The Emergence of the British Virgin Islands as a Global Digital Assets Hub
I am delighted to be here today. As you all know, the International Arbitration Centre is an important cog in the wheel of our business and financial services sector and while I cannot be at all the sessions this week, I believe the content of the programme reinforces our growing reputation in the area.
Of course, having someone of the calibre of John as Chair helps immensely and I have to admit, he is a hard act to follow as a speaker. But I will do my best! This morning, I want to address the development of the digital assets business in the BVI, as well as explain the guard rails we are putting in place to regulate and safeguard this sector, one which is important to the diversification of our economy.
We, in the BVI, are conscious that the emergence of the digital assets business sector signifies a revolutionary shift in the financial world, one in which we aim to play a critical role. However, we also recognise that like all revolutions, it will only succeed if the new ideas, services and products which emerge, are balanced with the robust rule of law.
Global hubs which do this effectively and bring together service providers in a collaborative ecosystem, supported by a trusted and safe regulatory framework will be essential to success of the sector. As an agile, innovative and respected financial services jurisdiction, I believe that the BVI is perfectly placed to be at the forefront of this effort and it is our objective to be a major global hub.
Both, the design and effectiveness of the regulatory framework will be critical to our success.
It will be no surprise to you that global standard setters, such as the Financial Action Task Force, view the sector with some trepidation. They are rightly concerned about the lack of regulation that has existed to date, which means that virtual assets have presented clear challenges, both in terms of regulation and remediation.
This absence of stringent, harmonised global oversight has made digital asset classes vulnerable to misuse for illicit activities. Achieving the precarious balance between innovation and risk has underscored the urgent need for regulatory frameworks to adapt robust models. We must ensure that this digital finance revolution is a benefit for all, without becoming a conduit for illegitimate activity and a hindrance to law enforcement.
I believe that we can achieve the transformation we seek but only if the industry can reach a place of trust and safety for all providers, investors, and users.
Many of the challenges associated with regulation of this space, come from the very nature of its development. The decentralised nature of these assets makes it hard to establish a central authority to oversee and enforce regulations, and the peer-to-peer networks involved come 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. These issues are underpinned by the fact that rapid technological innovation in the industry means that regulators have to stay on top of developments and adjust their regulatory regimes accordingly and sometimes rapidly.
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 their efforts. These have also confirmed that cross-border collaboration is critical to mitigate risk in areas of financial risk and investor protection. I don’t have to tell you that this is an area in which the BVI professional services industry has deep experience.
We have also seen global developments in efforts to regulate the sector. One of these is the development of the Crypto-Asset Reporting Framework or CARF from the OECD. Established in 2022, this 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 of establishing an international standard on automatic information sharing.
CARF is not the only legislative framework in motion. In Europe, the Markets in Crypto-Assets regulation or MiCA came into force in June 2023, offering a new legal framework to ensure financial stability and integrity to those who gain a license to operate.
Meanwhile, in the US, the SEC has taken a ‘regulation by enforcement’ approach, actively pursuing exchanges and platforms to establish and define the nature of the assets.
As we can see from these examples, establishing an effective and comprehensive global framework is a major task. But it is one that various authorities are pursuing with intent.
Those who operate platforms and exchanges recognise this and we are already seeing many of them approach compliance with a renewed sense of clarity and understanding around the necessity of the strict nature of legislation. Positively, there is a new wave of businesses eager to work with regulatory authorities and to capitalise on the opportunities that this collaboration will bring. It is my hope that the BVI will be at the heart of these developments.
We have emerged as an epicentre for digital assets for several reasons. Most importantly, we were one of the first movers in the market. In 2015, when digital asset funds were first coming to market, the BVI Investment Fund Association worked closely with the Financial Services Commission to explore opportunities for leveraging this new asset class. Recognizing the potential of the sector, the objective was to ensure that the jurisdiction could maintain its competitive advantage. Since then, I am pleased to say that our industry has kept its finger on the pulse of this shifting market, adapting our offering to accommodate the innovations and developments within the space and setting an important market precedent.
