It is important appreciate that not all activities of a BVI entity which involve virtual assets will necessarily fall within the VASP Act. For example, dealing, arranging deals in, or managing investments, providing investment advice, custodian and/or administration services with respect to investments, and operating an investment exchange may regulated under the BVI Securities and Investment Business Act (“SIBA”) if the virtual asset constitutes an “investment” under SIBA.

The key features of the VASP Act include:

1. details of the application and approval requirements for registration as a VASP, including additional specific requirements for VASPs seeking to provide virtual assets custody services or operate a virtual assets exchange;
2. the requirement for VASPs to appoint authorised representatives;
3. particulars of the functions of an authorised representative and the requirement for authorised representatives to be approved by the Financial Services Commission (the “Commission”) to act in relation to VASPs;
4. the requirement for VASPs to appoint an auditor approved by the Commission and the obligations of the auditor to the Commission;
5. details of the information that a registered VASP must report to the Commission on an ongoing basis;
6. the process to be adopted for disposing or acquiring a significant or controlling interest in a VASP;
7. the establishment of measures to protect clients’ assets;
8. prohibitions on making or issuing misleading advertisements;
9. AML/CFT and other regulatory compliance matters; and
10. the legal mechanism for a VASP to participate in the Regulatory Sandbox.

The benefits and advantages of establishing virtual assets businesses in the BVI include:

1. Stability and reliability. As an autonomous British Overseas Territory that applies English common law rules and principles, it has a well-tested and efficient judicial system, with a final right of appeal to the Privy Council.
2. Incorporation and maintenance costs. BVI companies are cheap to incorporate and maintain in good standing.
3. Tax neutrality. No income, corporate, capital gains or wealth taxes, withholdings or other similar taxes are imposed on BVI companies as a matter of BVI law.
4. Exchange controls. There are no exchange controls and restrictions as a matter of BVI law.
5. Confidentiality. Shareholders and directors of a BVI business company are generally a matter of private record.
6. Corporate flexibility. The objects, capacity and powers of a BVI company are generally unrestricted. Most decisions can be taken by the board of directors of the relevant company, with only certain matters requiring shareholder approval. There is considerable flexibility to tailor the memorandum of association and articles of association to meet a client’s requirements.

Subject to certain limitations, a ‘virtual asset’ is defined in the VASP Act as: “a digital representation of value that can be digitally traded or transferred, and can be used for payment or investment purposes“. This is a broad definition and will cover all types of virtual assets, including non-fungible tokens.

The VASP Act provides that a company may apply to the Commission to be regulated as a VASP in one or more of the following categories:

1. carrying on the business of providing a virtual asset service;
2. engaging in the business of providing a virtual assets custody service; and
3. operating a virtual assets exchange.

The term “virtual assets service” is defined in the VASP Act as the business of engaging, on behalf of another person, in the following activities:

1. exchange between virtual assets and fiat currencies;
2. exchange between one or more forms of virtual assets;
3. transfer of virtual assets, where the transfer relates to conducting a transaction on behalf of another person that moves a virtual asset from one virtual asset address or account to another;
4. safekeeping or administration of virtual assets or instruments enabling control over virtual assets; and
5. participation in, and provision of, financial services related to an issuer’s offer or sale of a virtual asset.

The VASP Act also states that the following activities would also be considered to be the provision of a virtual assets service:

1. hosting wallets or maintaining custody or control over another person’s virtual asset, wallet or private key;
2. providing financial services relating to the issuance, offer or sale of a virtual asset; and
3. providing kiosks (such as automatic teller machines, bitcoin teller machines or vending machines) for the purpose of facilitating virtual assets activities through electronic terminals to enable the owner or operator of the kiosk to actively facilitate the exchange of virtual assets for fiat currency or other virtual assets.

The above lists may be expanded by subsequent guidelines or regulations.

