The Lending, Credit and Finance (Bailiwick of Guernsey) Law
2022, (LCF Law) came into effect on 1 July 2023.
Businesses carrying out activities covered by the LCF Law must now
obtain a licence (unless any of the exemptions apply).
PART III – VASPS
In our previous article (which can be found here), the different parts of the LCF Law were
discussed. This article will focus on Part III, section 17 of the
LCF Law: Virtual Asset Services Providers
(VASPs).
One of the outcomes of the new licensing regimes is that any
VASP that is in scope will now also fall under Guernsey’s
AML/CFT regime. Whilst the LCF Law is a welcome development in
terms of formal steps to regulate the virtual asset marketplace,
the activities which are licensable remain reasonably tightly
controlled.
VIRTUAL ASSET SERVICES PROVIDERS
The LFC Law provides that it is prohibited to provide, offer or
carry out any activities by way of business in relation to virtual
assets without having obtained a Part III Licence. These activities
are targeted at the institutional/wholesale market; it is
prohibited to target individual (or “retail”)
consumers.
It is also prohibited to carry out activities which aim to
obscure ownership or the flow of assets (in other words,
discouraging mixers and tumblers). The LCF Law captures both on and
off-chain transfers, the focus being on control of the asset.
Developers are excluded (I.e. the creation of a virtual asset is
excluded, but those engaging in transfers of control/ownership are
captured).
‘Virtual Assets’ are defined as a
digital representation of value that can be digitally tracked or
transferred and can be digitally traded, or transferred and can be
used for payment or investment purposes, but virtual assets do not
include representations of fiat currencies (i.e. cash) or general
securities or derivatives (e.g. Shares, Debentures, bonds,
loans etc.) and other financial assets.
‘By way of business’ means any person
who provides any service or carries on any activity where in turn a
person receives any income, fee, emolument or other consideration
in money or money’s worth for doing so.
The following constitute as activities by way of
business:
- Exchange between virtual assets and fiat
currencies. (For example, businesses using Stable
coins – virtual assets that are backed by a fixed exchange
rate (i.e. a fiat currency) and are held as collateral by the
original creator. However, note that central bank digital
currencies are excluded.). - Exchange between one or more virtual assets.
(General trading of virtual assets on a centralised platform (a
block chain ledger) such as Bitcoin). - Transfer of virtual assets.
- Safekeeping and / or administration of virtual assets
or instruments enabling control over virtual assets.
(For example, a custodian wallet provider – a business
who provides, or facilitates the control of virtual assets or
governing the use of the virtual assets, this includes but not
limited to administrative activities such as balance checks and
fee/transaction confirmations). - Participation in and provision of final services
relating to the trading of virtual assets such as initial coin
offering (ICOs) and market making. (Business
activities which entails a person offering crypto assets, tokens,
to raise capital and creating a market of virtual
assets). - Any other service or activity or class or description
in respect of virtual assets specified by the
regulations.
A VASP that is already, or planning to conduct the
above-mentioned activities, is required to obtain a licence.
Further information on how to apply for a licence and the
application form can be found here.
In addition to providing information about the business
activities themselves, VASPs are required to provide the
following:
- An Environmental Assessment – undertaken by the VASP as
well an independent expert regarding the environmental impact from
their use of consensus mechanisms. Details of their findings must
be disclosed to the public annually. This involves information such
as carbon emission and use of electrical power. - Information in relation to any external sources of finance,
i.e. a loan. - Information regarding financial commitments to the business
itself and others.
The Guernsey Financial Services Commission
(GFSC) may grant or refuse the application for a
licence depending if the VASP has fulfilled the minimum criteria of
licencing, provisions set out in the LFC law has been met and the
prescribed fee has been provided.
The GFSC on granting the licence, may impose certain conditions
which a VASP will have to comply with. Examples of such conditions
could include any of the following:
- A VASP will have to take certain steps to refrain from adopting
or pursuing a particular course of action or to restrict the scope
of its business in a particular way. - Limitations relating to the acceptance of business.
- Prohibit the licensee from soliciting (whether at all or in any
specified manner) business, either generally or from particular
persons or class of persons. - Prohibit the licensee from entering into any other transaction
or class or description of transactions. - Require the removal of any person who is the holder of a
supervised role in respect of or who is an officer or auditor of
the licensee. - Specify requirements as to capitalisation and liquidity or
margin of solvency of the business of the licensee. - Provide the GFSC with information and documents required at
particular times. - Require the licensee to obtain professional indemnity
insurance. - Prohibit or impose limitations on the carrying on of the
business regulated by the LFC law or any class or description of
such business in or from within any place or any particular place,
outside the Bailiwick by the licence itself, by any undertaking
established by the licensee. - Any provision in whatever form and manner and whatever time the
GFSC may reasonably determine of evidence of compliance with the
provisions of this Law or regulatory laws. - A licensee which contravenes any condition of a Part III
licence is guilty of an offence.
A VASP is also allowed to surrender its licence should it wish
to. This has to be done by writing to the GFSC, however the
surrender would be subject to GFSC consent and they may refuse
their consent to the surrender of a Part III licence if:
- in the opinion of the GFSC, the liabilities of the licensee
have not been discharged or transferred; - the GFSC believes that the surrender would not be in the
interests of the public or the reputation of the Bailiwick as a
finance centre, etc.; - the licensee would not, immediately after the surrender, comply
with the requirements of section 49 of the Enforcement Powers
Law.
Upon the surrender of a Part III licence no fee paid or payable
by the licensee concerned pursuant to regulations under section 37
shall be refunded, remitted or waived.
If a VASP believes it should be exempt from having to apply for
a licence (the list of exemptions can be found here) but is unable to use any of the
exemptions provided, a discretionary exemption may be sought from
the GFSC (see the ‘Discretionary Exemption Form‘).
A VASP which fails to obtain a licence (and is otherwise
required to do so) will be in breach of the LCF Law and therefore
guilty of an offence. This may result in a fine or imprisonment and
removal of directors or officers, depending on the nature of the
breach.
THE FUTURE
A consultation paper has been issued on the proposed additional
rules and guidance for virtual asset service providers
(VASPs) and specified businesses with a connection
to, or involvement with, virtual assets, on how to meet the
requirements of Schedule 3 to the Criminal Justice (Proceeds of
Crime) (Bailiwick of Guernsey) Law 1999 (POC Law)
and rules in the Handbook on Countering Financial Crime and
Terrorist Financing (Handbook).
The consultation paper also seeks comments on proposed
additional rules and guidance for trustees of trusts and partners
(excluding limited partners) of partnerships and limited
partnerships without legal personality to hold information on the
identity of other regulated agents and service providers to a trust
or partnership, and disclose their status as trustee or
partner.
The consultation paper and associated draft legislation and
Handbook changes can be found on the Commission’s Consultation Hub. It closed on 3 July 2023. We
await the results of the consultation in due course.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
