The British Virgin Islands have launched a new Fintech sandbox
to encourage technological innovation in financial services under a
lighter touch regulatory regime. The sandbox, which opened for
applications on 31 August 2020, further strengthens the BVI’s
ambitions to become a global hub for innovation and emerging
technologies.

With the COVID pandemic resulting in the acceleration of
digitised financial services and the forced adoption of remote
solutions, the sandbox may have launched at the perfect time for
existing businesses looking to update client offerings and for
start-ups challenging traditional financial institutions.

Equally, with the fears that increased financial regulation
following past global recessions has stifled innovation, we expect
innovators to look for ‘regulatory-light’ solutions to get
new products and service offerings to market. The successful launch
of an innovative financial services solution often hinges on the
capacity of its innovators to fit within predetermined regulatory
landscapes that are outdated and ill-adapted for emerging
technologies. The BVI sandbox looks to reduce the regulatory burden
on start-ups so they can focus on customer experience, whilst
maintaining regulatory oversight.

The BVI has previously shown its receptiveness to disruptive
financial technologies, being the host jurisdiction for
cryptocurrency exchanges, algorithmic traders, tokenized funds and
staker pools, among other emerging technologies, each of which has
benefited from BVI’s progressive financial services regulation
and pragmatic and communicative regulator. It is hoped that the BVI
will further utilise the sandbox to build upon its existing
experience, to craft smarter legislation and to enable open
dialogue and education between participants and the regulator.

Who will benefit from the sandbox?

We anticipate that the BVI sandbox will appeal to innovators in
the following areas:

  1. Start-up business that would otherwise be regulated in
    the BVI

    Examples?

    Derivative trading platforms; money transmitters; investment
    advisory services using artificial intelligence and machine
    learning; InsureTech.

    How will the sandbox assist?

    For start-up businesses that would be regulated in the BVI, but
    which cannot afford or meet the requirements of full licensing in
    the BVI (for example, because of difficulties in finding auditors
    or insurers for innovative asset classes or in meeting regulatory
    paid-up capital requirements), the sandbox will allow participants
    to work with the BVI regulator, the Financial Services Commission
    (FSC), to deviate from regulatory requirements on a bespoke basis
    and allow innovators to go to market more quickly than if they were
    required to implement and finance more stringent restrictions.

  2. Business operating in regulatory ‘grey
    areas’

    Examples?

    Businesses dealing in digital assets which straddle the boundaries
    of regulated financial investments, including certain stable-coins,
    tokenized fund products and analogous structures.

    How will the sandbox assist?

    Whilst the BVI has strived to promote clarity in the application of
    its existing financial services regulations to emerging technology,
    the pace of innovation has inevitably resulted in certain digital
    assets blurring the lines between utilities and investments (or
    ‘securities’ in analogous jurisdictions) and certain
    services being on the fringe of a regulated ‘investment
    activity’. The sandbox will provide clarity and comfort to
    innovators operating in these ‘grey’ areas, their
    investors, service providers, banks and customers.

  3. Businesses not currently regulated in the BVI, but
    which may expect to be in the future

    Examples?

    Pure cryptocurrency exchanges, custodians and wallet providers not
    dealing in ‘investments’, as such term is defined in the
    BVI; peer-to-peer lending platforms; RegTech (which will be of
    particular interest to the FSC)

    How will the sand box assist?

    Businesses not currently regulated in the BVI, but which anticipate
    that these may become regulated in the future (whether because of a
    global trend towards regulation or otherwise), would benefit from
    regulatory comfort for at least the first year and a half of
    operations. Sandbox participation may also provide these businesses
    with cross-border recognition and legitimacy, where unlicensed
    operations may not.

In addition, such businesses will be able to inform the FSC on
how regulation could be practically applied going forward. Speed of
developments and the nature of disruptive technology has meant that
specialised legislation risks becoming outdated quickly. The
sandbox should allow the FSC to take the time to craft balanced and
smarter legislation with greater longevity, which is directed at
the specific risks of such businesses as they transpire, whilst
also allowing the regulator to assess areas which do not pose a
regulatory risk and can remain unregulated.

Who can apply for the sandbox?

The BVI sandbox is open to any BVI incorporated companies and
limited partnerships (together with non-BVI companies who wish to
conduct business in the BVI) whose proposed business model involves
‘innovative FinTech’, being defined by the FSC as the
“development or implementation of a new system, mechanism,
idea, method or other arrangement through the use of technology to
create, enhance or promote a product or service with respect to the
conduct or provision of a financial services business.”

With the subjectivity of the ‘innovation’ requirement,
we expect the FSC to focus primarily on how the existing
regulations fit, or fail to fit, around the proposed business plan,
and the dispensations required to make the business viable.

BVI companies and limited partnerships will be required to have
at least two individual directors or partners, respectively. Other
entities will be required to show that there is at least one senior
individual who will manage the sandboxed business.

There are no prescribed limits as to the number of participant
businesses that can be in the sandbox at any time.

What documents need to be filed?