Rather helpfully, the BVI VASP Act sets out a non-comprehensive list of some of the services which are specifically excluded from its remit and these are as follows:

1. Rather helpfully, the BVI VASP Act sets out a non-comprehensive list of some of the services which are specifically excluded from its remit and these are as follows:
2. providing service as a software developer or provider of unhosted wallets whose function is only to develop or sell software or hardware;
3. solely creating or selling a software application or virtual asset platform;
4. providing ancillary services or products to a virtual asset network, including the provision of services like hardware wallet manufacturer or provider of unhosted wallets, to the extent that such services do not extend to engaging in or actively facilitating as a business any of those services for or on behalf of another person;
5. solely engaging in the operation of a virtual asset network without engaging or facilitating any of the activities or operations of a VASP on behalf of customers;
6. providing closed-loop items that are non-transferable, non-exchangeable and which cannot be used for payment or investment purposes; and
7. accepting virtual assets as payment for good or services (such as the acceptance of virtual assets by a merchant when effecting the purchase of goods).

The issuance by a BVI company of virtual assets is not included in the definition of virtual assets service. This is the opposite of the position in the Cayman Islands. Accordingly, to the extent that a BVI company is involved in a crypto project solely as the issuer of tokens, the VASP Act would not require the entity to be regulated in respect of that activity.

A VASP must at all times have the following functionaries:

1. an authorised representative;
2. an auditor; and
3. an individual approved by the Commission who acts as compliance officer, to ensure compliance by the VASP with the provisions of the VASP Act and other applicable legislation.

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This publication is not intended to be a substitute for specific legal advice or a legal opinion. If you require further advice relating to the matters discussed in this Briefing, please contact us. We would be delighted to assist.

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BVI law does not have legislation or case law that defines what a DAO is. In the US, courts have considered the issue of whether or not members of a DAO may be considered as forming a partnership in certain circumstances. However, to date, this issue has not arisen before the BVI courts.

DAOs can be completely decentralised in the sense of being an unincorporated association of persons operating under the framework of certain governance protocols or rules for a common purpose. Further, many DAOs operating in the BVI are often set up as companies or limited partnerships, or more often they are organised so that the actions or collective decisions of DAO members are undertaken through a corporate vehicle governed by token holders (such as via a company limited by guarantee) so as to mitigate this risk.

The legal structure affects the treatment of assets and liabilities in case of insolvency. If a DAO is incorporated as a company, it will generally follow the BVI Business Companies Act (as amended), which provides the framework for solvent liquidation or the BVI Insolvency Act (as amended), which governs insolvent liquidations.

In insolvency proceedings, the assets and liabilities of the DAO (if the DAO is structured as a BVI business company or limited partnership) will be treated like those of any other BVI legal entity. In this case, the DAO assumes its own liabilities.

In the event of insolvency, the DAO itself is responsible for its debts, and creditors can pursue the DAO’s assets for satisfaction of those debts. The precise treatment would depend on the governance rules established by the DAO and the specific agreements among members and stakeholders.

Virtual assets are treated as property under BVI law and this has a number of implications, including: (1) these types of assets will form part of the DAO’s liquidation estate under BVI law; and (2) the usual tools that can be employed by insolvency professionals in insolvency proceedings under BVI law (e.g. interim proprietary injunctions to freeze virtual assets or crypto wallets, or disclosure orders in support of interim injunctions) are also available in the context of the insolvency of a DAO.

If a DAO is deemed insolvent, it may be subjected to the usual insolvency processes, such as court-appointed liquidation. The BVI has robust legal frameworks for insolvency, including under the BVI Insolvency Act (as amended), which outlines the processes for dealing with insolvent entities (if the DAO is structured as a BVI business company or limited partnership).

While BVI law does not explicitly address smart contracts, they may be recognised as valid under existing contractual principles. This means that smart contracts governing DAO operations could play a crucial role in defining the rights and obligations of members, especially in insolvency scenarios.

The liability of members and operators of the DAO may depend on the legal structure and the specific provisions in the DAO’s governing documents. If structured appropriately, member liability may be limited, mitigating personal financial exposure in the event of the DAO’s insolvency.

