With the COVID pandemic resulting in the acceleration of digitised financial services and the forced adoption of remote solutions, the sandbox may have launched at the perfect time for existing businesses looking to update client offerings and for start-ups challenging traditional financial institutions.

Equally, with the fears that increased financial regulation following past global recessions has stifled innovation, we expect innovators to look for ‘regulatory-light’ solutions to get new products and service offerings to market. The successful launch of an innovative financial services solution often hinges on the capacity of its innovators to fit within predetermined regulatory landscapes that are outdated and ill-adapted for emerging technologies. The BVI sandbox looks to reduce the regulatory burden on start-ups so they can focus on customer experience, whilst maintaining regulatory oversight.

The BVI has previously shown its receptiveness to disruptive financial technologies, being the host jurisdiction for cryptocurrency exchanges, algorithmic traders, tokenized funds and staker pools, among other emerging technologies, each of which has benefited from BVI’s progressive financial services regulation and pragmatic and communicative regulator. It is hoped that the BVI will further utilise the sandbox to build upon its existing experience, to craft smarter legislation and to enable open dialogue and education between participants and the regulator.

Who will benefit from the sandbox?

We anticipate that the BVI sandbox will appeal to innovators in the following areas:

  1. Start-up business that would otherwise be regulated in the BVI

    Examples?

    Derivative trading platforms; money transmitters; investment advisory services using artificial intelligence and machine learning; InsureTech.

    How will the sandbox assist?

    For start-up businesses that would be regulated in the BVI, but which cannot afford or meet the requirements of full licensing in the BVI (for example, because of difficulties in finding auditors or insurers for innovative asset classes or in meeting regulatory paid-up capital requirements), the sandbox will allow participants to work with the BVI regulator, the Financial Services Commission (FSC), to deviate from regulatory requirements on a bespoke basis and allow innovators to go to market more quickly than if they were required to implement and finance more stringent restrictions.

  2. Business operating in regulatory ‘grey areas’

    Examples?

    Businesses dealing in digital assets which straddle the boundaries of regulated financial investments, including certain stable-coins, tokenized fund products and analogous structures.

    How will the sandbox assist?

    Whilst the BVI has strived to promote clarity in the application of its existing financial services regulations to emerging technology, the pace of innovation has inevitably resulted in certain digital assets blurring the lines between utilities and investments (or ‘securities’ in analogous jurisdictions) and certain services being on the fringe of a regulated ‘investment activity’.  The sandbox will provide clarity and comfort to innovators operating in these ‘grey’ areas, their investors, service providers, banks and customers.

  3. Businesses not currently regulated in the BVI, but which may expect to be in the future

    Examples?

    Pure cryptocurrency exchanges, custodians and wallet providers not dealing in ‘investments’, as such term is defined in the BVI; peer-to-peer lending platforms; RegTech (which will be of particular interest to the FSC)

    How will the sand box assist?

    Businesses not currently regulated in the BVI, but which anticipate that these may become regulated in the future (whether because of a global trend towards regulation or otherwise), would benefit from regulatory comfort for at least the first year and a half of operations.  Sandbox participation may also provide these businesses with cross-border recognition and legitimacy, where unlicensed operations may not.

In addition, such businesses will be able to inform the FSC on how regulation could be practically applied going forward. Speed of developments and the nature of disruptive technology has meant that specialised legislation risks becoming outdated quickly. The sandbox should allow the FSC to take the time to craft balanced and smarter legislation with greater longevity, which is directed at the specific risks of such businesses as they transpire, whilst also allowing the regulator to assess areas which do not pose a regulatory risk and can remain unregulated.

Who can apply for the sandbox?

The BVI sandbox is open to any BVI incorporated companies and limited partnerships (together with non-BVI companies who wish to conduct business in the BVI) whose proposed business model involves ‘innovative FinTech’, being defined by the FSC as 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.”

With the subjectivity of the ‘innovation’ requirement, we expect the FSC to focus primarily on how the existing regulations fit, or fail to fit, around the proposed business plan, and the dispensations required to make the business viable.

BVI companies and limited partnerships will be required to have at least two individual directors or partners, respectively. Other entities will be required to show that there is at least one senior individual who will manage the sandboxed business.

There are no prescribed limits as to the number of participant businesses that can be in the sandbox at any time.

What documents need to be filed?

An application for entry into the sandbox will consist principally of a business proposal to cover, among other things: (i) 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; (ii) 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); (iii) details on the proposed customers (including estimated numbers, investment experience and geographical reach); (iv) an analysis of the risk profile of the proposals and the measures to be taken to manage those risks; (v) an indication of the resources (whether financial, technological, human or otherwise) available to the application; and (vi) a strategy for exiting the sandbox.

The FSC reserves the right to request further information from any applicant.

