TerraLex Cross-Border Guide to Crypto Assets

There is no statutory definition of crypto assets in the British Virgin Islands. As far as we are aware, the definition of crypto or virtual assets has not yet been the subject of any authoritative decision in the British Virgin Islands.

However, the Financial Services Commission of the British Virgin Islands in its Guidance on Regulation of Virtual Assets in the Virgin Islands (BVI) published on 13 July 2020 (the “Guidance”) uses the Financial Action Task force (“FATF”) ’s definition, of a virtual asset being “a digital representation of value that can be digitally traded or transferred and can be used for payment or investment purposes.” The Guidance goes on to state that virtual assets do not include digital representations of fiat currencies.

There is no British Virgin Islands statute setting out the legal status of crypto, digital, or virtual assets. As far as we are aware, the specific legal status of crypto or virtual assets has not yet been the subject of any comprehensive authoritative decisions in the British Virgin Islands or in any common law jurisdiction.

The Financial Services Commission of the British Virgin Islands in its Guidance on Regulation of Virtual Assets in the Virgin Islands (BVI) published on 13 July 2020 (the “Guidance”) states that the Commission’s position is that virtual assets and its related products have value, exhibit the attributes of property, and meet the definition of intangible property.

Whilst there is no specific legislation that regulates virtual assets or virtual asset service providers the Financial Services Commission of the British Virgin Islands in its Guidance on Regulation of Virtual Assets in the Virgin Islands (BVI) published on 13 July 2020 (the “Guidance”) sets out various factors which must be considered in determining whether licensing is required for virtual asset related activities under existing legislation.

The Financial Services (Regulatory Sandbox) Regulations, 2020 provide a mechanism for persons developing or proposing to develop technology that is to be used in providing or supporting financial services business (FinTech) to apply to participate in the Regulatory Sandbox for a limited period (18 months extendable by a further 6 months). Applicants accepted as Sandbox participants will be under the supervision of the BVI Financial Services Commission but will not need to apply for a licence to conduct financial services business in the British Virgin Islands.

The Financial Services Commission of the British Virgin Islands is the regulatory authority responsible for the regulation of securities and investment business, insurance and banking and fiduciary services.

Virtual assets and virtual asset service providers may fall to be regulated under existing BVI legislation.

If the virtual asset fits the definition of an investment in the Securities and Investment Business Act (Revised Edition 2020) (“SIBA”) and, or the virtual asset service provider carries on investment business then if no safe harbour applies the virtual asset service provider may need to be licensed under SIBA.

If the virtual asset service provider acts as a bank or provides banking services, it may fall to be regulated under the Banks and Trust Companies Act (Revised Edition 2020).

If the virtual asset service provider carries out insurance business, it may fall to be regulated under the Insurance Act (Revised Edition 2020).

If the virtual asset service provider carries out financing or money services business, it may fall to be regulated under the Financing and Money Services Act (Revised Edition 2020).

Where virtual asset service provider is regulated, it is likely to be carrying on “relevant business” for the purpose of Anti-money Laundering Regulations, 2008 (the “AML Regulations”) and need to comply with the AML Regulations and the Anti Money Laundering and Terrorist Financing Code of Conduct, 2009 (the “AML Code”).

Where a virtual asset service provider is unregulated it is likely to fall outside the AML Regulations and the AML Code. For example, an issuer of pure utility tokens or exchange tokens is currently likely to be outside the scope of the AML Regulations and the AML Code.

The Financial Investigation Agency of the British Virgin Islands is the competent authority for reporting of suspicious activity in relation to anti-money laundering, terrorist, and proliferation financing and sanctions violations.

Virtual asset service providers should also be mindful of their obligations under the BVI Data Protection Act 2021.

Although the Financial Services Commission of the British Virgin Islands Guidance on Regulation of Virtual Assets in the Virgin Islands (BVI) published on 13 July 2020 (the “Guidance”) provides some insight into the application of the British Virgin Islands anti-money laundering regime to virtual assets and virtual asset service providers, no specific AML measures have been implemented in relation to crypto assets as yet.

However, the BVI is a member of the Caribbean Financial Action Task Force and has agreed to implement common countermeasures against money laundering and terrorism financing recommended by Financial Action Task Force (“FATF”). FATF published its Updated Guidance: A Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers in November 2021 and as a consequence it is perhaps likely that new legislation will be brought in the near future to regulate Virtual Assets and Virtual Asset Service Providers.