Generally, members of a BVI business company (or similarly structured DAO) are not personally liable for the debts of the company beyond their unpaid contributions, provided that the company is properly maintained, and corporate formalities are followed. This limited liability is a fundamental principle of modern corporate law meant to protect individual members from the organisation’s liabilities.

In certain situations, such as where there is evidence of fraud, improper conduct or disregard for the separate legal personality of the entity, the BVI courts may hold individuals liable (known as “piercing the corporate veil”). This means that if members of a DAO were found to have acted in a manner that effectively pierced the corporate veil of the DAO and undermined the legal entity’s status, they could be held responsible for the DAO’s losses or debts.

Given the BVI’s status as an offshore financial centre, the legal treatment of DAOs engaging in cross-border operations may involve additional complexities.

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Gary Smith is a partner at Loeb Smith Attorneys in the Cayman Islands and Edmond Fung is a senior associate at Loeb Smith Attorneys in Hong Kong

First published on Asia Business Law Journal on 12 November 2024 BVI treatment of DAOs in insolvency | Asia | Law.asia

The jurisdiction where the judgment was obtained will determine which procedure (i.e. the 1922 Act or the common law) is used to enforce the foreign monetary judgment.

1922 Act

Monetary judgments from the following jurisdictions are covered under the 1922 Act:

1. England and Wales;
2. Scotland;
3. Northern Ireland;
4. New South Wales;
5. the Bahamas;
6. Barbados;
7. Bermuda;
8. Belize;
9. Guyana;
10. Grenada;
11. Jamaica;
12. Nigeria;
13. St Lucia;
14. St Vincent; and
15. Trinidad and Tobago.

The 1922 Act provides a simplified registration process for judgments originating from one of the abovelisted jurisdictions. In order for a foreign monetary judgment to be recognised, the judgment from the foreign court must be for a specified sum of money and be final and conclusive on the merits. The BVI court must be satisfied that the foreign court had jurisdiction over the judgment debtor, and that they were duly served. Registration would be prevented if, among other things, the judgment was obtained by fraud or registration of the judgment would be against public policy.

A monetary judgment from a jurisdiction which is covered by the 1922 Act can be registered in the BVI for enforcement as if it were a BVI judgment (the judgment will have the same force and effect as if it was a BVI judgment from the date of its registration). An application for registration of a foreign judgment under the 1922 Act may be made without notice but must be supported by affidavit evidence, together with a certified copy of the foreign judgment and a certified English translation (if necessary).

It should be noted that a judgment is registrable within 12 months of the date of the judgment if (in all the circumstances of the case) the court thinks it is just and convenient to enforce the judgment in the BVI. The 12-month period can be for such longer period as may be allowed by the BVI court.

Common law debt claim

A judgment that is not from a jurisdiction that is subject to the 1922 Act cannot be registered. Notwithstanding this, a judgment creditor can normally commence a common law claim in the BVI court for the judgment sum as a cause of action for debt in itself so that there is no retrial of the issues. Such a debt claim on the foreign judgment must be commenced within 12 years of the judgment becoming enforceable.

Any arrears of interest on the foreign judgment debt cannot be recovered after six (6) years from the date on which the interest was due.

The foreign judgment must not be impeachable. It must also, among other things, be for a debt or definite sum of money as well as be final and conclusive.

A common law claim is commenced via a Claim Form and Statement of Claim. An affidavit must also be included (exhibiting a certified copy of the foreign judgment and, if relevant, a certified English translation).

After the claim is served, the judgment creditor will generally be able to apply for either:

1) default judgment (if no acknowledgement of service or defence is filed); or
2) summary judgment (on the grounds of the doctrine of obligation by action or estoppel).

The BVI court will not look again at the merits of the foreign judgment. A common law debt claim is not generally a lengthy or complicated process. If judgment is granted on the judgment creditor’s common law debt claim, it is enforceable like any other BVI judgment.

