Crypto-currency And ICOs In The British Virgin Islands (Update) – Technology


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Initial coin offerings (ICOs) of
crypto-currencies, tokens and other block chain based assets have
raised billions of dollars in recent years. Leading offshore
financial centres such as the British Virgin Islands
(BVI) have sought to become a major part of this
new capital raising phenomenon and there is increasing interest in
the use of BVI companies as ICO issuer vehicles. While other
offshore jurisdictions have experienced similar interest,
structuring an ICO through a BVI company offers a number of
advantages which have made the BVI an attractive ICO base. As a
result the jurisdiction has seen a number of highly successful
launches during the last 12 months.

ICOs

ICOs are, in essence, just another means of accessing
third-party capital. Rather than receiving a security whose return
is dependent on the performance of the business of the issuer or
its group, as in a traditional IPO, in an ICO investors exchange
cash for a new crypto-currency on a blockchain network. In most
cases this crypto asset takes the form of a credit or token for use
in purchasing goods or services in the application or enterprise
into which the ICO proceeds will be invested. However, rather than
using these “utility tokens” for making purchases within
the application, most investors will hold the tokens in the hope
that the success of the underlying enterprise (in which the new
utility token will be the sole or principal unit of exchange) will
cause the relative cash value of the utility token to increase as
demand for those tokens for use within the application increases
and their potential being accepted as wider means of exchange
increases.

As the value of a token is determined by the demand for the
token itself rather than returns or repayments from some underlying
business operated by the issuer (albeit that there may be an
indirect link between token value and business performance), then
most types of utility token are not regarded as
“investments” or “securities” by regulators and
are therefore not subject to many of the regulations and
restrictions that might apply to a public debt or equity issue by a
company. As a result, ICOs offer an efficient and cost effective
means of accessing mass capital for start-up or early stage
enterprises or technology entrepreneurs which might not otherwise
have access to capital markets.

Structuring

Similar to existing forms of special purpose vehicle capital
raising, a typical ICO structure will feature a newly formed issuer
vehicle (the ICO Issuer) established and managed
by a group of ICO sponsors (the sponsors or
founders) for the purpose of investing in a
particular project which will be detailed in the ICO business plan
– known as the “white paper”. The white paper will also
set out the fundraising target which the ICO Issuer expects to
achieve. The ICO Issuer will then raise funds by issuing
crypto-currency tokens on a blockchain network in exchange for
investor cash (which may be in the form of conventional fiat
currency or, in some cases, other crypto-currencies). The new
tokens may be used within the project being developed by the
founders or held for potential capital gains as demand grows. Once
the ICO Issuer has achieved its target fundraising goal, the funds
raised will be invested in the project described in the white
paper.

Most BVI ICOs are structured through an ICO Issuer incorporated
as a BVI business company under the BVI Business Companies Act,
2004 (the BCA).

ICOs in the BVI

The use of a BVI business company incorporated under the BCA as
an ICO Issuer brings with it all of the standing advantages
associated with BVI business companies and the BVI as a capital
friendly jurisdiction. These advantages include:

  • corporate flexibility and efficiency enshrined in the modern
    and commercially minded BCA and other BVI corporate
    legislation;

  • the absence of capital control and maintenance rules, allowing
    for the free flow of funds in and out of a BVI ICO Issuer;

  • tax neutrality;

  • low incorporation and annual company maintenance costs relative
    to similar jurisdictions such as Cayman and Bermuda;

  • efficient company maintenance;

  • continuing obligations for BVI companies and their officers and
    owners are commercially progressive and non-onerous, and, for the
    present at least, most traditional ICO forms would not be subject
    to additional securities or public offering regulations under BVI
    law; and

  • “transaction fluency” – as the largest offshore
    corporate domicile the BVI enjoys the presence of a strong
    professional services community of lawyers, accountants and
    corporate services providers. Transactions are professionally
    handled and transaction fluency is optimised.

The BVI Financial Services Commission (FSC)
recently issued the Guidance on the Regulation of Virtual Assets in
the Virgin Islands (the Guidance), relating to the
regulation of virtual assets generally, which would include
crypto-currencies and utility tokens. The FSC has taken a
constructive attitude towards virtual assets and, generally, is not
seeking to impose regulation on virtual assets that they would not
have been subject to under the existing, “mainstream”
financial services regulatory framework in the BVI.

It is also worth noting that, in addition to those general
advantages of BVI law set out above, there are particular aspects
of BVI legislation which have specific application to ensuring the
success and attractiveness of the BVI as an ICO jurisdiction. For
example, since everything in relation to the launch and conduct of
the ICO will be done on an electronic platform, the utility of the
provisions of the BVI’s Electronic Transactions Act 2001
(ETA) relating to electronic signatures and record
keeping requirements is of fundamental importance. In very general
terms the ETA underscores that electronic contracts and records
will not be denied legal validity in the BVI simply because they
are maintained in electronic, as opposed to paper, format and that
transactions of all kinds can be executed by electronic
exchange.

ICOs and Existing BVI Securities and Financial Services
Regulation

While there is a clear consensus that an ICO in its customary
form would not be restricted or subject to more onerous regulation
under existing BVI financial services legislation, it is still
important and necessary to consider any proposed ICO against such
legislation and with regard to the Guidance so as to ensure that it
is appropriately structured, to avoid tripping any restriction or
obstacle that otherwise would not apply.