Key to this innovation was the BVI’s financial and professional services expertise which can cater for the entire life cycle of a business company, and is particularly well-suited to serve new and developing markets. Furthermore, our legislative framework and world-leading legal sector has proven that it can deal with complex legal cases. Indeed, we saw this in the Three Arrows Capital case. In this example, advisory firm, Teneo BVI, was appointed by the court to take control of the assets, clearly demonstrating how the BVI is already creating a comprehensive and secure environment in which the sector can operate.
Our overarching aim is to create a dynamic ecosystem populated with innovative, dependable, and trusted providers with state of the art and effective regulation as its beating heart.
To achieve this, we have introduced the Virtual Assets Service Providers Act or VASP. This has created the legal framework for the registration and supervision of virtual asset service providers, and an authority for the supervision of entities engaging in any virtual assets service.
In the development and deployment of VASP, the Financial Services Commission consulted closely with industry leaders so that the unique challenges of the sector could be accommodated and important and necessary elements built into the framework.
The first consideration of our legislative approach is the fluidity of the sector. Due to the rapid speed of innovation, models and processes have become unfit for purpose within a few short years. With the expectation that this development speed will continue, effective legislation requires built-in agility and a regime that can adapt to upcoming developments in both the industry and global regulatory landscapes.
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 to the potential for anonymous transactions and financial crime. To mitigate this risk, VASP was drafted with a clear focus on stringent regulatory requirements, requiring providers to prove effective risk management and demonstrate clear compliance with Financial Action Task Force recommendations. Higher-risk offerings, such as custodians and exchanges, are also subject to even stricter regulatory obligations. Furthermore, although VASP did not come into force until mid-2023, we expected all Virtual Asset Service Providers to have implemented Anti-Money Laundering compliance systems from 2022.
The final consideration is the supranational element of the sector. Cross-border collaboration is critical for digital assets, with many providers also having a footprint in at least one other jurisdiction, often more than that. It is a critical part of the VASP assessment to work in coordination with fellow regulators – from Canada to Singapore – to ensure that all entities who receive licenses through VASP are not only compliant in the BVI, but also in all other relevant jurisdictions.
Indeed, we recently saw a good example of how international cooperation can work, with the Courts in Singapore and the BVI co-operating to protect a victim of digital assets fraud. In this particular case, carried in last week’s BVI Finance This Week (for those wanting to read the interesting details), an individual who was transferring cryptocurrency to the value of over three million dollars in Dubai was scammed as a result of address poisoning. The individual successfully applied to the Singapore Court to freeze the cryptocurrency and for disclosure orders against the relevant exchanges. However, the cryptocurrency was issued and centrally controlled here in the BVI and so, with the Singapore Court’s permission, the Applicant was also able to apply to the BVI Court for a freezing injunction to the value of the claim, and a mandatory injunction to restrict the transfer or disposal of the cryptocurrency.
This case is an excellent example of the BVI Court demonstrating its flexibility and ability to react to new technologies. The capacity to take quick action, and show the sector its willingness to do so, is a very positive sign for victims of digital asset fraud. Critically, it reinforces our intention in the BVI, to be a hostile environment for financial crime, in whatever form it takes.
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 and build vibrant and successful businesses.
I am delighted to say that we have received over 60 applications for licenses under VASP so far, and that we expect 2024 to be a critical year in the formation of this world-leading digital ecosystem within the BVI.
For all these reasons, I believe that the BVI is perfectly situated to become a global hub for digital assets. The work we have done with the sector and the creation of the VASP framework represent a milestone in our journey to becoming a trusted and innovative digital assets ecosystem.
We expect that as the market matures, and realigns economic structures globally, new and trusted platforms and services will come to the fore. But all of these will look for the same attributes: a cadre of experienced professionals, smart and innovative products and services together with an internationally recognised robust and effective regulatory framework which meets the requirements of global standard setters, including the FATF.
This is the BVI Advantage. I am proud of everyone who has been involved in the progress we have made so far – many in this room – and I know that you will help us to create a global hub which can lead the world in digital asset innovation and development and in effective and efficient regulation. As you can tell, I am bullish about the success and growth of our jurisdiction in this vital area. I look forward to the panel discussion to follow this presentation.
Thank you.
