Blockchain Market and Business Model Overview

1.1 Evolution of the Blockchain Market

As one of the foremost offshore financial centres, the BVI is recognised across the globe as the premier jurisdiction for the registration of asset-holding companies. The BVI is tax neutral with no direct taxation on companies and a nominal rate of income tax on individuals which has led to the BVI becoming an attractive destination for technology entrepreneurs.

Notwithstanding that the majority of the BVI’s financial services legislation was written before the recent blockchain revolution began, the BVI has committed to being a welcoming jurisdiction for technology and innovation and has taken a number of legal and regulatory steps to make the BVI a jurisdiction that will allow such innovation to thrive. The BVI has been open and clear in its ambition to become a global technology hub, such declaration being supported by a sound legal framework.

The BVI proved a popular choice for issuers of virtual assets during the initial coin offering boom of 2017–18. During the “Crypto Winter” that followed, the BVI’s flexible, business-orientated legislation and internationally recognised securities regulatory regime enabled it to move with the trends in the blockchain field and encourage a move towards security tokens and stablecoins, which provided greater value stability and more predictable investment returns. This evidence of flexibility means that BVI has a proven track record of continuing to develop with fast-moving trends and is well placed to take advantage of the latest shift towards securitising common assets and decentralised finance (DeFi) products as well as virtual asset funds.

The BVI Virtual Asset Service Providers Act, which regulates virtual asset service providers, came into force on 1 February 2023 (see 2.1 Regulatory Overview) and has already attracted a number of new entrants to the BVI market.

A new administration in place in the USA and increased pressure from proposed EU tax and regulatory reforms could impact the BVI’s current flexibility in this space going forward.

While a large of number of BVI companies have been impacted (one way or another) by the bankruptcies of FTX and other leading centralised business in the blockchain space, the impacts have been more limited than might have been expected considering the BVI’s market leading position in the industry. Where there has been fallout, the BVI courts and practitioners have mutually benefited from the experience afforded by such high-profile events and remain at the forefront as applicable BVI regulations and jurisprudence continue to evolve.

1.2 Business Models

New technologies have not yet displaced traditional financial service providers in the BVI. BVI Finance, a group that represents the BVI’s financial services sector, has established a digital assets working group, which representatives from Appleby (BV) sit on, to engage with the financial services industry, regulators, the government and the media to promote the development and use of new technologies in the BVI.

In August 2018, changes were made to the Anti-Money Laundering and Terrorist Financing Code of Practice to permit entities in the BVI to digitally verify identities and receive electronic copies of documents instead of traditional “wet ink” paper-based processes. The amendments are further evidence of regulators in the BVI embracing the blockchain revolution and will set a new standard for anti-money laundering (AML) verification in the region. Given the BVI’s stringent know-your-customer (KYC) requirements and in light of these amendments, a number of service providers have adopted technologies to enable the onboarding of clients and the collection of KYC information digitally.

Tokenised funds have proved increasingly popular in recent years. In a tokenised fund, an investor’s interest is represented by a cryptographic token, as opposed to shares or other interests or units offered to investors in a more traditional fund structure. Additionally, the BVI is seeing a number of tokens pegged to or representative of real world assets.

1.3 Decentralised Finance Environment

To date, the use of decentralised finance (DeFi) protocols is not regulated, except where they can be established to fall within existing regulation (see 2.1 Regulatory Overview) but by the very nature of decentralisation, regulators would find it difficult to regulate truly decentralised products. Particular care is required where BVI companies are interacting with or providing support services to DeFi protocols to ensure that their activities do not breach existing regulation (or alternatively, that they are properly licensed under the appropriate legislation).

1.4 Non-fungible Tokens

The BVI has seen a significant increase in the interest around non-fungible tokens (NFTs) recently, with a particular focus on art, collectibles and gaming. It is clear that NFTs could open new revenue streams and are a source of earning potential for brands and many others in the “creator” economy. There is every reason to expect that interest in using the British Virgin Islands as a launch pad for such opportunities will continue to grow as the regulatory landscape becomes clearer. There is no separate legislation relating to the regulation of NFTs; however, the characteristics of particular NFTs should be considered in detail.

