An overview of the regulation of virtual assets in the Isle of Man

Virtual asset laws and regulations in the Isle of Man

Regulation of virtual assets and offerings of virtual assets in the Isle of Man

Regulation of VASPs in the Isle of Man

Regulation of other crypto-related activities in the Isle of Man

Other relevant regulatory information

Pending litigation and judgments related to virtual assets in the Isle of Man (if any)

Government outlook on virtual assets and crypto-related activities in the Isle of Man

Advantages of setting up a VASP in the Isle of Man

1. Virtual asset laws and regulations in the Isle of Man

The Isle of Man has developed a conducive regulatory environment to facilitate innovation in the digital asset space. The Proceeds of Crime Act (POCA) was amended in 2015 to require virtual currency businesses to comply with Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) regulations, and the Designated Businesses Registration and Oversight Act 2015 requires businesses whose activities involve virtual currencies to register with, and be overseen by, the Isle of Man Financial Services Authority (IOMFSA). The IOMFSA has released guidelines that certain cryptocurrencies, like Bitcoin and Ethereum, will not be considered securities and will fall outside regulatory oversight.

To ensure that companies operating in this sector comply with AML/CFT requirements, designated businesses must register with the IOMFSA and, depending on the nature of their activities, may require a financial services license.

What is considered a virtual asset in the Isle of Man?

According to the Designated Businesses (Registration and Oversight) Act 2015, a “virtual asset” means convertible virtual currencies, including cryptocurrencies, and any other digital representation of value that can be used to purchase goods or services.

“Convertible virtual currency activity” means issuing, transmitting, transferring, providing safe custody or storage of, administering, managing, lending, buying, selling, exchanging or otherwise trading or intermediating convertible virtual currencies, including cryptocurrencies, virtual assets or similar concepts where the concept is accepted by persons as a means of payment of goods or services, a unit of account, a store of value or a commodity.

What are the relevant laws and regulations?

The Isle of Man has established a regulatory framework for virtual assets designed to strike a balance between consumer protection, anti-money laundering measures, and innovation in the digital asset space. Below given are the relevant laws and regulations related to virtual assets in the Isle of Man.

1. The Financial Services Act, 2008: It regulates the financial services industry in the jurisdiction and the IOMFSA. It also establishes a framework for licensing regulated activities and licensing requirements to licensees. The act includes provisions related to the supervision, inspection, and investigation of licensees, as well as the prohibition of carrying out regulated activities without a license. The act also includes provisions for directors, controllers, and key people of licensees, and for the publication of information by the authority. Finally, the act establishes several schedules detailing further provisions related to regulation and supervision of financial services and other matters.
2. Designated Business Registration and Oversight Act, 2015: The Designated Business Registration and Oversight Act 2015 provides that virtual currency businesses are designated businesses, requiring such businesses to register with, and be overseen by, the Isle of Man Financial Services Authority. Virtual currency businesses are defined in the Act as those that are in “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 cryptocurrencies 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.”
3. Proceeds of Crime Act, 2008: The POCA is the key piece of primary legislation in the Isle of Man that governs money laundering and other forms of financial crime, and it applies to virtual currency businesses. Virtual currency businesses are subject to the Anti-Money Laundering and Countering the Financing of Terrorism Code 2019 (AML/CFT Code), whether they are licensed by the IOMFSA or are ‘designated businesses’ under the Designated Businesses Act.
4. Regulated Activities Order, 2011: It prescribes certain activities in relation to virtual currencies that require financial services licensing. Depending on the nature of the token and the activities being conducted, entities involved in virtual currencies may be required to apply for a financial services license from the IOMFSA.
5. Financial Services (Exemptions) Regulations, 2011: It provide a legal framework for certain activities related to virtual currencies and offer exemptions from licensing requirements.
6. Guidelines Issued by IOMFSA: IOMFSA has issued guidance to virtual currency businesses to comply with regulatory standards and avoid penalties. The guidance provides clarification on the Anti-Money Laundering and Countering the Financing of Terrorism Code 2019, and advice on good practices for data protection and cybersecurity.

Who do such laws and regulations apply to?

The laws and regulations related to virtual assets apply to virtual currency businesses, which are defined as those that are in “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 cryptocurrencies 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” in the Isle of Man.

Who are the relevant regulatory authorities in relation to virtual assets in the Isle of Man?

The IOMFSA is the relevant regulatory authority when it comes to virtual assets in the Isle of Man. The IOMFSA is responsible for the licensing, registration, and supervision of virtual currency businesses as detailed in the Designated Business Registration and Oversight Act 2015, and they also issue guidance to ensure compliance with regulatory standards and good practices concerning data protection and cybersecurity.

What are the penalties for breaches of virtual asset laws and regulations in the Isle of Man?

The Designated Businesses (Registration and Oversight) Act 2015 does not use the phrase “virtual asset”. Instead, it refers to “Designated Businesses”. It specifically describes the prohibition on carrying on a designated business without being registered. It states that any person who carries on a designated business without being registered commits an offence.