Directors, partners, principals and senior officers, as applicable, of the applicant will be required to show that they are ‘fit and proper’ to conduct the proposed business and will be required to provide supporting evidence (including, we expect, resumés, educational history, criminal record checks and references).  However, we expect that the regulator will forego some of the more stringent requirements of this application as they apply to full licenses, most notably the requirement to show significant experience, where start-ups can exhibit their expertise, if not years of experience.

What is the proposed timing for sandbox applications?

The initial application is made online, with a preliminary conclusion on whether the start-up is eligible for the sandbox expected within 30 days of submission.

Following this eligibility approval, the FSC will engage with participants to discuss the proposals further, to determine if the business is suitable and adequately tested for the sandbox, whether the sandbox will benefit the business and to determine a mutually agreeable scope of any limitations to be placed on the business whilst it is operating from the sandbox. Following this discussion, applicants will be informed of the outcome of their application.

What are the fees for the sandbox?

The application fee for the sandbox will be US$2,000, with an approval fee of US $2,000 (for ‘standard’ business models), US$5,000 (for ‘moderately complex’ business models) and US$10,000 (for ‘complex’ business models), on the basis that more complex business proposals will require a greater level of regulatory oversight. The lower fee brackets can be expected for BVI-based businesses, with low numbers of projected customers and client assets, where applicable. The higher fees would be applicable to non-BVI businesses with a large number of retail customers and/or client assets.

Whilst the fees for complex business models may be greater than the regulator fees for a full licence in the BVI for the same time period, we would expect that savings as a result of regulatory dispensations will result in the sandbox costing significantly less than a full financial services licence for the duration of the testing period.

What happens once you are in the sandbox?

Provisions of the BVI’s existing regulatory legislation (including, notably, the Securities and Investment Business Act, the Financing and Money Services Act and the Banks and Trust Companies Act) shall not apply to participants of the sandbox, such participants instead being subject to bespoke limitations established between the participant and the FSC during the application process. We expect that such restrictions will be targeted principally at ensuring that the type and number of customers are appropriate for the type of innovation, the level of regulatory oversight and the customer risk exposure. More stringent requirements and disclosure obligations are expected where retail customers are targeted. Bespoke restrictions may also include, where appropriate for the business, requirements for systems audits or the preparation of unaudited financial statements.

While sandbox participants will be required to comply with BVI’s anti-money laundering regulations and KYC obligations, BVI offers a digital-friendly approach to KYC, with recent amendments allowing digital verification and reflecting a move away from ‘wet ink’ paper based processes. The BVI has not, to date, adopted the Financial Action Task Force (FATF) recommendations on virtual asset services providers (most notably, the crypto-travel rule) and we expect that if such recommendations are adopted, the regulator will need to assess the practicality of start-up businesses complying with such requirements.

We further expect sandbox participants will continue to be required to comply with existing BVI requirements related to the handling of client funds and client information which provide fundamental protections. Participants will also be required to notify the FSC immediately of any unforeseen matter or change in circumstances that has, or is likely to have, a material impact on the participant’s risk profile or regulatory obligations. Participants will be required to submit reports on, among other matters, regulatory compliance; client numbers, monetary exposures and geographic spread; risk management; complaint handling and compliance with key performance indicators.

Participants will be required to advise clients that they are participating in the sandbox and that they do not hold a full financial services licence.

There is no requirement to establish a physical presence in the BVI by virtue solely of being a participant in the sandbox.

How long can you stay in the sandbox?

Participants can remain in the sandbox for up to 18 months, with the opportunity to extend, on application, for a further six months – making the BVI sandbox one of the longer sandboxes available globally.

Participants may be removed from the sandbox by the FSC upon certain events, such as a participant contravening any restriction imposed upon it; any data security breach; failure to launch the product within a prescribed time; or where the FSC determines that activities are being carried out in a manner that is detrimental to the participant’s clients or the public generally.

Upon exiting the sandbox, participants will need to apply for a full licence (if available) or wind down operations. Given the FSC’s familiarity with the business model and principals, we would expect the application process for a full license to be significantly streamlined. Where the FSC has opted to not proceed with regulating a business area, we expect that sandbox participants will be able to opt to exit the sandbox and continue their business as an unregulated entity.

Further information

The creation of the sandbox further signals the BVI’s commitment to emerging tech, and, even where the sandbox regulations are not suitable for a particular business, innovators should look to the BVI as a jurisdiction that is forward-thinking, open to emerging technologies and willing to learn from the market to create smarter regulations which balance the resources of the innovator with the risks to the consumers.

For more information on the sandbox or if you wish to make an application, please contact a member of our Technology and Innovation team.

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Key Contacts

Jeffrey Kirk

Managing Partner: BVI

T +1 284 393 5318
E Email Jeffrey

Andrew Jowett

Partner: BVI

T +1 284 393 5316
E Email Andrew

Rebecca Jack

Senior Associate: BVI

T +1 284 393 5346
E Email Rebecca

Peter Colegate

Counsel, Joint Global Head of Technology & Innovation : Cayman Islands

T +1 345 814 2745
E Email Peter

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