Regulation in General

2.1 Regulatory Overview

The VASP Act

The VASP Act came into force on 1 February 2023. Importantly, the VASP Act derives from recommendations made by the Financial Action Task Force (FATF) in 2019 and updated in 2021 and 2023. As the BVI is committed to meeting international standards with regard to anti-money laundering and countering the financing of terrorism (AML/CFT) measures, the VASP Act provides for the regulation of virtual asset service providers and for the registration and licensing of persons who are providing virtual asset services.

Under the VASP Act a “virtual asset” is defined as a digital representation of value that can be digitally traded or transferred and used for payment or investment purposes, but does not include digital representations of fiat currencies.

“Virtual asset services providers” (VASPs) are businesses providing one or more of the following services:

  • exchange between virtual assets and fiat currencies;
  • exchange between one or more other forms of convertible virtual assets;
  • transfer of virtual assets;
  • safekeeping or administration of virtual assets or instruments enabling control over virtual assets; or
  • the participation in, and provision of, financial services related to an issuer’s offer or sale of a virtual asset.

In addition to the VASP activities described above, certain other virtual asset services which could fall under one of the VASP limbs above are separately defined in the VASP Act and include:

  • providing kiosks (such as bitcoin teller machines); and
  • hosting wallets or maintaining control over a wallet or private key.

Under the VASP Act, operators who are already undertaking activities within the BVI which would fall in scope, may benefit from the helpful transitional arrangements. Provided those operators make an application to register as a VASP within six months of the new framework coming into force, they can continue to operate and provide a virtual asset service until their application is processed by the BVI Financial Service Commission (FSC).

For entities that have already been approved to sit in the regulatory sandbox, the VASP Act also provides a route for those entities to register as VASPs.

For entities which are not existing VASP operators or in the regulatory sandbox, they will need to apply to register with the FSC.

The VASP Act provides for various exceptions including:

  • the provision of ancillary infrastructure to enable others to offer a service – such as cloud storage;
  • the development, sale or offering of software or hardware;
  • the provision of an “unhosted” wallet service where the customer retains control of their own private keys; and
  • the acceptance by a merchant of virtual assets as payment for goods and services.

Under the VASP Act, VASPs are subject to a number of general obligations including:

  • anti-money laundering obligations;
  • strict data protection and cyber security obligations in connection with the personal data they process;
  • the filing of annual accounts with the FSC and ongoing financial reporting;
  • the requirement for senior officers and beneficial owners to be fit and proper persons;
  • the prior approval of senior officer appointments by the FSC; and
  • having a dedicated compliance officer.

The Securities Investment Business Act

The primary piece of legislation regarding securities and investment businesses in the BVI is the Securities Investment Business Act, 2010 (as amended) (SIBA). SIBA provides for the licensing and control of persons engaged in investment businesses in or from within the BVI.

SIBA sets out an exhaustive list of financial instruments that constitute “investments”. Cryptographic tokens are not expressly included in that list. However, whether the characteristics of a token or other digital asset could nevertheless render it an investment under SIBA is a fact-specific enquiry dependent on the unique functionalities exhibited by the token or asset. If a token qualifies as an investment, the issuer of the token will be either dealing in, or arranging deals in, securities, although the issuer’s activities may fall within a list of excluded activities or safe harbours under SIBA.

A person who is not carrying on an investment business under SIBA may still bring themselves within the licensing requirements where they hold themselves out as carrying out an investment business. Care should be taken that, among other things, no words are used, in any language, which connote a securities investment business in the description or title of the business in question and that no representation is made in any document or in any other manner that a person is carrying on investment business.

2.2 International Standards

The BVI has long been committed to implementing best international practices and is compliant with the anti-money laundering and anti-terrorist financing requirements of the OECD and FATF. As a member of the Caribbean FATF, the BVI implements recommendations promulgated by the FATF.

