Emergence Of The BVI As A Global Digital Assets Hub

The emergence of digital assets signifies a revolutionary shift in the financial world, mirroring the transformative potential and pitfalls highlighted by the FATF. As these virtual assets pave the way for more efficient, affordable, and accessible payment methods, they simultaneously present new challenges in terms of regulation and security. The lack of stringent oversight has made these digital resources prone to volatility, cyber threats, and misuse for illicit activities. This precarious balance of innovation and risk underscores the urgent need for regulatory frameworks to adapt and ensure that the digital finance revolution benefits all, without becoming a conduit for financial crime.

Building on the lessons from the last five years, it is evident that digital assets, and the underlying blockchain technology supporting them, have the potential to transform our financial global landscape, but this will only be achieved if the industry can reach a place of trust and safety for all providers, investors, and users. Therefore, one of the key opportunities presented by digital assets is the establishment of a global hub that brings together service providers in a collaborative ecosystem supported by a trusted and safe regulatory framework. The British Virgin Islands (BVI) is at the forefront of this endeavour.

With its extensive experience in financial and professional services, strong emphasis on cross-sector collaboration, and stringent regulatory and legal frameworks, the BVI is perfectly poised to become the global hub for digital assets. With major regulatory updates occurring all over the world, in the BVI specifically, and a general ‘settling down’ of the markets, we can expect 2024 to be a hugely significant year in this journey.

The Global Landscape: Moving Through Volatility To Stability

A major reason for the volatility in the digital assets and cryptocurrency space stems from the challenges that come with global regulation. Unlike traditional finance systems, the decentralised nature of these assets makes it hard to establish a central authority to oversee and enforce regulations, and the peer-to-peer network comes with an anonymity that complicates regulatory and enforcement efforts. The global nature of the industry also poses jurisdictional challenges, as different countries have differing approaches and conflicting interests. All these issues are then underpinned by the fact that rapid technological innovation in the industry can render frameworks inadequate within a few years of their establishment.

Regulators have grappled for years with how to deal with these complex challenges, but over the last 18 months, industry-shaping events such as the collapse of FTX and Three Arrows Capital have accelerated efforts and confirmed that jurisdictions cannot ensure compliance and safety by working in isolation. On the contrary, cross-border collaboration is deemed critical in mitigating risk in areas such as anti-money laundering (AML) and investor protection.

In this period, there have been significant steps taken in the right direction. One of these is the development of the Crypto-Asset Reporting Framework (CARF) from the OECD. Published in 2022, CARF aims to create a standard framework for reporting on crypto and digital asset transactions, ensuring consistency in areas such as tax compliance. In November 2023, it was announced that just under fifty national governments have issued a joint ‘pledge’ to support this new framework, with the hope to establish an international standard on automatic information sharing.

CARF is not the only legislative framework in motion, with specific geographies creating new structures to accommodate their own concerns and needs. In Europe, the ‘Markets in Crypto-Assets’ regulation (MiCA) came into force in June 2023, offering a new legal framework to ensure financial stability and integrity to those who gain a licence to operate. In the US, there has been a different tactic, with the Securities and Exchange Commission (SEC) pursuing a ‘regulation by enforcement’ approach, actively pursuing exchanges and platforms throughout 2023 to establish and define the nature of the assets.

In the UK, the government has repeatedly asserted its desire to become a hub for the sector, publishing its proposals for the UK’s future financial services regulatory regime for crypto assets in October 2023, with the Financial Conduct Authority (FCA) and Bank of England (BoE) publishing discussion papers on the first phase of the regime. In February, it was announced that draft legislation for a more expansive framework is likely to be published this year.

It is evident from these examples that establishing an effective and comprehensive global framework is a major task. However, as we emerge from a period of ‘crypto winter’ and digital assets volatility, we are now experiencing a settling of the market both from a legislative and industry perspective.

One key reason for this is that policy makers and regulators are finally getting to grips with the intricate and unique nature of the sector, and are now able to establish the right processes to regulate it. Another factor is the capability and attitude towards compliance from the industry itself. We are now seeing platforms and exchanges approach compliance with a renewed sense of clarity and understanding around the necessity of the stringent nature of legislation. Positively, there is a new wave of platforms and businesses eager to cooperate with authorities and capitalise on the opportunities that this collaboration will bring.

The BVI Offering

The BVI has emerged as an epicentre for digital assets for several reasons. Firstly, it was one of the first movers in the market. In 2015, when digital asset funds were first coming to the market, the BVI Investment Fund Association collaborated closely with the Financial Services Commission (FSC) to explore opportunities for leveraging this new asset class. Recognising the potential of real investments and strategic approaches to cryptocurrencies, they aimed to ensure that the jurisdiction could maintain its competitive advantage. Since then, the BVI has kept its finger on the pulse of the shifting market, continuously adapting its offering to accommodate the innovations and developments within the space and setting an important market precedent.

