The Isle of Man is becoming a popular choice of jurisdiction for Cryptosphere Entrepreneurs looking for a middle ground solution between excessive regulation and zero regulation.
In short you can incorporate an ICO in the Isle of Man (“IOM”) and have the business officially registered as an ICO without needing to go through a formal license application such as exists in other Financial Centres.
Below is a series of Commonly Asked Questions (and Answers thereto) recently published by the IOM Authorities which should provide a neat summary of everything you will want/need to know when beginning your assessment as to the viability of choosing the Isle of Man as your preferred ICO Launch site:
Where does the business of issuing Convertible Virtual Currency (“CVC”) (such as via an Initial Coin Offering “ICO”) fit in Isle of Man legislation?
In April 2015 the Proceeds of Crime (Business in the Regulated Sector) Order 2015 amended Schedule 4 to the Proceeds of Crime Act 2008 which lists all of those businesses considered by that Act to be “Business in the Regulated Sector”. One type of such business is convertible virtual currency business which Schedule 4(1) (mm) to that Act describes as:
the business of issuing, transmitting, transferring, providing safe custody or storage of, administering, managing, lending, buying, selling, exchanging or otherwise trading or intermediating convertible virtual currencies, including crypto-currencies or similar concepts where the concept is accepted by persons as a means of payment for goods or services, a unit of account, a store of value or a commodity (emphasis added)
Therefore issuing CVC (which could be via an ICO or other concept), in or from the Island falls under the above definition and so is classed as “Business in the Regulated Sector”.
So does this mean that all business areas listed as “Business in the Regulated Sector” under Schedule 4 to the Proceeds of Crime Act 2008 are regulated by the Isle of Man Financial Services Authority (“IOMFSA”)?
No. “Business in the Regulated Sector” does not necessarily mean that the business is regulated in the contemporary sense of the word.
“Business in the Regulated Sector” for the purposes of the Proceeds of Crime Act 2008 means that additional legislation applies to those businesses (namely the Anti-Money Laundering and Countering the Financing of Terrorism Code 2015 or “the Code”).
Many of the business sectors in Schedule 4 are fully regulated by the IOMFSA, for example, under the Financial Services Act 2008 or the Insurance Act 2008. These businesses are subject to a wide array of regulatory controls and are subject to detailed scrutiny as required by the terms of the legislation they are regulated under.
Some businesses listed under Schedule 4 are only overseen for compliance with the Code. These businesses are called Designated Businesses. Their oversight does not extend to conduct of business, prudential and solvency regulation or protection of client assets. For the avoidance of doubt, businesses operating as CVC businesses (including ICOs) fall under this category.
If I am registered, what are my legal obligations?
The Designated Businesses (Registration and Oversight) Act 2015 imposes a number of obligations on the business. Some of those requirements include that it must keep all of the information submitted as part of its application for registration accurate and up to date, file an annual return and provide information or documentation to the IOMFSA upon request.
The AML/CFT obligations imposed on the business are detailed in the Code. In summary it requires that the business must identify and take reasonable steps to verify the identity of their customers including the beneficial owners of the customers and any persons who are empowered to act on their customers’ behalf. The Code also requires that the business must assess the risks facing it as well as the risks posed by its customers and monitor the transactions and activity of the customers on an ongoing basis.
Can I start the pre-sale of a token or coin before being registered or while the registration is being processed?
No. The business of selling or issuing a convertible virtual currency is undertaking a designated business. No distinction is made as to whether the sale or issuance of a CVC is undertaken as a pre-sale or after a public launch. Care should also be taken to ensure that the business is not holding out as undertaking a designated business prior to its registration.
So, if an ICO business is “overseen” by the IOMFSA for AML/CFT compliance, is it therefore “licensed”, “authorised” or otherwise regulated by the IOMFSA or hold a “cryptocurrency licence”?