All BVI-incorporated entities are subject to the BVI Proceeds of Criminal Conduct Act, 1997 (as amended), which sets out the principal money laundering offences. Certain “relevant” businesses (which would include, for instance, entities caught within BVI financial services regulations and other entities thought to be at a higher risk of money laundering) are further subject to the BVI Anti-Money Laundering Regulations, 2008 (the “AML Regulations”), and the Anti-Money Laundering and Terrorist Financing Code of Practice 2008 (the “AML Code”) (each as amended), which prescribe certain identification, record-keeping and internal control procedures for such businesses.

In August 2018, changes were made to the AML Code to permit entities in the BVI to digitally verify identities and receive electronic copies of documents instead of traditional “wet ink” paper-based processes. The amendments are further evidence of regulators in the BVI embracing the blockchain revolution and will set a new standard for AML verification in the region.

Following amendments to the AML Code which took effect from 1 December 2022, certain virtual asset services will satisfy the definition of “relevant business” under the AML Code which may result in certain virtual asset service providers being treated as a “relevant person” for the purposes of the AML Regulations. Such entities which satisfy the definition of “relevant person” and “relevant business” will be subjected to a reduced threshold of USD1,000 for a one-off transaction.

2.3 Regulatory Bodies

The FSC provides oversight for investment funds, entities caught by SIBA and also oversees the VASP Act. The FSC has not changed its approach but has maintained its supervision, in particular, in relation to products offered to retail investors.

2.4 Self-Regulatory Organisations

BVI Finance, a group that represents the BVI’s financial services sector engages with the financial services industry, regulators, the government and the media to promote the development and use of new technologies in the BVI.

2.5 Judicial Decisions and Litigation

There have, to date, been no important judgments in the blockchain area.

In light of ongoing BVI matters relating to the bankruptcies of FTX and other leading centralised businesses in the blockchain space together with various other ongoing disputes before the BVI courts in the blockchain sector, it is, however, anticipated that there will be a number of important judicial decisions in the coming months and years ahead.

2.6 Enforcement Actions

In 2022, the BVI Commercial Court handed down its judgment in ChainSwap v Persons Unknown. This judgment was the first time that the BVI court granted a freezing order over assets held by persons unknown. The judgment was in relation to crypto fraud and follows similar decisions in the UK and other commonwealth countries. Additionally, as the respondents were “persons unknown”, the Court permitted ChainSwap to serve the respondents outside the jurisdiction by alternative methods.

2.7 Regulatory Sandbox

In August 2020, the FSC launched a regulatory sandbox for companies whose proposed business model involves the development or implementation of a new system, mechanism, idea, method or other arrangement through the use of technology to create, enhance or promote a product or service with respect to the conduct or provision of a financial services business. The sandbox is designed to encourage technological innovation in financial services under a lighter touch regulatory regime.

An application for entry into the sandbox will consist principally of a business proposal to cover, among other things:

  • the proposed product or service, and how this encompasses innovation to improve accessibility, efficiency, effectiveness, security, quality in the provision of, or addresses shortcomings or opens up new opportunities in, financial services or the regulation thereof;
  • the testing already carried out on the proposed product (with the expectation that testing, to the extent permitted by legislation, will be carried out prior to entry into the sandbox);
  • details on the proposed customers (including estimated numbers, investment experience and geographical reach);
  • an analysis of the risk profile of the proposals and the measures to be taken to manage those risks;
  • an indication of the resources (whether financial, technological, human or otherwise) available to the application; and
  • a strategy for exiting the sandbox.

2.8 Tax Regime

The BVI is a tax-neutral jurisdiction. A registered BVI entity is not subject to any direct taxes. There may, however, be tax implications for beneficial owners in their own jurisdiction.

2.9 Other Government Initiatives

To date, there have been no other state-backed regulatory programmes.

