Why the Caribbean is a favourable place for crypto businesses
An overview of the crypto regulatory regimes in Bermuda, the British Virgin Islands, the Cayman Islands and The Bahamas
The Caribbean is an important part of the global crypto ecosystem and has become the home to a range of leading virtual asset firms and crypto business structures, including global exchanges, custodians, dealers, issuers and a range of decentralised finance (DeFi) projects. There are currently at least 67 virtual asset service providers (VASPs) authorised to provide services across the Caribbean.1
To date, roughly half of the 24 member countries of the Caribbean Financial Action Task Force (CFATF) have a framework in place for the regulation and supervision of virtual assets. The implementation of bespoke crypto regulatory regimes by governments and regulators is a major reason for the region’s popularity.
Most jurisdictions with regulatory regimes in the Caribbean require firms to establish robust AML/CFT policies and procedures in line with the Financial Action Task Force (FATF) recommendations. Many of these regimes also include a range of prudential and market conduct standards that better protect investors and consumers.
The scope of application of regimes across the Caribbean differs. Most regimes capture the core services, as defined by the FATF recommendations, which include exchanges, custodians, dealers and payment service providers, but some also capture virtual asset issuances. Certain jurisdictions are also evolving their regimes and considering bringing lending and borrowing activity, staking and other niche crypto-related activities within scope.
Within the Caribbean, Bermuda, the British Virgin Islands (BVI), the Cayman Islands and The Bahamas are key jurisdictions regulating virtual assets with comprehensive regulatory regimes.
In 2018, the government of Bermuda and the Bermuda Monetary Authority (BMA) introduced the Digital Asset Business Act (DABA), a regime for businesses seeking to conduct digital asset activities.
There are three classes of licenses available, Class F, M, and T. Classes M and T are designed for entities that are not in a position to meet the requirements of a full licence in Bermuda with the expectation that these licensees will graduate to a full licence in a prescribed period of time.
The Class F licence, which accounts for the full licensing regime, includes AML, cybersecurity, prudential and market conduct requirements. Class F licenced firms are required to maintain a head office in Bermuda and to direct and manage their digital asset business from the country.
The BMA has licensed 21 digital asset businesses (DABs), ten of which have Class F licenses. The jurisdiction also implemented the Digital Asset Issuance Act (DAIA), which regulates persons seeking to carry out a virtual asset issuance.
The British Virgin Islands
The British Virgin Islands (BVI) is well-known as a popular hub for decentralised financial (DeFi) protocols and virtual token issuance. In February 2023, BVI brought the Virtual Assets Service Providers (VASP) Act into effect, a legal framework for the registration and supervision of VASPs operating in the jurisdiction. Through the provisions of the VASP Act, the Financial Services Commission is established as the competent authority for supervision.
Consistent with FATF definitions, which are based on traditional intermediated models of issuance, the VASP Act applies to the business of providing financial services relating to the issuance, offer or sale of a virtual asset. Whilst these activities fall within the regulatory scope, it is not clear whether issuance itself is a regulated activity.
The VASP Act includes a six-month transition period for entities conducting virtual asset activities in the jurisdiction to apply to the Commission for registration in order to continue operations. The deadline to apply was 31 July 2023.
To date, there is not yet a VASP authorised to conduct virtual asset activities in BVI.
In 2020, the Cayman Islands rolled out Phase 1 of its Virtual Asset Service Providers (VASP) Act, which regulates all VASPs, including issuers, custodians, trading platforms and dealers operating in the jurisdiction.
Currently in force, Phase 1 of the VASP Act requires all VASPs to register with the Cayman Island Monetary Authority (CIMA). Phase 1 requirements primarily address AML/CFT controls and cybersecurity.
Expected to roll out in the near future, Phase 2 of the VASP Act will include a licensing and issuance approval regime which addresses prudential and market conduct requirements for trading platforms and custodians. VASPs that do not offer services subject to Phase 2 licensing requirements, like broker-dealers, will only be required to obtain a registration and fulfil Phase 1 requirements.
CIMA has currently registered 21 virtual asset service providers (VASPs).
In 2020, The Bahamas enacted the Digital Asset and Registered Exchanges (DARE) Act, which regulates Bahamas-based entities involved in the issuance, sale, and exchange of digital assets. The regulatory framework creates a legal definition for digital assets and takes an activities-based approach to the registration of digital asset businesses (DABs) permitted in The Bahamas. In its current state, the DARE Act covers AML/CFT, consumer protection and corporate governance requirements.
The current DARE Act does not apply to businesses providing digital asset custody services. Digital asset custodians operating in The Bahamas are required to register under the Financial and Corporate Services Providers Act (FCSPA). However, if an applicant intends to enhance or improve core activities rather than provide a separate service, the SCB will typically bring this under the scope of the DARE Act.
On 25 April 2023, the Securities Commission of The Bahamas (SCB) issued a revised DARE Bill for public consultation. The revision is expected to bring into scope requirements for digital asset custody services and address the issuance of stablecoins, non-fungible tokens (NFTs) and staking as a service.
To date, the SCB has registered 19 digital asset businesses, three of which exclusively offer digital asset custody services and are only registered under the FCSPA.
Regulatory uncertainty in jurisdictions with significant crypto market development has forced firms to seek alternative jurisdictions that provide sound regulation and encourage technological innovation. The Caribbean will continue to play an important role in the global crypto market due to the region's nimble application of bespoke regulatory frameworks. The nuances of these regimes give crypto firms the ability to select a jurisdiction best suited to the business model and stage of development of their company.