ‘relevant activities’ are not being inadvertently conducted. Complications are likely to arise if a BVI incorporated blockchain business is generating income from intellectual property and/or if it has appointed senior executives to act as part of a wider group. This is because conducting relevant activities (such as intellectual property business and/or headquarters business) without sufficient substance in the BVI may give rise to significant penalties, and may result in the relevant company being struck-off and dissolved. Conversely, achieving adequate substance may be difficult and/or expensive in practice, and reorganising the relevant entity by divesting certain assets and/or functions to group members or other affiliates to ensure compliance may be preferable and more cost-effective.

Next Steps

We would recommend and encourage blockchain businesses that are located in the BVI or seeking to operate a BVI entity in the virtual assets sector, to seek legal advice to obtain regulatory clarity on its proposed activities, and to ensure that the business is properly structured and insulated against commercial risks.

Peter Vas
Peter is a Partner in Spencer West’s Banking & Finance and Corporate Groups and advises on matters of British Virgin Islands and Cayman Islands law. He has acted on offshore transactional matters for around a decade and has previously worked as an attorney in the London office of a US law firm and the Channel Islands and Hong Kong offices of an international offshore law firm. More recently, he has led and co-ordinated the banking & finance and corporate groups of a Cayman Islands headquartered offshore law firm in Hong Kong. Peter is sector agnostic and has acted on some of the largest and most complex cross-border banking & finance and corporate transactions which have been recognised as landmark transactions by leading directories and publications. Clients describe him as “very knowledgeable of offshore legal matters, and able to provide succinct, commercial advice in a timely manner” and “practical, responsive and a pleasure to work with”. Peter has been recognised as a rising star in Hong Kong in the Asian Legal Business and is consistently ranked as one of the top offshore lawyers in the Asian Legal Business Offshore Client Choice List and in Asia Business Law Journal’s A-List of top offshore lawyers. The Legal 500 Asia-Pacific describes Peter as “very responsive”.