Garden of Eden: Are Offshore Jurisdictions still a haven for VASPs?

KEY TAKEAWAYS

• During the first ICO boom of 2017, the Cayman Islands and the British Virgin Islands were seen as crypto havens. However, with the introduction of stricter compliance and crypto-specific regulations, this is no longer the case.
• More popular jurisdictions that emerged to dethrone Cayman and the BVI, such as Seychelles, Saint Vincent and the Grenadines, are also in the process of introducing their own VASP laws, which will rapidly make them equally challenging for the writ large issuances that are popular in Web3.
• Up-to-date and reliable consulting and advice are essential to structuring the issuance of Virtual Assets today, and any project or founder proceeding based on advice received from another project instead of formal legal support is proceeding with incredible risk.
• The cowboy days are ending. It is now essential to organise and structure issuances and token raises lest local regulators in even offshore jurisdictions cancel your companies, terminate your issuances and put your project in peril before you have even got past the starting line.

REPORT

In the rapidly evolving world of virtual assets like cryptocurrencies and non-fungible tokens, offshore financial hubs are moving swiftly to implement robust regulatory frameworks. As blockchain-based assets gain mainstream traction, jurisdictions like Mauritius, the British Virgin Islands (BVI), the Cayman Islands and Saint Vincent and Grenadines (SVG) have emerged as pioneers in providing clear guidelines for virtual asset service providers (VASPs).

1. Mauritius

Mauritius enacted its comprehensive Virtual Asset and Initial Token Offering Services Act in 2021 (VAITOS), which has set the bar high for VASP governance across critical areas. The VAITOS Act came into force on 7 February 2022 to enable the Financial Services Commission, Mauritius (FSC) to regulate and supervise Virtual Asset Service Providers (VASPs) and issuers of Initial Token Offerings (ITOs) in the virtual asset sector in Mauritius.

• Licensing Requirements

Under Mauritius law, no entity can operate as a VASP – providing services like virtual asset exchange, transfer, custody, or participation in token sales – without obtaining a license from the Financial Services Commission. License categories encompass broker-dealers, wallet services, custodians, advisories, and virtual asset marketplaces. For instance, a platform like Binance would need a Class S “Marketplace” license to legally operate a virtual asset exchange from Mauritius. Similarly, companies like Ledger or Trezor providing crypto wallet services would require a Class O license.

• Capital and Fee Structure

Depending on the license category, VASPs must maintain stipulated minimum capital ranging from MUR 2 million (approx. $45,000) for broker-dealers to MUR 6.5 million (approx. $150,000) for marketplaces. Application fees span $1,000 to $3,000, with annual fees from $1,900 to $5,000.

• Token Offering Compliance

The Act also governs initial token offerings (ITOs) or coin offerings. Issuers must register with the Commission and publish a detailed whitepaper covering aspects like the token’s functionality, financial projections, use of proceeds, and risk disclosures. This aims to promote transparency for investors participating in such offerings from Mauritius.

2. The British Virgin Islands

Following Mauritius’ efforts, the British Virgin Islands (BVI) swiftly introduced the Virtual Asset Service Providers Act, 2022, to establish a comprehensive licensing regime for VASPs. The act came into force on 1 February 2023.

• VASP Registration

All entities providing virtual asset exchange, transfer, custody or other defined services from within the BVI must register with the Financial Services Commission under categories like, or other defined services from within the BVI must register with the Financial Services Commission under categories such as virtual asset business, custody service, or exchange operation.

• Additional Custody and Exchange Requirements

Companies offering virtual asset custody or operating an exchange must meet stringent conditions. For custodians, this includes robust safekeeping and asset segregation measures, transparent disclosures to clients on risks and access, and insurance coverage. Exchanges, on the other hand, face requirements around trading access controls, asset listing criteria, prevention of market manipulation, clearing and settlement processes, and cybersecurity safeguards.

• Approved Local Representative

An important provision mandates that VASPs without a physical presence in the BVI must appoint an approved local representative – either a BVI company, partnership, or resident individual with relevant expertise.

• Fee

The BVI is a cost-effective jurisdiction. The application fee is US$ 10,000 for custody services, US$ 10,000 for exchange services, and US$ 5,000 for VASPs other than those providing custody and exchange.