The second reason is that the BVI has the financial and professional services expertise to cater for the entire life cycle of a business company, making it well suited to serve new and developing markets. As digital assets are often non-geographical, the tax neutrality of the BVI is also extremely attractive to businesses. Furthermore, the BVI’s robust legislative framework and world-leading legal sector have the capability to deal with complex cases, evident in the Three Arrows Capital case in which advisory firm Teneo BVI was appointed by the court to take control of the assets. This demonstrates how the wider community in the business and finance centre is creating a comprehensive and secure environment for the sector to operate.

VASP: A Landmark Legislation Comes Into Play

The BVI’s aim is to create a dynamic ecosystem populated with innovative, dependable, and trusted providers. To achieve this, last year the FSC introduced the Virtual Assets Services Providers Act (VASP), which created a legal framework for the registration and supervision of virtual asset service providers, and an authority for the supervision of individuals engaging in any virtual assets service.

In the development and deployment of VASP, the FSC underwent a careful process of consultation with industry leaders to accommodate the unique challenges of the sector and build key considerations into the framework.

The first consideration is the fluidity of the sector. Due to the rapid speed of developments, models and processes have become not fit for purpose within a few short years. With the expectation that this speed will continue, effective legislation requires built-in agility with a regime that can adapt to upcoming developments in both the industry and global regulatory landscape.

The second consideration is risk and compliance challenges. The nature of these assets holds an inherent risk, due to both the newness of the technology and the potential for anonymous transactions and money laundering. To mitigate this risk, VASP was drafted with the intention of being an incredibly stringent regulatory framework, requiring providers to prove effective risk management and compliance with Financial Action Task Force (FATF) recommendations. Higher-risk offerings, such as custodians and exchanges, are also subject to more stringent regulatory obligations. Furthermore, although VASP did not come into force until mid-2023, the jurisdiction expects all entities applying to have implemented compliance systems since 2022.

The third consideration is the supranational element of the sector. Cross-border collaboration is critical for digital assets, with many providers also having a footprint in another jurisdiction. It is a critical part of the VASP assessment to work with fellow regulators – from Canada to Singapore – to ensure that all entities who receive licences through VASP are not only compliant in the BVI, but in all other relevant jurisdictions.

These considerations form the underlining principles of the VASP legislation, creating a rigorous regulatory landscape in the BVI where businesses, investors and financial institutions can be confident in the safety and security of the market. With over 70 applications to VASP so far, 2024 will be a critical year in the formation of this world-leading digital ecosystem within the BVI.

The Journey Continues

The BVI’s emergence as a global hub for digital assets has been the result of almost a decade of careful consultation among local regulators, global industry experts, and stakeholders. Steeped in its financial services expertise and outstanding regulatory frameworks, the BVI has long held the foundations to establish this trusted and innovative digital assets ecosystem, with VASP representing a landmark stepping stone in this journey. As the market continues to settle and mature throughout 2024, we can expect new, trusted platforms and services to come to the fore, leading the way in a new chapter for the sector.

Hon. Lorna Smith
Hon. Lorna Smith, OBE has several decades of experience at the highest levels of public service in the British Virgin Islands and has spent the last decade supporting Caribbean Governments, corporations and individuals in various commercial ventures. She played a pivotal role in establishing BVI Finance, a public private partnership devoted to business development and promotion of the financial services industry. Prior to being elected and thereafter appointed as the Deputy Premier and Minister of Financial Services, Labour and Trade in April 2023, she served as Vice President of Bank of Asia as well as a Director of several BVI businesses. Over the course of her senior-level public service, Hon.Smith has developed extensive relationships with leaders from the business community, international NGO’s and government leaders from around the world. She has been one of the key ‘engineers’ behind the BVI’s rise from relative obscurity to its present position as a top-flight tourist destination and one of the premier centres for global finance. Her unique experience and expertise serving as a facilitator between the public, private and non-profit worlds both within the BVI and between different nations gives her special insights into the challenges and opportunities facing organizations seeking to operate in the BVI and across the Caribbean. In 2002, Hon. Smith took the helm of the BVI International Finance Centre, which is charged with promoting the BVI’s Financial Services. She worked in close collaboration with the private sector, mounting promotional events in London, New York, Miami, Zurich, Geneva, Shanghai, Hong Kong and Singapore. Hon. Smith was also pivotal to getting the financial services industry restored in the aftermath of Hurricanes Irma & Maria through her leadership and communications skills. She also played a vital role within Government especially on the interim Recovery Board as well as through the Rotary Club of Tortola where she raised significant sums to aid the recovery and to help the needy. Hon. Smith was awarded the Order of the British Empire (OBE) by Her Majesty Queen Elizabeth II for her contribution to Public Service in the British Virgin Islands and is a multiple Paul Harris Fellow for her contributions to the service organization, Rotary International.