In the BVI, there is only the indirect enforcement of non-monetary judgments. Where a judgment creditor has a foreign judgment which is based on a cause of action that is recognised under BVI law and can establish that the courts in the BVI have jurisdiction over the judgment debtor, then the cause of action can be brought in the BVI by the judgment creditor. The cause of action or the issue(s) are not re-litigated because of the foreign judgment and the principles of estoppel. It should be noted that the BVI claim must seek to determine an identical issue or question to that which was determined in the foreign proceedings and given in proceedings between identical parties.

The recognition and enforcement of arbitral awards are governed by the Arbitration Act.

Convention Award

A Convention Award is enforceable in the BVI either:
1) by instituting an action in court; or
2) applying to seek leave of the court.

Non-Convention Award

A non-Convention Award can only be enforced by seeking leave of the court.

Leave to enforce arbitral award

The requirements and procedure which are applicable to both a Convention Award and a non-Convention Award are the same.

An application for the recognition and enforcement of a foreign arbitral award is made by way of a Fixed Date Claim Form supported by affidavit evidence. The evidence must, among other things:

• exhibit the original or a certified copy of the award (and, if relevant, a certified English translation); and
• exhibit the original or certified copy of the arbitration agreement (where applicable).

The Fixed Date Claim Form must be served on the award debtor. In the event that the award debtor is located outside the jurisdiction, the award creditor must serve out of the jurisdiction.

If leave is granted, the award has the same effect as a BVI court judgment or order and can be enforced using the remedies provided for under the Eastern Caribbean Supreme Court Civil Procedure Rules which apply in the BVI. The order must be served on the award debtor. The award debtor has the right to apply to set aside the decision.

Refusal to enforce a Convention Award

The enforcement of a Convention Award may only be refused if the person against whom enforcement is sought proves one of the Convention defences. The defences include:

• the arbitration agreement was invalid under the applicable law, or if there was no indication of the applicable law, under the law of the country where the award was made;
• the party was not given proper notice of the appointment of the arbitrator or of the arbitral proceedings, or was otherwise unable to present their case; and
• the award has not yet become binding on the parties or has been set aside or suspended by a competent authority of the country in which, or under the law of which, it was made.

The party against whom enforcement action is taken against has the burden of proof to demonstrate that one of the applicable circumstances applies

Refusal to enforce a non-Convention Award

The grounds for refusal of enforcement of a non-Convention Award are the same as for a Convention Award. However, there is the additional ground where the court has a wider discretion to refuse enforcement on its own volition if it considers it just to do so.

Once the foreign judgment or arbitration award become a BVI judgment, it can be enforced by:

• a charging order;
• garnishee order;
• judgment summons;
• an order for the seizure and sale of goods; and
• an order for the appointment of a receiver.

From a practical standpoint, the enforcement of any foreign judgment or arbitration award in the BVI is only effective if the judgment debtor has assets in the BVI against which the foreign judgment or arbitration award can be enforced. This will usually be in the form of shares in a BVI company. The most common way to enforce is to seek a charging order over the shares in the relevant BVI company owned by the judgment debtor. Procedurally, this is done by joining the BVI company to the proceedings and applying for a provisional charging order (“PCO”). The PCO can then be made final. The application for the PCO does not need to be served on the judgment debtor but the order (once granted) needs to be served. It should be noted that the judgment debtor can oppose the PCO being made final. If in the event that the PCO is made final, the judgment creditor can apply for the appointment of a receiver and an order for sale.

Notwithstanding the above, the judgment creditor can instead apply to appoint a liquidator over the judgment debtor (where the latter is a BVI company) to wind up the judgment debtor on the basis that the foreign judgment or arbitration award is unpaid. The liquidator can then apply the proceeds of the liquidation to the satisfaction of the judgment debtor’s debts, including the relevant foreign judgment or arbitration award. It is normal to serve a statutory demand on the judgment debtor company first in such a situation (although this is not strictly required under the laws of the BVI).

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This publication is not intended to be a substitute for specific legal advice or a legal opinion. For specific advice on the matters covered above, please contact your usual Loeb Smith attorney or any of the following:

E: gary.smith@loebsmith.com
E: robert.farrell@loebsmith.com
E: edmond.fung@loebsmith.com
E: vivian.huang@loebsmith.com
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