The BVI financial services legislation relevant for
consideration in respect of an ICO includes the following:-

Securities and Investment Business Act 2010
(SIBA)

Investment business activity in the BVI is regulated by the
provisions of SIBA which prohibits a person from carrying on, or
holding themselves out as carrying on, investment business of any
kind in or from within the BVI unless that person holds a licence
from the FSC or is within one of the exemptions or safe harbours
offered by SIBA. However, an ICO of, and subsequent dealings in,
standard utility tokens should not be subject to the general
prohibition as utility tokens would not come within the definition
of an “investment” for the purposes of SIBA. Indeed, the
Guidance considers each class of “investment” with regard
to tokens and, while every token must be assessed with regard to
its own terms, it seems clear that the FSC will not look to
interpret SIBA to cover any token that would not otherwise have
already been within the regulatory ambit of SIBA.

While most ICO issues would not fall within the scope of SIBA,
and therefore there should be no need for the BVI ICO Issuer to
hold an FSC investment business licence, there is still a danger
that certain forms of token or crypto asset might come within the
definition of investment if their value or return is determined by
reference to the performance of some other asset or business (such
that it becomes a form of derivative). Therefore the terms of any
proposed token or crypto asset should be carefully considered.

Similarly, most ICOs should fall outside the public offer rules
at Part II of SIBA for the same reason as set out above (because
standard utility tokens would not be considered
“investments”) – if such rules were presently in
force. Part II of SIBA requires that a formal offering prospectus
be produced and registered when an offer of securities is made to
the public and deals generally with “public issue of
securities”, however none of Part II is presently in force and
therefore consideration of its application still remains
academic.

BVI AML Law

The BVI’s present anti-money laundering laws are codified in
the form of the Proceeds of Criminal Conduct Act 1997, the
Anti-Money Laundering Regulations 2008 and the Anti-Money
Laundering and Terrorist Financing Code of Practice 2008 (together
the AML Law). As in other responsible
jurisdictions, the requirements of the AML Law are intended to
provide a comprehensive set of rules and safeguards aimed
eliminating or at least minimising money laundering or terrorist
financing through the BVI.

The identification, record keeping and reporting obligations
imposed by the AML Law are however only applicable to persons
(“relevant persons”) involved in certain types of
regulated business (“relevant business”). ICOs of
standard utility tokens would not be caught within the definition
of relevant business for these purposes and therefore the BVI ICO
Issuer involved is unlikely to be a “relevant person”.
Sponsors though should nevertheless be aware of the provisions of
the AML Law and obligations thereunder should any aspect ever be
brought to apply to a BVI ICO or BVI ICO Issuer – albeit that
we are no aware of any intention to modify any aspect of the AML
Law in this respect.

The Financing and Money Services Act 2009 (FMSA)

The FMSA regulates “money services business” in the
BVI which includes, inter alia, such activities as
dispensing money, transmitting money, cheque encashment, currency
exchange, and dealing in travelers’ cheques. The types of
services listed either expressly or self-evidently contemplate
transactions in “fiat currency”, i.e. currency which is
legal tender. As tokens and crypto-currencies generally are not
fiat currency, then the general view is that these fall outside the
scope of the definition of money services business and therefore
ICOs and subsequent transactions in tokens or other
crypto-currencies would not be subject to FMSA.

Beneficial Ownership Secure Search System Act 2017 (the
BOSS Act)

The BOSS Act requires BVI companies and their registered agents
to record information as to the beneficial ownership of the company
on a central government controlled, but confidential, database.
Beneficial ownership for the purposes of the BOSS Act is determined
by reference to control tests, i.e. share ownership, voting rights,
the right to remove a majority of the board of directors and the
exercise of significant influence and control over a company. Given
that any disclosure here is driven by reference to
“control” of the entity, it should be relatively
straightforward to ensure that the identity of token holders will
not need to be recorded in any beneficial ownership register of an
ICO Issuer.

Foreign Account Tax Compliance Act (FATCA) and the Common
Reporting Standard (CRS)

At present, the terms of FATCA and CRS as implemented into BVI
law would not require an ICO Issuer to record or disclose
information on mere token holders (or holders of other crypto
assets issued by the ICO Issuer).

Crypto exchanges

Operating an investment exchange is an activity that is
regulated by SIBA, but only to the extent that what is traded on
that exchange would qualify as an “investment” under
SIBA. Accordingly, where a token is considered to be a utility
token (and thus outside of the regulatory purview of the
legislation considered above), operating an exchange of such tokens
would not be considered to be regulated activity, provided that
nothing that would count as an ‘investment’ is used as a
medium of exchange for such utility tokens. So, trading utility
tokens for other utility tokens, or even fiat currency or some
stablecoins, would not be a regulated activity. On the other hand,
trading utility tokens for a token with the characteristics of an
investment would likely fall to be regulated.

Regulatory Sandbox

It should be noted that, to deal with situations where a token
would be likely to be regulated (whether under SIBA, FMSA,
or otherwise), or where an exchange would likely involve the
trading of “investments”, the BVI has recently enacted
the Financial Services (Regulatory Sandbox) Regulations, 2020 (the
Regulations). The Regulations have not yet been
brought into force, but when they are they will provide a
“regulatory sandbox” in which it is possible for
innovative fintech companies to operate, provided that they operate
within a clearly defined business plan and with a limited (and set)
number of clients. Accordingly, even in the rare situations that a
token may be considered to be within the scope of financial
regulation, it may be possible to ‘sandbox’ that activity,
such that full compliance with BVI financial services regulation
can be delayed while the fintech is tested.

Conclusion

Existing BVI legislation, as supported by the Guidance, is
sufficiently flexible to support ICOs of utility tokens without
these being subject to any additional licensing, disclosure or
record keeping obligations under existing BVI financial services
legislation. This, coupled with those generally advantageous
aspects of BVI law, make the BVI an attractive locale for ICOs and
it is expected that the number of ICOs involving BVI companies will
continue to increase.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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