The Isle of Man is regarded as an interesting jurisdiction for businesses involved in the Crypto / Virtual Currency business.
Our regulatory regime is not particularly well understood so here is an overview which might be helpful for those considering the Island as their base.
The first point to note is that Crypto / Virtual currency businesses do not require a licence to operate in the Isle of Man.
Under our Financial Services Act 2008, the various types of business activities licensable in the Isle of Man are listed in the Regulated Activities Order 2011 (last amended 2016). If you review this you will note that Crypto / Virtual currency business is not listed. (The closest match to virtual currency exchange business is Bureau de change activity under Class 8(1) but as virtual currency is not considered money it remains outside the scope of this).
However, the fact that Crypto / Virtual Currency businesses are not licensable in the Isle of Man does not mean they are not subject to regulation.
This is because under our laws ‘not licensable’ is not the same as ‘unregulated’. Schedule 4 of our Proceeds of Crime Act 2008 (POCA) sets out a list of business activities which are considered to be within the ‘Regulated Sector’ for Isle of Man money laundering purposes and businesses within the ‘Regulated Sector’ are subject to money laundering rules whether or not they are formally licenseable under our financial services legislation.
The Schedule 4 list includes most of the businesses you would expect to see – estate agents, high value cash businesses, lawyers and tax advisors. However, close to the end of the list under (1) (mm) – on page 189 the following definition is listed…
“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;”
You will note that this is very broad in scope in terms of business activity involving virtual currencies. Consequently, It means that most Crypto / Virtual Currency businesses are ‘Relevant Persons’ for anti money laundering purposes as they are within the ‘Regulated Sector’. This means that they are subject to the provisions of POCA.
The specific requirements placed upon ‘Relevant Persons’ operating within the Regulated Sector are set out in the Anti-Money Laundering and Countering the Financing of Terrorism Code – the practical application of which is helpfully detailed in the surprisingly readable Anti Money Laundering & Countering the Financing of Terrorism Handbook.
The Financial Services Authority has also issued Virtual Currency Business Sector Specific AML / CFT Guidance Notes which provides additional context.
What does all this mean in practice ?
(Please note – this is a summary of 300+pages into a few lines so it is somewhat abridged !)
‘Relevant Persons’ must adopt and implement appropriate written procedures in respect of the relevant legislation which would include….
(i) Obtaining and maintaining identity information about their customers.
(ii) Appointing a Compliance officer,
(iii) Appointing a Money Laundering Reporting Officer
(iv) Undertaking and documenting a variety of business and customer risk assessments
If you dig down into the detail you will see that there is no de minimis within Virtual Currency business for obtaining and maintaining identity information about customers. This means that customer information needs to be obtained and held about every customer no matter how small the transaction they are involved in.
However, while customer identity details need to be held in every case there is no requirement to verify the identity of customers performing one off transactions with value below Euro 1000.00. This means that, subject to them not being higher risk customers, certified identity documents are not required for customers engaged in such transactions.
How is compliance with POCA Enforced ?
The analysis above shows that Virtual Currency businesses operating in or from the Isle of Man are generally subject to the POCA rules – the obvious next question is how is this enforced in the Isle of Man…..?
The answer is that the schedule 4 (1) (mm) definition from also appears in the Designated business (Registration and oversight) Act 2015 under schedule 1 Part 1 (1) (l).
This legislation requires ‘Relevant Persons’ to register themselves with the Isle of Man Financial Services Authority as ‘Designated Businesses’.
Part 3 of the legislation provides for ‘Oversight’ by the Isle of Man Financial Services Authority in the form of inspections on site to verify compliance with POCA, the AML CFT Handbook and the Guidance notes.
It also provides the Financial Services Authority with the power to make directions to designated businesses to take remedial action and, if required, to take enforcement action against those businesses for their non compliance.
Failure to comply with POCA is a criminal offence and therefore, in serious cases, the business and its controllers may be referred to the Attorney General who may take a view on whether criminal prosecution in the local courts is warranted.