The future of virtual assets and blockchain in the British Virgin Islands

Indeed, virtual assets now permeate so many different aspects of offshore legal structuring that it is hard to believe that the Bitcoin whitepaper was published not much more than 17 years ago, with the Bitcoin genesis block following very shortly after. The days when virtual assets and blockchain technology could be dismissed as a flash in the pan, or suitable only for criminals, money launderers and their enablers, are long behind us. They are truly here to stay, and it ill behoves any jurisdiction serious about its future position in the global economy to disregard the importance of setting out a serious, credible plan to engage with them, and on their own terms.

It is common to hear the phrase "crypto years are like dog years" given the speed of the evolutionary cycle, and it is an apt comparison. This space moves at an unprecedented rate, and legislators and regulators must be prepared to move faster than they are accustomed to in order to give legal frameworks any chance of keeping up with technological innovation.

Recent years have seen a flurry of activity around the world, bringing activity in the virtual asset space much more squarely within the purview of regulators and supervisory bodies. With the final coming into force of the Markets in Crypto Assets regulation in the European Union, and the GENIUS Act and, on the horizon, the CLARITY Act in the United States, we are seeing the world's largest markets and economies starting to engage seriously with this space. Closer to home, in the BVI, the Virtual Assets Service Providers Act, 2022 (the VASP Act) brought certain activities involving virtual assets within the remit of the BVI's Financial Services Commission (the FSC).

In this article, we will firstly examine the current position of the BVI in this world. We will examine our strengths, our weaknesses, the areas in which we lead and those where we are following, and then we will look at how the sector should continue to develop into the future. Whilst the full jurisdictional 'SWOT' analysis is beyond the scope of this article, we hope to be able to outline some key areas for focus and development. Specifically, we will look to highlight the ways in which the current system is working, and should continue to function in its current form, whilst attempting to suggest ways and directions in which the BVI can look to develop.

There are many for whom the starting point with virtual assets is that they are just another asset class. That is to say, there is often nothing inherent about a virtual asset that makes it more complex to deal with than any other type of asset in which one could invest; one may need to learn some new jargon and understand a few technical concepts, but from a legal perspective a virtual asset is just another 'thing' that you can own.

In this context, the BVI has put in place a solid framework for this high-level position, which should endure well into the future. BVI funds (which we will discuss further later on) are well suited to holding and investing in virtual assets, and the highly flexible investment funds regime in the BVI is more than versatile enough to absorb and reflect the complex investment strategies that virtual assets enable. In a similar vein, BVI business companies have been popular historically as listed vehicles on major stock exchanges and provide a good choice for those looking to set up digital asset treasury companies or other holding vehicles. Handled with some care, BVI entities can also be good vehicles through which to coordinate operational activities or ecosystem support. These are all areas in which the BVI already demonstrates strength and should find it easy to maintain.

Outside of traditional finance, a crucial role that BVI entities frequently occupy is that of the token issuer. As the VASP Act does not expressly regulate the issuance of virtual assets from a BVI company (a position that is generally congruent with the approach to securities issuances), BVI entities have been an immensely popular choice for token issuance vehicles in an overwhelming number of projects. Unlike other regimes elsewhere, the BVI does not distinguish between different forms of virtual asset: so, to the extent that they fall within the definition of a 'virtual asset' under the VASP Act, a utility token, for example, would be subject to the same frameworks as a governance token or a non-fungible token. This approach lends a welcome comparative degree of clarity to the regulatory regime.

At the other end of the lifecycle of a project, the BVI is in an enviable position with regard to the body of jurisprudence that is building up in respect of disputes in the virtual assets space, and the experience of its legal and insolvency practitioners in the major insolvencies that have occurred. Whilst the technology may develop at an incredible rate, as referenced above, the more prosaic business of settling disputes and resolving insolvency claims proceeds much as before, and the BVI is often at the forefront of these matters, with a commercial court and an arbitration system that is highly attuned to the industry's particular nuances. With the inevitable time lapse between the particular act giving rise to litigation, or the onset of insolvency, and the handing down of any judgment, the BVI will continue to enjoy this lead for some time to come.

As it is now an inevitable conclusion for many, the question that is often asked is: what would mass adoption of blockchain and virtual assets look like? It is fanciful to believe that this will come in the form of the general public comfortably opening self-custodied wallets en masse and paying for their morning coffee in Bitcoin; it is far more likely that mass adoption is going to happen in the background of daily life, as more of our daily transactions are handled on blockchain rails.

There is no doubt that this industry has not yet found a way to promote universal understanding of the underlying technology, but we are seeing a pivot away from that and instead a focus on the user experience; that is, how to allow people to access the systems without even really noticing, save for the vastly increased speeds, lower costs and more flexible optionality available to them. At the institutional level, a hot topic at the moment is the tokenisation of real-world assets and bringing investments on chain, which is a logical next step in the development of dematerialised securities. The BVI took an early lead in the tokenisation of funds, particularly with the launch of BlackRock's first tokenised fund on the Ethereum network, bringing the benefits of near-instantaneous settlement and twenty-four-hour markets to investors.