There is no specific regulation of blockchain in the financial services sector in the British Virgin Islands. To the extent that blockchain or distributed ledger technology products and services amount to investments or the virtual assets service providers carry on investment business, banking business or insurance business, or any other type of regulated business or activity they may fall to be regulated in the British Virgin Islands.

The Financial Services (Regulatory Sandbox) Regulations, 2020 provide a mechanism for persons developing or proposing to develop technology that is to be used in providing or supporting financial services business (FinTech) to apply to participate in the Regulatory Sandbox for a limited period (18 months extendable by a further six months). Applicants accepted as Sandbox participants will be under the supervision of the BVI Financial Services Commission but will not need to apply for a licence to conduct financial services business in the British Virgin Islands.

Crypto assets are not taxed in the British Virgin Islands.

There is no British Virgin Islands statute that recognises crypto, digital, or virtual assets as property. The Commercial Court of the British Virgin Islands (the “Commercial Court”) handed down judgement in ChainSwap v Persons Unknown [2022], in granting a freezing injunction over the crypto assets, that the crypto assets were choses in action and as such property. The Commercial Court is so doing agreed with the UK High Court’s judgement in Fetch. AI Limited v Persons Unknown [2021] EWHC 2254 (Comm).

The Eastern Caribbean Supreme Court (the “Supreme Court”) stated in Philip Smith and Jason Kardachi (in their capacity as joint liquidators) v Torque Group Holdings Ltd that crypto assets should be treated as property specifically in the context of liquidation [26]. The Supreme Court gave an express endorsement of the UK Jurisdiction Taskforce’s Legal statement on crypto assets and smart contracts (the “UK Statement”) in coming to its view and cited with approval the UK High Court case of AA v Persons Unknown, Re Bitcoin [2019] EWHC 3556 (Comm) on the issue as to whether crypto assets are a form of property. In Re Bitcoin the UK High Court decided that even though crypto assets did not fall neatly into either of the categorisations of ‘chose in action’ nor ‘tangible assets,’ they could still be regarded as property.

The Financial Services Commission of the British Virgin Islands in its Guidance on Regulation of Virtual Assets in the Virgin Islands (BVI) published on 13 July 2020 (the “Guidance”) states that the Commission’s position is that virtual assets and its related products have value, exhibit the attributes of property, and meet the definition of intangible property.

Whilst there is no statute that sets out the legal status of crypto assets in the British Virgin Islands the BVI courts are likely in our view to follow the Supreme Court’s judgment in Philip Smith and to take account of the Guidance and the UK Statement. The section in the UK Statement on Property provides:

“Whether English law would treat a particular crypto asset as property ultimately depends on the nature of the asset, the rules of the system in which it exists, and the purpose for which the question is asked. In general, however: (a) crypto assets have all of the indicia of property; (b) the novel or distinctive features possessed by some crypto assets—intangibility, cryptographic authentication, use of a distributed transaction ledger, decentralisation, rule by consensus—do not disqualify them from being property; (c) nor are crypto assets disqualified from being property as pure information, or because they might not be classifiable either as things in possession or as things in action; (d) crypto assets are therefore to be treated in principle as property.”

The British Virgin Islands courts may also consider precedent and or regulatory guidance from other Commonwealth and or common law jurisdictions where British Virgin Islands statute is silent or the application of the common law is uncertain.

There is no specific statutory legislation in the British Virgin Islands dealing with the application of property laws to crypto or virtual assets.

The Commercial Court of the British Virgin Islands (the “Commercial Court”) handed down judgement in ChainSwap v Persons Unknown [2022], in granting a freezing injunction over the crypto assets, that the crypto assets were choses or things in action and as such property. The Commercial Court in so doing agreed with the UK High Court’s judgement in Fetch. AI Limited v Persons Unknown [2021] EWHC 2254 (Comm).

The Eastern Caribbean Supreme Court (the “Supreme Court”) stated in Philip Smith and Jason Kardachi (in their capacity as joint liquidators) v Torque Group Holdings Ltd that crypto assets should be treated as property specifically in the context of liquidation [26]. The Supreme Court gave an express endorsement of the UK Jurisdiction Taskforce’s Legal statement on crypto assets and smart contracts (the “UK Statement”) in coming to its view and cited with approval the UK High Court case of AA v Persons Unknown, Re Bitcoin [2019] EWHC 3556 (Comm) on the issue as to whether crypto assets are a form of property. In Re Bitcoin the UK High Court decided that even though crypto assets did not fall neatly into either of the categorisations of ‘chose in action’ nor ‘tangible assets,” they could still be regarded as property.