3. Cayman Islands

Even before Mauritius and the BVI, the Cayman Islands had taken the pioneering step of enacting the Virtual Asset (Service Providers) Act in 2020 to regulate this burgeoning sector. The Virtual Asset (Service Providers) Act (as amended) came into effect on 31 October 2020, and the Cayman Islands Monetary Authority was given the ability to enforce and take action against contraventions of the Act from 31 January 2021. Notably, some amendments have also been proposed to the Act through the Virtual Asset (Service Providers) (Amendment) Bill, 2024. These amendments, as discussed below, are yet to be enforced.

• VASP Licensing Categories

The Act establishes a licensing regime for virtual asset custody services and trading platform operations. For example, a firm aiming to operate a digital asset exchange serving Cayman Islands clients and counterparties would require applying for and obtaining a virtual asset service license from the Cayman Islands Monetary Authority (CIMA).

• Regulatory Oversight

CIMA can impose specific requirements on licensed virtual asset custodians – ranging from net worth obligations and internal controls to transparency in operations and safeguarding of client assets. Likewise, virtual asset trading platforms face CIMA supervision across areas like client segmentation, price discovery, disclosures, risk management, and anti-money laundering controls.

• Fee

The registration fee is determined after the assessment and approval of the application by the Authority, with such fee being determined by the Authority based on, but not limited to, the nature, size and scope of the service provider. The application is assessed and approved by the Authority. The Authority determines the licensing fee based on several factors, including not limited to, the nature, size, scope, and complexity of the virtual asset service or fintech service set out in the application.

• Token Issuance

Under this Act, any registered VASP entity seeking to issue virtual assets or tokens to the public must obtain prior approval from CIMA by submitting the proposed issuance details and commercial terms.

• Proposed Amendments

The Ministry for Financial Services and Commerce, Cayman Islands, is now in the process of adding provisions of the Act relating to the licensing of virtual asset trading platforms and custodians along with certain other aspects. The ministry has also identified and proposed several changes to the Act necessary for supervising virtual asset services in the Cayman Islands. The consultation period closed on 3 April 2024 and is now awaiting publication. Below is an outline of the proposed principal amendments to the Act:

• Licensing regime: The new licensing regime seeks to impose requirements in addition to those in the Act virtual asset trading platform operators and virtual asset custodians to ensure these services are provided in a safe and regulated manner in or from within the Islands.

• Fees: The proposed changes seek to simplify the fee structure by removing the fee-assessment requirement, thus giving greater clarity on the fees payable by any new applicant. The proposed amendments seek to impose a fee for registration ranging from $ 1,500 to $ 15,000 on the basis of the generated or expected revenue of the VASPs and the jurisdictions in which the services are being offered (within the Cayman Islands only or to persons outside the Cayman Islands). The proposed amendments also provide a licence fee of: (i) $ 5,000 (assessment for virtual asset licence); and (ii) $ 30,000 (for custody services); and (iii) $ 60,000 (for virtual asset trading platform) along with the corresponding renewal fee.

• Requirement for directors: The amendment proposes requiring a minimum of two directors for a virtual asset service provider.

• Other clarifying changes: The amendment contains a definition outlining who falls within the ambit of an “operator” of a virtual asset trading platform and the definition of a “convertible virtual asset”.

4. Saint Vincent and the Grenadines

SVG is also joining the group of offshore jurisdictions regulating the virtual asset space through its Virtual Asset Business Act of 2022 (VABA). VABA was passed on 10 May 2022. However, the Governor General has not proclaimed it, so it is not yet in force. The critical points in the legislation include:

• VASP Registration Mandate

The Act requires all entities operating virtual asset businesses in or from within SVG to register with the Financial Services Authority. Virtual asset businesses are defined as providing services such as an exchange between virtual assets and fiat currencies, transfer of virtual assets, custody or administration of virtual assets, and participating in token issuances.

• Local Representation

VASPs without a physical presence in SVG need to appoint an approved local resident as their principal representative.