Cryptocurrencies and Other Digital Assets

3.1 Ownership

In Philip Smith and Jason Kardachi (in their capacity as joint liquidators) v Torque Group Holdings Limited, Justice Wallbank in the BVI Commercial Court, in following decisions from numerous other courts in Commonwealth jurisdictions, held that crypto-assets should be treated as its “assets or property”.

As to the ownership of crypto-assets in the case, Wallbank J recognised that the test for ownership of crypto-assets should be decided on the basis of who holds the private key that facilitates dealing with those assets. Wallbank J found in the case that the crypto-assets in the “User Trading Wallets” were assets that belonged to the owner of the wallets who held the private key.

While the authors of this article are not aware of this being tested in the BVI courts, subject to contractual terms, transfers would probably be considered final once they have reached finality on the blockchain and are credited to the wallet of the recipient to which they hold a key (regardless of whether these can be transferred).

Where digital assets represent shares in a BVI company, the register of members is prima facie evidence of ownership of the shares and therefore legal title to the underlying shares represented by the token will be determined (in the absence of fraud, manifest error, or other extraordinary circumstances) by reference to the company’s register of members (which can be maintained in a digital format). A BVI company’s constitutional documents will usually oblige the company to treat the holder entered on the register of members as the sole person entitled to the shares, including any voting rights and dividend payments in respect thereof.

3.2 Categorisation

SIBA sets out an exhaustive list of financial instruments that constitute “investments”. Cryptographic tokens are not expressly included in that list. However, whether the characteristics of a token or other digital asset could nevertheless render it an investment under SIBA is a fact-specific enquiry dependent on the unique functionalities exhibited by the token or asset. If a token qualifies as an investment, the issuer of the token will be either dealing in, or arranging deals in, securities, although the issuer’s activities may fall within a list of excluded activities or safe harbours under SIBA.

Virtual assets which represent securities under SIBA may result in issuers, custodians and other service providers being required to be licensed (please see 2.1 Regulatory Overview).

3.3 Stablecoins

Please refer to 3.2 Categorisation.

3.4 Use of Digital Assets

There are currently no restrictions, subject to AML compliance.

3.5 Non-fungible Tokens

The FATF in its most recent Guidance made clear that NFTs are generally not considered to be virtual assets under the FATF definition. This is on the basis that NFTs are not used for payment or investment purposes and therefore would not meet the definition of a “virtual asset” under the VASP Act. However, as with all tokens, each project will turn on its own facts and so consideration should be given to the qualities of each NFT before a determination is made.

NFTs should also be considered in the context of SIBA to analyse whether the NFT is an “investment” and as such the issuer is required to be licensed.

Exchanges, Markets and Wallet Providers

4.1 Types of Markets

A significant number of custodial and non-custodial exchanges and decentralised exchanges (DEXs) are operated through or supported by BVI companies, but to date there are none with operations or a physical presence in the BVI. Currently, the BVI does not have a traditional stock exchange.

4.2 On-Ramps and Off-Ramps

To the extent that cryptocurrencies can be both purchased with, and redeemed for, fiat currencies via a BVI entity, such transmission is likely to fall within the VASP Act. Whilst FMSA does not capture the transmission or lending of virtual currencies or the exchange of virtual currencies, it does capture the transmission of money in any form including electronic money and may therefore require a licence.

4.3 KYC/AML/Sanctions

Please see 2.2 International Standards.

4.4 Regulation of Markets

Please see 2.1 Regulatory Overview.

4.5 Re-hypothecation of Assets

Please see 4.1 Types of Markets.

4.6 Wallet Providers

BVI entities providing custody solutions for cryptographic keys, either online or offline now need to be registered under the VASP Act.

Capital Markets and Fundraising

5.1 Initial Coin Offerings

Please see 2.1 Regulatory Overview.

5.2 Initial Exchange Offerings

Please see 2.1 Regulatory Overview.

5.3 Other Token Launch Mechanisms

Please see 2.1 Regulatory Overview.

5.4 Investment Funds

There is no separate framework for the regulation of funds that invest in virtual assets in the BVI.

