Seychelles Steps Up: New Bill to Regulate Virtual Asset Service Providers

Key Takeaways

The VASP Bill was introduced on 12 July 2024 to regulate VASPs in the Seychelles.
The VASP Bill follows a 2022 National Risk Assessment highlighting high money laundering risks and terrorist financing without regulation.
Only entities licensed by the FSA can provide virtual asset services, covering wallet providers, exchanges, brokers, and investment platforms.
Licensing criteria include economic substance requirements, compliance with insurance and solvency standards, and cybersecurity measures.
The base application fee for a VASP license is SCR 75,000 (USD 5,750), with additional annual fees for specific activities.
VASPs must demonstrate compliance with economic substance requirements, including local office presence and regular meetings.
VASPs undertaking ICOs or issuing NFTs must register with the FSA and be licensed under the VASP Bill or Securities Act, 2007.
The FSA is empowered to combat financial crimes related to virtual assets, and relevant laws have been amended to include VASPs.
VASPs must apply for a licence or registration by 31 December 2024, with a transition period for ongoing activities.
The Seychelles’ regulatory framework is compared to the UAE’s established and flexible environment, highlighting the Seychelles’ early-stage regulatory efforts.

The Virtual Asset Service Providers Bill, 2024 (“VASP Bill”) was introduced in the Seychelles on 12 July 2024 as a framework for regulating virtual asset service providers (“VASPs”).[i] The Financial Services Authority of the Seychelles (“FSA”) conducted a National Risk Assessment (“NRA”) for virtual assets (“VAs”) and VASPs in 2022 to assess the risks of financial crimes associated with the VA/VASP regime in the Seychelles.[ii] The NRA concluded that there were very high risks of money laundering and terrorist financing if VASPs were allowed to carry out their activities without being regulated. This NRA led to the introduction of the VASP Bill, which is in line with Recommendation 15 of the Financial Action Task Force (“FATF”).[iii] The regulatory authority responsible for implementing the provisions of the VASP Bill is the FSA.[iv]

Licensing Regime

The VASP Bill introduces a licensing regime under which no entity other than those licensed by the FSA may provide a virtual asset service.[v] This prohibition extends to the operation of mining facilities and mixer or tumblr services as well.[vi] VASPs have been defined broadly to include wallet providers, exchanges, brokers, and investment platforms.[vii]

Licensing Criteria

A VASP carrying out any virtual asset service is required to apply to the FSA for a licence.[viii] Applications will be assessed on the following six criteria:

Meet mandatory economic substance requirements.[ix]
Demonstrate that they can comply with the FSA’s prescribed insurance, capital and solvency requirements.[x]
Ensure that key personnel (such as directors and principal officers) meet the FSA’s fit and proper criteria, and appoint such personnel only with the FSA’s prior approval.[xi]
Meet the prescribed cyber security measures, and once licensed, submit a cyber security report in January of each year.[xii]
Have premises or data solutions for accessing and retaining records for the purpose of auditing.[xiii]
Satisfy the FSA that granting the licence is in the public interest owing to the size, scope, and role of the VASP in the market.

License Fees

The application for a VASP licence under the new regime will cost SCR 75,000 (approx. USD 5,750).[xiv] This would be a base fee and for each permissible activity, there would be an additional fee charged annually as follows:

Virtual Asset Wallet Provider: SCR 300,000 (approx. USD 23,000)
Virtual Asset Exchange: SCR 175,000 (approx. USD 13,400)
Virtual Asset Broking: SCR 150,000 (approx. USD 11,500)
Virtual Assets Investment Provider: SCR 75,000 (approx. USD 5,750)

Apart from these fees, the FSA charges USD 130 as a registration fee for setting up an International Business Company, and an annual fee every subsequent year.[xv] Additionally, the VASP may have to procure separate licences from the FSA depending upon the activities that they intend to carry out, which would incur additional charges.

Substance Requirements

To be issued a licence, a VASP must demonstrate compliance with economic substance requirements. These include having at least one resident director, having a fully manned office located within the Seychelles (which stores all the records and documentation that the VASP is obligated to keep), and conducting at least two board meetings and four management meetings within the Seychelles yearly.

Promotion of Initial Coin Offerings and Non-Fungible Tokens

Initial Coin Offering (“ICO”) refers to an offering of virtual assets in exchange for funds, and Non-fungible Token (“NFT”) refers to a unique digital identifier on a blockchain that can be used to certify ownership and authenticity. The VASP Bill requires VASPs that undertake an ICO or issue NFTs to register with the FSA.[xvi] Additionally, these VASPs must be licensed either as a VASP under the VASP Bill or as a service provider under the Securities Act, 2007.[xvii]

Monitoring and Supervisory Measures

As the primary intention behind the legislation is risk mitigation with respect to money laundering and terrorism financing, the FSA will be given very wide powers to combat any such financial crimes in connection with virtual asset services. To this effect, the Anti-Money Laundering and Countering the Financing of Terrorism Act 2020 will also be amended by the VASP Bill to ensure that these laws apply equally to VASPs. The Financial Consumer Protection Act 2022 will also be amended so that VASPs licensed under the VASP Bill must comply with the same reporting requirements as other financial service providers.