On summary conviction, a person may be liable to a fine not exceeding £5,000 or to custody for a term not exceeding 12 months, or to both. On conviction on indictment, a person may be liable to a fine or to custody for a term not exceeding two years, or to both.

Additionally, the IOMFSA has the power to impose civil penalties on designated businesses that breach their regulatory obligations. The maximum civil penalty is £5,000,000 or 10% of turnover for companies, and £500,000 for individuals.

The maximum financial penalty that can be levied for non-compliance with anti-money laundering requirements is £1 million, as set out in the AML/CFT Code,2019. The IOMFSA can also revoke a virtual currency business’s license if it is found to be non-compliant with the laws and regulations concerning virtual assets.

2. Regulation of virtual assets and offerings of virtual assets in the Isle of Man

Are virtual assets classified as ‘securities’ or other regulated financial instruments in the Isle of Man?

Virtual assets are not classified as securities or other regulated financial instruments in the Isle of Man. They are classified as designated businesses under the Designated Businesses (Registration and Oversight) Act 2015. The Act provides for the regulation and oversight of various businesses that are at risk of being used for laundering the proceeds of crime or for financing terrorism, including virtual asset service providers. Therefore, the regulatory regime for virtual assets in the Isle of Man focuses on anti-money laundering and countering the financing of terrorism, rather than securities regulation.

Are stablecoins and NFTs regulated in the Isle of Man?

Stablecoins are likely to fall within the purview of electronic money regulation in the Isle of Man, although this has not yet been tested in judicial or regulatory proceedings.

On the other hand, NFTs may potentially fall under the definition of “financial instrument” under the Regulated Activities Order 2011 of the Isle of Man. The Order defines “financial instrument” quite broadly as “any instrument which –

1. creates or acknowledges indebtedness;
2. creates or acknowledges any transferable right to participate in the profits or losses arising from property of any kind, or any such right sandwiched between such rights; or
3. is a contract for differences”.

NFTs are a new phenomenon, and there is no specific reference to them. Therefore, the regulatory status of NFTs in the Isle of Man is unclear at the moment.

It is important to note that the application of regulations to stablecoins and NFTs depends on their specific use case and characteristics.

Are decentralised finance (DeFi) activities (e.g. lending virtual assets) regulated in the Isle of Man?

Schedule 1 to the Regulated Activities Order 2011 specifies the classes of regulated activities for the purpose of the Financial Services Act 2008. It lays out a list of activities that are regulated, including deposit taking, insurance, investment, advising, and administration.

Lending virtual assets may be classified as accepting deposits of money for investing or lending purposes, which is regulated under Class 1 Deposit-Taking of Schedule 1. Therefore, DeFi activities such as lending virtual assets could be regulated under the Financial Services Act 2008 depending on the exact structure of the lending activity. However, at present, virtual assets themselves are not treated as money or currency in the Isle of Man, so they would not fall under the definition of “deposit” as used in Schedule 1A.

Are there any restrictions on issuing or publicly offering virtual assets in the Isle of Man?

1. Yes, there are restrictions on issuing or publicly offering virtual assets in the Isle of Man. The Designated Businesses (Registration and Oversight) Act 2015 defines “designated businesses” as including businesses engaged in convertible virtual currency activity. Section 7(1)(c) of the same act states that a person must not carry on a designated business in or from the island unless the person complies with AML/CFT legislation. Moreover, of the POCA, as amended by The Designated Businesses (Registration and Oversight) Act 2015, makes it an offense to issue or publicly offer virtual assets that are not in compliance with AML/CTF legislation.
2. IOMFSA generally refuses to register persons carrying out initial coin offerings (ICO) where the coin issued provides no benefit to the purchaser other than the coin itself. Virtual currencies of this nature are generally considered by the IOMFSA to be posing an unacceptably high risk that the money raised from the ICO could be used for unanticipated and illegal purposes, as well as posing a risk to consumers.

Are there any exemptions to the restrictions on issuing or publicly offering of virtual assets in the Isle of Man?

The Financial Services (Exemptions) Regulations 2011 provide a number of exemptions for persons who do not hold a license under the Financial Services Act 2008 but are still engaged in certain types of regulated activity. The regulations grant exemptions to certain activities that are classified as regulated activities under the Collective Investment Schemes Act 2008, and also to those who make use of specific equipment under certain circumstances.

Under Schedule 1 of the Financial Services (Exemptions) Regulations 2011, persons who do not hold a license under the Act are exempt from the license requirement in certain circumstances. For example, individuals or businesses engaged in providing financial services related to certificates of deposit or participating in crowdfunding platforms may be exempt under certain conditions. Additionally, Schedule 1 also specifies exemptions for companies and their employees who carry out activities that are restricted solely to the supply of goods and services, the holding of real property, or manufacturing in the Isle of Man, among others.

Schedule 2 of the Financial Services (Exemptions) Regulations 2011 provides exemptions for the use of specific equipment in the Isle of Man. For example, certain persons who are permitted to utilise equipment in connection with virtual assets are exempt from requiring a license under certain conditions.