The primary piece of legislation in the BVI regulating funds is SIBA, which is supplemented by regulations including the Mutual Fund Regulations, the Financial Services Commission (Securities and Investment Business Fees) Regulations 2010 and the Securities and Investment Business (Incubator and Approved Funds) Regulations 2015, and is regulated by the FSC. The legislation only captures open-ended investment funds, being those which collect and pool investor funds and issue fund interests (such as tokens in a tokenised fund structure) that entitle the holder to receive on demand, or within a specified period thereafter, an amount calculated by reference to the net asset value of the fund. Such open-ended funds are categorised in the BVI as either public funds, professional funds (with only professional investors with a minimum initial investment), private funds (with no more than fifty investors), recognised foreign funds (being open-ended funds incorporated outside the BVI but who wish to offer inside the BVI), approved funds (aimed at family offices) or incubator funds (for start-up funds). Such open-ended funds must be approved or recognised by the FSC.

Closed-ended funds, being funds where the investor or token holder is not entitled to redeem on demand their interests at a sum calculated with reference to the fund’s net asset value, were not traditionally caught by fund regulations within the BVI. The BVI enacted the SIBA Amendment Act and the Private Investment Funds Regulations, 2019 (the “PIF Regulations”), which came into force on 31 December 2019 and which legislation introduces a new regulatory regime for close-ended funds. Such closed-ended private investment funds are required to apply for recognition as a private investment fund within 14 days of commencing business. The fund’s constitutional documents must specify that:

  • the fund is not authorised to have more than 50 investors;
  • an invitation to subscribe for or purchase, fund interests issued by the fund must be made on a private basis only; or
  • the fund interest shall be issued only to professional investors, with an initial investment of each professional investor, other than an exempted investor, not being less than USD100,000.

5.5 Broker-Dealers and Other Financial Intermediaries

Please see 2.1 Regulatory Overview.

Smart Contracts

6.1 Enforceability

There are no laws, regulations or BVI judicial decisions addressing the enforceability of smart contracts.

Provided that the defining features of a contract are present – offer, acceptance, the intention to be legally bound and consideration – smart contracts are capable of satisfying the requirements for a binding contract and are enforceable by the courts.

Arguably the role of contractual interpretation for smart contracts written wholly in computer code may be limited as the language (in this case code) will typically be clear and unambiguous, although issues may arise where the code is ill-defined or corrupted.

The Electronic Transactions Act (ETA) puts electronic signatures on an equal footing with wet ink signatures in the BVI. The ETA is not prescriptive as to the method of authentication protocol used.

6.2 Developer Liability

Although the point remains untested in BVI, the authors’ view is that developers of blockchain protocols are not fiduciaries. The role played by protocol developers in the governance of public blockchain networks does not pose the risks of abuse that characterise traditional legal fiduciaries and therefore does not require the imposition of fiduciary duties.

It should also be borne in mind that the risk of developer abuse in a publicly governed blockchain is minimal. By its nature, each update to the open-sourced code is analysed and tested by other network participants who have a significant economic interest and the technical abilities to audit the code before implementing it.

Lending, Custody and Secured Transactions

7.1 Decentralised Finance Platforms

Please see 1.3 Decentralised Finance Environment and 2.1 Regulatory Overview.

7.2 Security

The form of security will depend on the manner in which the virtual assets are held and the characteristics they possess. Where tokens are held through a custodian or other agent, security could be taken over the rights that the obligor has against that custodian or agent. An assignment of rights would likely be governed by the same governing law as the custody or agency agreement and an opinion should be sought as to the enforceability of the assignment of rights agreement to ensure its enforceability in the BVI courts.

Where tokens represent underlying shares of a BVI company, security should be taken in the British Virgin Islands in the usual way that security is taken over the equity interests of company, typically by way of an equitable share mortgage or charge.