This area may well be relatively low-hanging fruit that the jurisdiction could enhance and reap with relatively minor changes to existing legislation and regulation. Similarly, the ability to issue and transfer other forms of securities on-chain will only grow in importance as the sector matures; it would be an asset to the BVI for it to ensure that its body of corporate laws, already one of the most versatile, flexible and modern in the world, is kept under review to ensure that business is not hampered by archaic rules or formalities, especially around execution and non-digital processes.

The foregoing suggestions will only ensure that the BVI is able to continue offering its existing services in an increasingly technology enabled world. In order to thrive and grow, however, the BVI will need to find a way to make virtual assets and blockchain its niche focus, given the incredibly intense competition from other onshore, mid-shore and offshore domiciles around the globe. So how can the BVI make itself an even more natural home for virtual asset business? In this context, we believe that the focus should be on regulated business. The BVI, through its flexible token issuance regime, has already claimed its place in the world of decentralised finance and unregulated business.

However, we are of the view that it is at the institutional level that mass adoption and integration into financial systems will take place, and there is therefore most at stake in this arena. The VASP Act has set a good tone and balance for regulation in this space, and the FSC has a long-standing international reputation as a pragmatic but robust regulator. The VASP regime has now been in place for a number of years, and we are starting to see licences being issued to virtual asset service providers at a reasonable flow. The question, then, is how to ensure that the BVI is able to operate at the forefront of this sector.

A significant motivator (and sometimes the only real motivator) for clients in this space is speed. We discussed above how the technology develops at a rapid pace and markets now operate around the clock; this always-moving mentality is pervasive, and the timeframe for obtaining a licence has to reflect client objectives and expectations. Speed here is measured in two areas: firstly, the time taken to actually submit an application; and secondly, the time taken to complete the process with the FSC.

The first area will always be led by the applicant and the experience of the service provider they are working with, and the fact that it can take time only underscores that a licence under the VASP Act is not granted just for the asking but instead is only available to those who are actually ready and able to meet the requirements of a regulated entity.

The second area, how long it takes to actually be granted a licence, can be more problematic. It is probably true to say that there is barely a legal practitioner in the BVI who has not heard a client say, "we started in a different jurisdiction, but they took too long", and who has come to the BVI for a better path to market. The BVI needs to be able to capitalise on this, without compromising on the quality of the offering nor the reputational stability of the jurisdiction. This will require significant investment in people and resources at the FSC in particular, to ensure that the expectations of both prospective licensees and those of the international regulatory community can be met.

Further, we would welcome more guidance being issued on the FSC's interpretation of the types of activities that are covered by the VASP Act and how they would be regulated. A good example of this would be the regulation of operators of decentralised exchanges and how they can meet the requirements of a licensee. We understand this guidance is already underway and it is welcomed with haste. Guidance on expectations around more mainstream VASP activities, such as custodianship, would also strengthen the BVI's offering, enabling it to position itself as a safe choice for institutions when building the rails on which the future economy is to be built.

Whilst every project has its nuances, they can generally be separated out into more generic groups, and if the FSC were willing to express a view on what it would expect from an applicant in any one of those groups, the entire roadmap of the process would be immediately more efficient. This approach also ensures that prospective licensees will know what they can expect and what will be expected of them. Consistent with this approach, applicants should have a clear understanding, based on published guidance, of how long an application may take, what capital requirements are likely to be imposed, and what the extent of their obligations will be. This will enable the founders of the future to build on certain foundations and not have to structure around difficult grey areas. We believe that focussing on these areas will create a natural fit for persons seeking an offshore home for digital business.

The BVI is already seen by the global community as a jurisdiction that is open for business for virtual assets and blockchain. As with traditional finance, the key is to tread the right line to ensure that regulation is appropriate and proportionate, something that the FSC has been adept at getting right in the past. It will be necessary to ensure that frameworks are implemented that enable virtual assets to be effortlessly adopted into existing structures, making them compatible with modern technology. It will also be necessary to safeguard existing unregulated virtual asset businesses, such that any future regulatory oversight does not stifle business, whether that is within the embryonic sandbox regime or elsewhere.

Finally, we suggest that the brightest future for digital assets in the BVI will lie with sensible but robust regulation of virtual asset businesses, enabling the jurisdiction to act as the backbone of tokenised finance globally. It has been noted that virtual assets and blockchain have represented one of the first moments in history where every national regulator has been presented with the same challenge at the same time, and their responses have been directly comparable. The FSC has done a truly excellent job reacting to the new world we find ourselves in, and at an impressive pace. We now look forward to working with them to proactively drive this space forwards, to ensure the future remains very bright in the BVI.