The British Virgin Islands: A secure Harbour for Security Toke
As the bear marketplace for ICOs continues, 2021 has so far seen a shift of investor focus from utility tokens towards security tokens which aim to provide more predictable investment returns. With flexible and commercially-minded legislation, an innovative method of anti-money laundering compliance, political stability as well as an internationally recognised securities regulatory regime, the British Virgin Islands is in a position to assist businesses seeking to securitise and digitise common assets.
TOKEN REGULATION
Utility tokens provide a means of access to a technology platform or service and derive their value from the interest in that access. The value of a security token is linked to an underlying asset or be part of the profits of the venture. The character of this asset is limited simply to its ability to be tied to a token. By attributing an electronic token to an otherwise illiquid asset, the token can give the asset a tradable quality, an irrefutable record of transfer, the potential of rapid transaction settlement and also the removal of costly middlemen.
Unlike other offshore jurisdictions, the BVI has not yet expressed a desire for implementing an overarching framework to govern digital assets. Instead, the primary legislation governing securities within the BVI may be the Securities and Investment Business Act 2010 . Within this fast-moving sector in which the technology is always running ahead of the law, this 'watch-and-wait' approach helps the BVI adapt quickly.
SIBA sets out an exhaustive listing of financial instruments that constitute 'investments' and requires those who carry on, or hold themselves out as continuing, an 'investment business' to obtain a licence from the BVI Financial Services Commission , susceptible to certain exemptions.
SAFE HARBOUR
While every token is different and requires a full regulatory review, pure utility tokens would not, generally, be deemed to be investments and for that reason wouldn't trigger licensing requirements under SIBA. Consequently, issuers, dealers, custodians and exchanges of pure utility tokens do not generally require licensing in the BVI. Conversely, most security tokens could be expected to fall within SIBA. However, as a result of SIBA's more prescriptive method of defining investments, certain tokens deemed generally as 'security' tokens may, actually, not fall within SIBA's ambit. Tokenised equities, debt and – where interpreted as a debt to holders – profit shares would be investments under SIBA, but their issuers may potentially benefit from a safe harbour exemption for entities issuing their own debt instruments.
Where licensing is required under SIBA, the BVI supplies a clear framework for obtaining this. At the beginning of 2021, the BVI had over 600 licensed investment businesses. Applications can usually be handled within Four weeks of submission towards the FSC, although additional time may be required for additional complex projects. Save for several regulated open-ended tokenised funds, there is certainly no reason to produce any prospectus or offering memorandum for offers of tokenised securities in or from within the BVI, provided the securities laws of the investors' jurisdictions are complied with. Notwithstanding this, we anticipate that many security token offerings is going to be completed by private placement.
AML COMPLIANCE
Regulatory concerns over AML and KYC compliance regarding the the issuance or exchange of security tokens could be alleviated in part through programming checks and restrictions upon a token or with the exchanges where an expression shows up. Such restrictions may, for instance, prevent onward transfer of an expression before the transferee has been whitelisted by a third-party KYC provider. Recent and welcome amendments to the BVI's AML regulations permit digital verification of identities, the receipt of electronic copies of documents rather than traditional “wet ink” paper-based processes and the use of 3rd party KYC providers.
SECURITY TOKEN EXCHANGES
Liquidity remains elusive for security tokens. Few security token exchanges have commenced operations and people who have remain in their infancy.
The BVI hosts a number of utility token and cryptocurrency exchanges. No security exchanges have yet been licensed in the BVI. However, SIBA supplies a regulatory regime for obtaining a licence to operate a good investment exchange that follows exactly the same, oft-used path as other investment businesses. There is no indication at this time the FSC would look to restrict such applications. If approved, a BVI-based security token exchange would take advantage of the recent amendments towards the BVI's AML regulations.
LOOKING AHEAD
The tokenisation of assets represents the next transfer of the blockchain revolution. The BVI's flexible corporate and regulatory regimes will still be at the forefront in aiding those businesses looking to launch the next generation of digital assets.
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