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15 December 2017
Interest in the setting up and distribution of initial coin offerings (ICOs) in the British Virgin Islands and other offshore locations has increased rapidly during 2017, and this is expected to continue. There are several key issues for parties in the British Virgin Islands to consider.
At present, ICOs are typically viewed as a means of raising third party capital through the issue of cryptocurrencies, termed 'tokens', on a blockchain network. The fundraising is coordinated by 'founders', the individuals or establishments which are sponsoring the ICO. Once sufficient funds are raised they are invested by the issuing company in a project which is set out in further detail in the ICO's business plan, known as a 'white paper'.
Below is a summary of the relevant considerations when launching an ICO through a BVI company. It is assumed that the ICO will be structured through a BVI business company, which is the vehicle of choice for ICOs in the British Virgin Islands.
Perhaps most importantly, no ICO or blockchain-specific rules or guidlines have yet been issued by the government or regulator. At this stage the British Virgin Islands is keen to 'wait and see' with regards to ICO regulation, which seems to be consistent with the position in the United Kingdom and across pan-EU law. As such, the question remains as to the impact of the pre-existing legislative and regulatory framework in the British Virgin Islands.
The following laws are the most relevant to structuring an ICO through the British Virgin Islands:
Below is a short description of the issues which each law seeks to address. The extent to which each law or a combination of the laws and regulations above will apply largely depends on the unique structure of the ICO.
Securities and Investment Business Act
The Securities and Investment Business Act prohibits persons from carrying on, or presenting themselves as carrying on, investment business of any kind in or from within the British Virgin Islands unless they hold a licence from the BVI Financial Services Commission, or else benefit from one of the safe harbours. 'Investment business', 'investment' and 'investment activity' are all defined by the act.
Most relevant to ICOs is the definition of 'investments' under the act. This includes:
However, ICO tokens or any form of cryptocurrencies are not expressly classed as investments in their own right under the act. Understanding whether tokens issued under an ICO are investments will therefore typically involve the question of whether the token itself is equivalent to a security or a derivative contract caught by the act. This is a complex task and each case will require professional legal advice.
However, most ICOs would not usually fall within the scope of the act and therefore may conduct business legitimately without the need for the BVI company to hold an investment business licence.
The act requires that a prospectus be registered where an offer is made to the public. However:
In relation to the latter, determining whether the types of crypto-currency can or will be considered securities within the context of the act is key. If they are, certain exemptions may apply so that no prospectus or offering document is required.
Anti-money laundering regime
The anti-money laundering regime needs careful consideration with respect to ICOs launched through BVI business companies. The regime primarily focuses on the regulated sector in the British Virgin Islands and requires certain policies and procedures to be established by 'relevant persons' conducting 'relevant business' – both of these terms are strictly defined. The requirements seek to provide general regulatory rules to minimise and eliminate any form of money laundering or terrorist financing through the British Virgin Islands.
ICOs are not within the definition of 'relevant business' in the regime and therefore the vehicle through which they are structured (ie, the BVI business company) is unlikely to be deemed a relevant person. However, any ICO team should consider anti-money laundering and counter-terrorist financing obligations regardless, as a way of future-proofing the business.
Financing and Money Services Act
The Financing and Money Services Act regulates 'money services business' in the British Virgin Islands, which under the act entails:
These services contemplate money which amounts to legal tender (ie, fiat currencies). Digital tokens and forms of cryptocurrencies would therefore fall outside the scope of the definition of a money services business.
Beneficial ownership regime
Briefly, considerations around share ownership, voting rights, the right to remove a majority of the board of directors and the exercise of significant influence and control over an ICO company will play a part in determining who must be recorded on the register. With this in mind, it is relatively straightforward to ensure that the identity of ICO token holders will not need to be maintained on any beneficial ownership register of an ICO company.
Foreign Account Tax Compliance Act and the CRS
Both of these regimes relate to the automatic exchange of tax information between participating and reportable jurisdictions. The Foreign Account Tax Compliance Act and CRS legislation will be important in determining the ultimate beneficial ownership of the BVI business company issuing the ICO. While these pieces of legislation will not be immediately relevant at the launch of the ICO, they must be considered as the BVI business company acting as the issuer starts to conduct business more generally.
Electronic Transactions Act
The Electronic Transactions Act is pertinent since everything in relation to the launch and conduct of the ICO will be done electronically. As such, understanding the impact of the act's provisions on electronic signatures and record-keeping requirements is fundamental. In general terms, the Electronic Transactions Act lends support to the position that electronic records will not be denied legal validity simply because they are maintained in electronic format, as opposed to paper.
The BVI legislative regime is flexible and able to foster the region's growing number of ICOs. Nevertheless, it will be important for each new ICO to be advised properly in order to mitigate any possibility of falling into regulatory prohibitions or other legal risks.
For further information on this topic please contact Mirza Manraj at Harneys by telephone (+1 284 494 2233) or email (firstname.lastname@example.org). The Harneys website can be accessed at www.harneys.com.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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