An application for entry into the sandbox will consist
principally of a business proposal to cover, among other things:
(i) the proposed product or service, and how this encompasses
innovation to improve accessibility, efficiency, effectiveness,
security, quality in the provision of, or addresses shortcomings or
opens up new opportunities in, financial services or the regulation
thereof; (ii) the testing already carried out on the proposed
product (with the expectation that testing, to the extent permitted
by legislation, will be carried out prior to entry into the
sandbox); (iii) details on the proposed customers (including
estimated numbers, investment experience and geographical reach);
(iv) an analysis of the risk profile of the proposals and the
measures to be taken to manage those risks; (v) an indication of
the resources (whether financial, technological, human or
otherwise) available to the application; and (vi) a strategy for
exiting the sandbox.

The FSC reserves the right to request further information from
any applicant.

Directors, partners, principals and senior officers, as
applicable, of the applicant will be required to show that they are
‘fit and proper’ to conduct the proposed business and will
be required to provide supporting evidence (including, we expect,
resumés, educational history, criminal record checks and
references). However, we expect that the regulator will forego some
of the more stringent requirements of this application as they
apply to full licenses, most notably the requirement to show
significant experience, where start-ups can exhibit their
expertise, if not years of experience.

What is the proposed timing for sandbox applications?

The initial application is made online, with a preliminary
conclusion on whether the start-up is eligible for the sandbox
expected within 30 days of submission.

Following this eligibility approval, the FSC will engage with
participants to discuss the proposals further, to determine if the
business is suitable and adequately tested for the sandbox, whether
the sandbox will benefit the business and to determine a mutually
agreeable scope of any limitations to be placed on the business
whilst it is operating from the sandbox. Following this discussion,
applicants will be informed of the outcome of their
application.

What are the fees for the sandbox?

The application fee for the sandbox will be US$2,000, with an
approval fee of US $2,000 (for ‘standard’ business models),
US$5,000 (for ‘moderately complex’ business models) and
US$10,000 (for ‘complex’ business models), on the basis
that more complex business proposals will require a greater level
of regulatory oversight. The lower fee brackets can be expected for
BVI-based businesses, with low numbers of projected customers and
client assets, where applicable. The higher fees would be
applicable to non-BVI businesses with a large number of retail
customers and/or client assets.

Whilst the fees for complex business models may be greater than
the regulator fees for a full licence in the BVI for the same time
period, we would expect that savings as a result of regulatory
dispensations will result in the sandbox costing significantly less
than a full financial services licence for the duration of the
testing period.

What happens once you are in the sandbox?

Provisions of the BVI’s existing regulatory legislation
(including, notably, the Securities and Investment Business Act,
the Financing and Money Services Act and the Banks and Trust
Companies Act) shall not apply to participants of the sandbox, such
participants instead being subject to bespoke limitations
established between the participant and the FSC during the
application process. We expect that such restrictions will be
targeted principally at ensuring that the type and number of
customers are appropriate for the type of innovation, the level of
regulatory oversight and the customer risk exposure. More stringent
requirements and disclosure obligations are expected where retail
customers are targeted. Bespoke restrictions may also include,
where appropriate for the business, requirements for systems audits
or the preparation of unaudited financial statements.

While sandbox participants will be required to comply with
BVI’s anti-money laundering regulations and KYC obligations,
BVI offers a digital-friendly approach to KYC, with recent
amendments allowing digital verification and reflecting a move away
from ‘wet ink’ paper based processes. The BVI has not, to
date, adopted the Financial Action Task Force (FATF)
recommendations on virtual asset services providers (most notably,
the crypto-travel rule) and we expect that if such recommendations
are adopted, the regulator will need to assess the practicality of
start-up businesses complying with such requirements.

We further expect sandbox participants will continue to be
required to comply with existing BVI requirements related to the
handling of client funds and client information which provide
fundamental protections. Participants will also be required to
notify the FSC immediately of any unforeseen matter or change in
circumstances that has, or is likely to have, a material impact on
the participant’s risk profile or regulatory obligations.
Participants will be required to submit reports on, among other
matters, regulatory compliance; client numbers, monetary exposures
and geographic spread; risk management; complaint handling and
compliance with key performance indicators.

Participants will be required to advise clients that they are
participating in the sandbox and that they do not hold a full
financial services licence.

There is no requirement to establish a physical presence in the
BVI by virtue solely of being a participant in the sandbox.

How long can you stay in the sandbox?

Participants can remain in the sandbox for up to 18 months, with
the opportunity to extend, on application, for a further six months
– making the BVI sandbox one of the longer sandboxes
available globally.

Participants may be removed from the sandbox by the FSC upon
certain events, such as a participant contravening any restriction
imposed upon it; any data security breach; failure to launch the
product within a prescribed time; or where the FSC determines that
activities are being carried out in a manner that is detrimental to
the participant’s clients or the public generally.

Upon exiting the sandbox, participants will need to apply for a
full licence (if available) or wind down operations. Given the
FSC’s familiarity with the business model and principals, we
would expect the application process for a full license to be
significantly streamlined. Where the FSC has opted to not proceed
with regulating a business area, we expect that sandbox
participants will be able to opt to exit the sandbox and continue
their business as an unregulated entity.

Further information

The creation of the sandbox further signals the BVI’s
commitment to emerging tech, and, even where the sandbox
regulations are not suitable for a particular business, innovators
should look to the BVI as a jurisdiction that is forward-thinking,
open to emerging technologies and willing to learn from the market
to create smarter regulations which balance the resources of the
innovator with the risks to the consumers.

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.

(Excerpt) Read more Here | 2020-10-10 00:20:07
Image credit: source

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