Timeline

VASPs must apply to the FSA for a licence or registration (for ICO or issuance of NFT) by 31 December 2024.[xviii] During this transition period, the VASP may continue carrying out its business activities until the application is either accepted or refused.[xix]

Analysing the Bill in context

The FATF has pushed for the broader implementation of their standards for VASPs as the borderless nature of virtual assets necessitates global coordination to regulate VASPs. Considering the large number of International Business Companies incorporated in the Seychelles that partake in virtual asset-related activities, the regulatory gap becomes a glaring impediment in monitoring. The Seychelles houses many cryptocurrency exchanges, with notable ones being OKX, KuCoin and MEXC Global.[xx]

This places them directly under the radar of the FATF. The FATF recommendations push for either a blanket prohibition or the establishment of a regulatory framework, and the Seychelles has preferred the latter, following in the footsteps of other tax haven, crypto-friendly jurisdictions like the Cayman Islands and British Virgin Islands.[xxi] The Seychelles VASP Bill aims to implement these standards in the interest of not only mitigating the risks of money laundering and terrorism financing but also encouraging responsible innovation and sustainable growth by ensuring that consumers are made adequately aware of and protected against these risks.

The Seychelles’ Emerging Framework vs. UAE’s Established Regulatory Landscape for VASPs

The United Arab Emirates (“UAE”) provides a well-established and diversified regulatory environment for VASPs. The Virtual Asset Regulatory Authority is the primary regulator for VAs in Dubai, and they have set out a comprehensive framework for VASPs operating in and from Dubai. The UAE’s financial free zones, namely the Dubai International Financial Centre and the Abu Dhabi Global Market, provide their own unique legal frameworks. These frameworks are renowned for their robust regulatory structures, catering specifically to VAs and offering specialised oversight tailored to the unique needs of crypto-native projects.

Comparatively, the Seychelles’ regulatory regime is still in its early stages, offering limited optionality and flexibility. Meanwhile, the UAE’s multiple regulatory options offer VASPs greater flexibility and the ability to choose the jurisdiction that best suits their specific needs and business models.

Any VASP in the Seychelles should examine and evaluate a suitable licensing strategy or restructuring strategy if licensing is still outside their means for budgeting reasons. But ignoring the incoming regulations globally will ultimately prove a hindrance for smooth business operations.

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[i] Virtual Asset Service Providers Bill, 2024, Bill No. 12 of 2024, https://www.gazette.sc/sites/default/files/2024-07/Bill 12 2024 – Virtual Asset Service Providers Bill 2024.pdf

[ii] Seychelles concludes National Risk Assessment (NRA) on Virtual Assets (VA) and Virtual Assets Service

Providers (VASPs), Press Release by Ministry of Finance, National Planning and Trade, http://www.finance.gov.sc/uploads/files/NAC-Seychelles-concludes-National-Risk-Assessment-for-Virtual-Assets-and-Virtual-Assets-Service-Providers-19.07.2022.pdf.

[iii] As per Recommendation 15 of the Financial Action Task Force, “Countries and financial institutions should identify and assess the money laundering or terrorist financing risks that may arise in relation to (a) the development of new products and new business practices, including new delivery mechanisms, and (b) the use of new or developing technologies for both new and pre-existing products. In the case of financial institutions, such a risk assessment should take place prior to the launch of the new products, business practices or the use of new or developing technologies. They should take appropriate measures to manage and mitigate those risks.”

[iv] Section 3, Virtual Asset Service Providers Bill, 2024.

[v] Section 5(1), Virtual Asset Service Providers Bill, 2024.

[vi] Section 5(2), Virtual Asset Service Providers Bill, 2024.

[vii] Section 2 read with the First Schedule of the Virtual Asset Service Providers Bill, 2024.

[viii] Section 7, Virtual Asset Service Providers Bill, 2024.

[ix] Section 13, Virtual Asset Service Providers Bill, 2024.

[x] Section 16, Virtual Asset Service Providers Bill, 2024.

[xi] Section 12, Virtual Asset Service Providers Bill, 2024.

[xii] Section 22, Virtual Asset Service Providers Bill, 2024.

[xiii] Section 23, Virtual Asset Service Providers Bill, 2024.

[xiv] Second Schedule of the Virtual Asset Service Providers Bill, 2024.

[xv] Licensing and Registration Fees, Financial Services Authority (Jul. 5, 2022), https://fsaseychelles.sc/images/Licensing_and_Registration_Fees.pdf

[xvi] Section 27, Virtual Asset Service Providers Bill, 2024.

[xvii] Section 27(2), Virtual Asset Service Providers Bill, 2024.

[xviii] Section 42(1), Virtual Asset Service Providers Bill, 2024.

[xix] Section 42(2). Virtual Asset Service Providers Bill, 2024.

[xx] Where are Crypto Exchanges Incorporated? (Top 30 Crypto Exchanges), CoinGecko (Oct. 23, 2023), https://www.coingecko.com/research/publications/crypto-exchanges-incorporated.

[xxi] What FATF’s Report on Recommendation 15 Means for Regulators & Private Sector, Chainalysis (Mar. 29, 2024), https://www.chainalysis.com/blog/fatf-r-15-update/.