No. The business of issuing, transmitting, transferring, providing safe custody or storage of, administering, managing, lending, buying, selling, exchanging or otherwise trading or intermediating convertible virtual currencies is a Designated Business as defined by Schedule 1 to the Designated Businesses (Registration and Oversight) Act 2015. This means it is subject to registration under that Act – not financial services regulation.
A Designated Business is not a regulated entity and must not hold out that it is anything but a registered Designated Business.
Are there any types of CVC business (including ICOs) which the IOMFSA would refuse to register?
The IOMFSA has published a registration policy which outlines what it expects of an applicant in terms of fitness and propriety.
In addition to this general registration policy, it is the IOMFSA’s policy to refuse to register an applicant which engages in the CVC business of issuing a CVC (of whatever type) where the CVC issued provides no benefit to the purchaser other than the CVC itself.
Examples of this include, but are not restricted to:
- · ICOs which convey:
- limited or no rights to the income generated from a project;
- limited or no rights to use the assets developed, purchased or acquired from the funds raised by the ICO;
- · ICOs where there is no reasonable basis for any expected capital growth of the value of the CVC.
Such characteristics are generally considered by the IOMFSA to pose an unacceptably high risk that the money raised from the CVC issuance could be used for unanticipated and illegal purposes, as well as posing a risk to consumers. It is because of these risks that it is the policy of the IOMFSA to refuse to register this type of business.
If a Designated Business is registered with the IOMFSA, is it required to state this on its website and other correspondence?
There is no requirement on a registered Designated Business to state that it is registered under the Designated Businesses (Registration and Oversight) Act 2015 to persons with whom it has communications in the course of its business. However where a business chooses to make such a reference, it should be made very clear that the business is registered under the Designated Businesses (Registration and Oversight) Act 2015 and the business must not ‘hold out’ that it is regulated.
Where a business is “registered” with the IOMFSA as a Designated Business, what requirements are imposed on the registered business?
As noted above, all businesses listed in Schedule 4 to the Proceeds of Crime Act 2008 are required to comply with the Anti-Money Laundering and Countering the Financing of Terrorism Code 2015 (‘the Code’). The IOMFSA has powers under the Designated Businesses (Registration and Oversight) Act 2015 to oversee compliance with the Anti-Money Laundering and Countering the Financing of Terrorism legislation (which includes the Code, including powers to inspect the accounts, books and records of the business and take copies of those records).
Further details about potential legal or regulatory obligations and how they impact your business should be sought from an independent legal practitioner prior to making an application for registration. No designated business must be undertaken without a registration.
How do I apply for registration to issue CVC (including via an ICO) on the island?
First you need to ensure your business is of a type the IOMFSA will register, and that it has the necessary number of Island directors and is managed and controlled from the Island (see the Designated Businesses Registration Policy page: https://www.iomfsa.im/designated-business/registration-policy/ ).
Then, to begin the process you need to create an account on the application system, to do this you can go through the link below: https://www.iomfsa.im/designated-business/registration-forms/
This page provides a high level outline of how to go about registering. At the bottom of the page is a link to the registration system itself, once you create an account you will be able to complete the application forms.
There is a detailed user guide which takes you through step-by-step how to use the system and how to complete the forms: https://www.iomfsa.im/media/1423/dnfbpuserguide.pdf
Does being registered under the Designated Business (Registration and Oversight) Act 2015 mean I can get a bank account and banking services in the Isle of Man?
No. Whether a bank will offer services to your business is a commercial decision for the bank to make and is a matter between your business and the bank.
CAUTIONARY NOTE: It would be highly advisable to engage an experienced International Corporate Service Provider to assist with formation of the Operating Company and with the ICO Registration Process. There are a number of unseen reefs you will need to successfully navigate your way around (ie legal boxes you will need to tick) in order to succeed with your registration application. Your chances of succeeding without specialist help would be greatly reduced. (The OCI Legal Team can provide such assistance).
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