In relation to security granted by a BVI company, companies are required to maintain a register of mortgages and charges at their registered office in the British Virgin Islands and a chargee would typically require registration of the security in the public register to preserve priority of the charge. An equitable share mortgage over shares in a BVI company should be noted in the internal register of members held at the registered office and a copy of the annotated register of members may be filed on the public register pursuant to the BVI Business Companies Act.

7.3 Custody

Please see 4.6 Wallet Providers.

Data Privacy and Protection

8.1 Data Privacy

The BVI Data Protection Act (DPA) came into full force on 9 July 2021. Drafted around a set of EU-style data protection principles to which data controllers must adhere, it mandates that personal data must be collected in a fair and transparent manner and only be used and disclosed for purposes properly understood and agreed to by data subjects. Any personal data collected must be adequate, kept up-to-date and should not be retained for longer than is necessary to fulfil the collection purposes.

Importantly, the DPA provides a standard framework for both public and private entities in the management of the personal data they use. Internationally active organisations will find many similarities between the DPA and data protection laws of other jurisdictions where they are active but there are some key differences. The DPA provides a lighter touch approach to data protection regulation than other jurisdictions in the region.

BVI courts recognise and subscribe to the common law duties of confidentiality and privacy, and English common law is persuasive, although not binding, in the BVI. As a result, all entities that manage and maintain personal data will be subject to the common law duty of confidentiality described above.

The duty of confidentiality has also been codified in various aspects of BVI legislation, in particular the Banks and Trust Companies Act, 1990 (as amended), which regulates all banking and trust/fiduciary-related activities in the BVI. Licensed operators of such businesses, regulated by the FSC, are under a general obligation to maintain the confidentiality of a client’s personal data unless the individual has granted specific permission for its release or disclosure to third parties. This obligation may be limited where the licensee is required to deal with anti-money laundering and similar legislation.

For corporate entities, the Registrar of Corporate Affairs is currently permitted to release only limited information regarding the particulars of any registered company, which would include the name, type of company, date of registration/incorporation, registered office address and status of the company. Details of individual shareholders, directors and officers of the company are not available for public inspection and shall only be made available by the Registrar to competent authorities (for tax compliance or other law enforcement purposes) on written request.

8.2 Data Protection

Please see 8.1 Data Privacy.



Mining and Staking

9.1 Mining

There are currently no restrictions on the use of mining. The BVI has high electricity costs and therefore mining within the BVI, particularly on a large scale is unlikely to be efficient.

9.2 Staking

There are currently no restrictions on the staking of tokens; however, where the BVI entity is receiving the coins and managing the staking pool/paying rewards it may require registration under the VASP Act. Please see 2.1 Regulatory Overview.

Decentralised Autonomous Organisations (DAOs)

10.1 General

While BVI corporate structures require shareholders and directors and there is no BVI equivalent to foundation companies or limited liability companies (LLCs) utilised in other jurisdictions, a DAO could be established by using a BVI purpose trust. To date, the authors are not aware of any DAOs in the BVI being organised by way of a purpose trust.

10.2 DAO Governance

Please see 10.1 General.

10.3 Legal Entity Options

Please see 10.1 General. A BVI purpose trust would potentially be beneficial to those seeking to set up a DAO. A trust is not a legal entity. BVI law permits a trust to be set up with a particular non-charitable purpose stated in the trust deed. The purpose must be specific, reasonable and possible. There are no ascertainable beneficiaries. However it is still possible to benefit individuals or legal entities if the trust instrument allows for that.

A purpose trust must have at least one trustee and one trustee must be a designated person (a BVI lawyer or accountant, a BVI licensee under the Banks and Trust Companies Act, a private trust company or such other person as the Minister of Finance may delegate). There must also be an enforcer. The enforcer has a fiduciary duty to enforce the trust and thus must be independent of the trustee.

There can also be hybrid trusts for both purposes and beneficiaries. Following contribution of assets to the purpose trust, assets are held in the name of the trustee, increasing counterparty risk.

First published by Chambers Blockchain 2023 Guide. The Blockchain 2023 guide features 22 jurisdictions. Click here for the full BVI chapter.


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