• Token Issuance Requirements

Crucially, no registered VASP can issue or offer virtual assets to the public without submitting a detailed prospectus to the regulator at least 14 days prior, obtaining a no-objection statement, and only then making the public offering. The prospectus mandates comprehensive disclosures about the issuer, the virtual asset, the offering terms, financials, risks, and legal certifications.

• Fee Structure

The VASP registration fee in SVG is US$4,000 for the application and $12,000 upon being granted registration, with an additional fee for virtual asset custody services ($10,000) and virtual asset exchange operations ($10,000).

With this Act, SVG has aimed to cultivate a regulated and compliant virtual asset ecosystem under the supervision of its Financial Services Authority.

5. Seychelles

Proposed Comprehensive VASP Regime

The Seychelles Cabinet approved draft VASP regulations in 2023, paving the way for the Virtual Asset Service Providers Act to be tabled before the National Assembly. As proposed, this would require VASPs to obtain licenses based on their specific activities, such as wallets, exchanges, broking, payments, and investment services. Notably, initial coin offerings and NFT sales would also need registration. The draft allows for a transition period until the end of 2024 for existing players to obtain authorisation. However, the draft regulations are yet to be enforced. The key aspects of the regulations are:

• Licensing Requirements

The draft mandates that all VASPs operating in Seychelles, including wallet providers, exchanges,  brokers, payment services and investment providers, obtain licenses based on their specific activities. Token Offering Registration Significantly, entities looking to conduct initial coin offerings (ICOs) or launch non-fungible token (NFT) sales would require registering their offerings with the regulator.

• Transition Period

The proposed law allows for a transition period until December 31, 2024, for existing virtual asset players to bring their operations into compliance by obtaining the necessary authorisations.

• Other Obligations

Approved VASPs would need to fulfil stringent obligations like maintaining complete transaction data and records accessible in real-time from Seychelles. Outsourcing core functions like AML/CFT compliance to third parties may not be permitted.

• Fee Structure

The proposed fees include a $5,000 processing fee for licenses, $1,500 for ICO/NFT offering registrations, and annual fees ranging from $5,000 for investment providers to $50,000 for VASP licensees.

6. Panama

In 2022, Panama passed a law to comprehensively regulate cryptocurrencies—recognising them as legal tender, mandating licenses for exchanges, enabling open disclosures by crypto firms, and governing the issuance of digital assets. However, Panama’s Supreme Court struck down the law in July 2023 as unconstitutional. While a setback, this nascent episode indicates Panama’s keenness to implement a robust crypto regulatory framework in the future.

7. Turks and Caicos’ Exploratory Stance

While the Turks and Caicos Islands have not enacted any VASP regulations yet, the Financial Services Commission conducted preliminary research in 2021-22 to assess the virtual asset ecosystem and associated risks.

A consequent report was expected to evaluate potential regulatory measures for virtual assets and service providers. However, definitive proposals have yet to be unveiled so far. The territory’s Cabinet considered assessing VASP activities in September 2023, indicating some exploratory efforts. However, the Turks and Caicos have not formally announced any specific virtual asset regulations or their timelines as of now.

CONCLUSION

As virtual assets solidify their place in mainstream finance, more offshore jurisdictions will likely follow the pioneering examples of Mauritius, BVI, and Cayman in formalising clear licensing and compliance requirements for VASPs and token issuers operating from their shores.

This rapidly evolving landscape highlights the need for virtual asset businesses – whether exchanges, custodians, brokers, or issuers – to stay updated on the latest regulatory developments across their prospective operational hubs. Comprehensive preparation, diligent compliance, and strategic professional advice will be vital to successfully navigating this complex multi-jurisdictional environment.

Disclaimer:

TLP Advisors is a registered legal consultancy in the United Arab Emirates. Our lawyers are licensed to provide legal advice for a number of jurisdictions including the UAE, England & Wales and India. Any summaries or explanations of applicable laws in the offshore jurisdictions mentioned below are based on an analysis of published laws and regulations and our experience. Nothing in this publication should be construed as legal advice and any reliance placed on the contents herein is at the reader’s own risk. TLP Advisors disclaims any and all liability for any loss arising, whether directly or indirectly, actually or potentially, by a reader due to reliance placed on the contents of this article.