While the Financial Services (Exemptions) Regulations 2011 provides various exemptions that allow individuals and organisations engaged in specific types of regulated activity to operate without holding a license, these exemptions are not absolute.

Firstly, the exemptions apply only to specific types of regulated activities and only in certain circumstances. For instance, Schedule 1 of the regulations specifies exemptions for certain types of regulated activity, such as crowdfunding or certificates of deposit, only under certain conditions.

Furthermore, the exemptions are subject to specific conditions that must be met by individuals or businesses looking to make use of a particular exemption. For example, Schedule 1 of the regulations specifies a number of conditions that must be met by companies and their employees seeking an exemption for carrying out regulated activity restricted solely to the supply of goods and services, the holding of real property or manufacturing in the Isle of Man, among others. These conditions include requirements for the company to be resident in the Isle of Man, to have a permanent establishment in the island, and to have the company’s activities restricted solely to certain types of activity.

Similarly, exemptions under Schedule 2 of the regulations require compliance with specific conditions, such as the use of prescribed equipment or the person or entity providing virtual asset-related services being resident in the Isle of Man or having a place of business there.

3. Regulation of VASPs in the Isle of Man

Are VASPs operating in the Isle of Man subject to regulation?

Yes, virtual asset service providers (VASPs) operating in the Isle of Man are subject to regulation under the POCA and the AML/CFT Code 2019.

According to the AML/CFT Code 2019 issued by IOMFSA, VASPs are considered to be carrying out “relevant financial business” which is subject to AML/CFT regulation in the Isle of Man.

This means that any person or company that conducts virtual asset-related business in or from the Isle of Man must comply with anti-money laundering and counter-terrorism financing measures applicable to financial services businesses under the island’s regulatory framework. The measures require VASPs to implement policies and procedures to prevent money laundering and financing of terrorism, to undertake customer due diligence measures and ongoing monitoring of transactions, to appoint a designated nominative officer (DNO), and to report suspicious transactions under POCA.

Furthermore, the regulations require VASPs to apply for a license under the Designated Businesses (Registration and Oversight) Act 2015, which imposes additional AML/CFT regulations on designated businesses, including financial businesses, in the Isle of Man.

In summary, VASPs operating in the Isle of Man are required to comply with AML/CFT regulations, which include applying for a license under the Designated Businesses (Registration and Oversight) Act 2015, implementing relevant policies and procedures, conducting customer due diligence and monitoring, and appointing a designated nominee officer and reporting suspicious transactions under POCA.

Are VASPs providing virtual asset services from offshore to persons in the Isle of Man subject to regulation in the Isle of Man?

According to the Designated Businesses (Registration and Oversight) Act 2015, any business which engages in ‘convertible virtual currency activity’ in or from the Isle of Man must register with the IOMFSA under the act. Therefore, VASPs providing virtual asset services from offshore to persons in the Isle of Man would be considered engaging in activities from the Isle of Man and subject to regulation by the IOMFSA. They would need to register with the IOMFSA for compliance with the AML/CFT Code 2019 and would be subject to regulatory oversight by the IOMFSA.

What are the main requirements for obtaining licensing / registration as a VASP in the Isle of Man?

Under the Designated Businesses (Registration and Oversight) Act 2015, any business that provides virtual asset services in or from the Isle of Man must register with the IOMFSA. Companies planning to engage in cryptocurrency activities such as transferring, exchanging, or providing secure storage of convertible virtual currencies, must also pay a special state fee and have first opened an account with a local bank. They must apply for a license and submit a package of documents including a business plan, description of services offered, information about the project team, financial statements, a document confirming the sources of income, and others.

Companies must also comply with the requirements of anti-money laundering legislation, including developing and implementing procedures for collection of customer data and maintaining records of the company’s activities to combat criminal schemes.

The approval process is designed in a way that the regulator conducts the examination for compliance with requirements on an individual basis as different applicants have varying circumstances. The IOMFSA also has several enforcement powers, including the ability to levy fines, issue directions, and in the most serious cases, revoke a registration or license.

It is important to note that being a registered designated business does not mean that you are automatically regulated by the IOMFSA. Instead, virtual currency providers (including ICOs) that are registered are overseen only for compliance with Anti-Money Laundering and Countering the Financing of Terrorism legislation (including the Code) just like other designated businesses.

The guidance issued by IOMFSA on virtual currency activity states that businesses do not need a financial services license or registration as a designated business to merely make or receive payments for goods or services in cryptocurrencies.

However, if a virtual currency business plans on running a token exchange for cryptocurrencies (such as Bitcoin or Ether), and it would not be handling tokenised securities, then it would not need a license from IOMFSA but it would need to be registered with the IOMFSA under the Designated Business (Registration and Oversight) Act 2015 and comply with the Anti-Money Laundering and Countering the Financing of Terrorism Code 2019.

If the virtual currency business plans on handling tokenised securities, it could only be operated under an Isle of Man crowdfunding platform, which requires a financial services license with class 6 permissions.

What are the main ongoing requirements for VASPs regulated in the Isle of Man?

4. Regulation of other crypto-related activities in the Isle of Man