BVI law allows parties to agree which country’s law should govern certain aspects of their business relationships and transactions. If the parties to a smart contract want BVI law to apply as far as possible, they should provide for this in the contract.

The UK Statement provides that:

“When it comes to assessing which country’s laws should be used to determine their effect, the law considers the transacting party’s choice to be of little relevance. Instead, to answer questions such as how property is to be classified, whether a proprietary security or other interest exists, and how and when a transfer of property affects third parties, judges have traditionally applied the law of the country where the property is situated at a relevant time. That is largely for two reasons. First, at least when dealing with tangible property— things in possession—the country in which the asset is located is easily identified and third parties might reasonably suppose that the law of the country determines property issues. Secondly, that country has physical control over assets within its borders, and a court judgment which is in conflict with its laws will often be ineffective.

Intangible property cannot of course be seen or touched, so what is meant by its ‘location’ is not so obvious. Nevertheless, the same rule is usually applied, even though the reason to do so is not as convincing. The law allocates an artificial location to certain types of intangible property, which is often the place in which some sort of control over the property might be exercised. Many things in action are therefore considered to be situated in the country where they are properly recoverable by action or can be enforced. But the rules and how they apply are often difficult to state with any certainty.”

…and suggests that:

“the following factors might be particularly relevant in determining whether English and Welsh law governs the proprietary aspects of dealings in crypto assets (in no particular order): (a) Whether any relevant off-chain asset is located in England and Wales; (b) Whether there is any centralised control in England and Wales; (c) Whether a particular crypto asset is controlled by particular participant in England and Wales (because, for example, a private key is stored here); (d) Whether the law applicable to the relevant transfer (perhaps by reason of the parties’ choice) is English law.”

There is no British Virgin Islands statute setting out whether smart contracts can transfer virtual assets in a legally binding manner. As far as we are aware, the ability of smart contracts to transfer ownership of crypto or virtual assets has not yet been the subject of any authoritative decision in the British Virgin Islands.

Whether smart contracts transferring ownership on a crypto asset can be treated as legally binding will depend upon the presence of the common law requirements of certainty, intention to be legally bound and consideration (other than in a contract made by deed).

The UK Jurisdiction Taskforce’s Legal statement on crypto assets and smart contracts (the “UK Statement”) which the BVI courts are likely to consider before making a judgment expresses the view that:

[Persons] “may contract on the basis that their obligations are defined by the code and that they abide by the behaviour of the code whatever it does; or they may contract on the basis that code will be used to implement their agreement but not to define it; or they may contract on some hybrid basis, where some obligations are defined by code, others merely implemented by code and perhaps others not involving code at all.”

“It follows that the question of whether, and under what circumstances, a smart contract is capable of giving rise to binding legal obligations turns on the question of whether, and under what circumstances, parties engaged in smart contracting are capable of reaching objective agreement as to terms, of intending to create a legally binding relationship, and of satisfying the requirement of consideration.”

There is no British Virgin Islands statute dealing with the taking of security over crypto or virtual assets. As far as we are aware, taking security over crypto or virtual assets has not yet been the subject of any authoritative decision in the British Virgin Islands.

The UK Jurisdiction Taskforce’s Legal statement on crypto assets and smart contracts (the “UK Statement”) which the BVI courts are likely to consider before making a judgment expresses the view that:

“English law only recognises four kinds of consensual security: pledge, contractual lien, equitable charge, and mortgage. Pledges and liens can only be created if it is possible to transfer possession of an asset. Since crypto assets cannot be possessed, they cannot be the object of a pledge or lien.”

“If a particular crypto asset is property, a mortgage or equitable charge can be created over it. This can be done in the same way that a mortgage or equitable charge can be created over other intangible property, and subject to the same requirements.”

If technical measures can simulate the effect of a mortgage or equitable charge where the crypto asset is not property this may create a simulated security or functional or quasi security however the law may not recognise that as security.

Not applicable. There is no inheritance tax in the British Virgin Islands.

None as far as we are aware. However, the British Virgin Islands is a member of the Caribbean Financial Action Task Force (“CFATF”), and the British Virgin Islands government has not introduced any new AML legislation since the publication of the Financial Action Task Force’s (“FATF”) Updated Guidance: A Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers published in November 2021. We think it likely that new legislation will be brought in the near to medium term to regulate Virtual Assets and Virtual Asset Service Providers.

The British Virgin Islands is a member of the Caribbean Financial Action Task Force which is an organisation of states and territories of the Caribbean basin which have agreed to implement common countermeasures against money laundering and terrorism financing.

Currently many crypto assets and virtual asset service providers remain largely unregulated.