The regulatory landscape in Seychelles is undergoing a significant transformation with the introduction of the Virtual Asset Service Providers Bill 2024. This legislation aims to establish a comprehensive regulatory framework for virtual asset service providers (VASPs), addressing the growing concerns of ML/TF risks associated with virtual assets. 

This article delves into the key components of the Seychelles VASP Bill, including the licensing regime, regulatory requirements, and amendments to existing laws such as the Anti-Money Laundering and Countering the Financing of Terrorism Act, 2020.

Understanding the Regulatory Framework for Virtual Assets in Seychelles

In July 2022, Seychelles published its first Overall National Risk Assessment (ONRA), which evaluated the money laundering and terrorist financing risks (ML/TF risks) associated with virtual assets (VAs) and virtual asset service providers (VASPs). The findings indicated that Seychelles is at a very high risk of these products and services being misused. 

A major vulnerability highlighted by the ONRA was the lack of a formal regulatory framework for this sector. This lack of regulation has led to a rapid increase in new VASPs in the country’s offshore sector, taking advantage of the absence of specific legislation and disclosure requirements. The ONRA exercise identified hundreds of entities operating as unlicensed VASPs within the Non-Bank Financial Institution (NBFI) sector, offering a variety of services involving different types of tokens from Seychelles. These entities were exploiting existing infrastructure meant for the non-VA ecosystem, creating a "shadow VA financial system" that urgently needed regulatory oversight. 

To address these concerns, the Technical Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) Committee (TAC), under the supervision of the National AML/CFT Committee (NAC), began several initiatives in August 2023. These initiatives were designed to tackle the vulnerabilities identified in the ONRA and reduce the ML/TF risks posed by the misuse of VAs and VASPs for criminal activities. 

On December 19, 2023, the NAC approved a formal consultation process aimed at establishing a regulatory framework for VA promoters and VASPs operating in or from Seychelles. The National Anti-Money Laundering and Countering the Financing of Terrorism Committee (NAC) officially launched this consultation on December 20, 2023. 

Subsequently, on July 12, 2024, the Virtual Asset Service Providers Bill 2024 was introduced. This bill seeks to create a legislative framework to regulate virtual asset service providers and address the potential financial crime risks associated with the misuse of virtual asset products and services.

Licensing Requirements for Virtual Asset Service Providers in Seychelles

No one is allowed to offer or purport to offer virtual asset services in or from Seychelles unless they have a license from the Authority. The Financial Services Authority (FSA) is appointed as the regulatory authority under the Bill.

The following entities are eligible to apply for a license as a virtual asset service provider: 

• A company that is incorporated or registered under the Companies Act, 1972 (excluding an overseas company).
• An international business company that is incorporated, continued, or converted under the International Business Companies Act, 2016.

Substance Requirements

Licensees must meet specific substance requirements, including the following criteria:

• There must be at least one director who is a resident of Seychelles on the board*.
• The company must maintain a fully staffed office in Seychelles.
• The office should be managed by qualified or experienced staff.
• All records and documents mandated by the Act and regulations must be accessible from the local office.
• The company must handle customer complaints within Seychelles.
• The board of directors must hold at least two meetings in Seychelles every year.
• There must be a minimum of four management meetings held in Seychelles annually.

*A licensee’s business and affairs must be overseen by a board of directors with at least two members, and according to the substance requirements, one of them must be based locally.  Interestingly, the IBC Act requires only a single director for a company to be incorporated. However, for licensing as a VASP, a minimum of two directors will be required. Concerns were raised about the challenge of having one director physically present in Seychelles, but the Government confirmed this requirement will remain in place. Experiences in other jurisdictions have shown that effective oversight and governance of VASPs are essential to understanding and managing financial crime risks. Seychelles has determined that allowing VASPs to be authorized with just one director, potentially a legal entity located overseas, would not provide an adequate governance model.

Permissible Activities for Virtual Asset Service Providers in Seychelles

During the consultation, participants highlighted several terms that needed defining and clarification. One of the key areas requiring clarification was the scope of VASP activities that would require authorization. The draft bill has been updated to refine definitions and clarify the authorization scope for specific terms and targeted activities.

The First Schedule of the Virtual Asset Service Providers Bill 2024 provides a comprehensive outline of the permissible virtual asset activities in Seychelles. These activities are grouped into four main categories:  (1) Virtual Asset Wallet Providers, (2) Virtual Asset Exchange, (3) Virtual Asset Broking, and (4) Virtual Asset Investment Providers.

Each category is further divided into specific services that VASPs are authorized to offer in Seychelles and the FSA may issue further guidance to clarify these activities, ensuring that the services are carried out in compliance with the legal framework established by the Bill.

Prohibited Activities for Virtual Asset Service Providers in Seychelles

The Bill bans the operation of (1) mining facilities and (2) mixer or tumbler services both within Seychelles and by entities operating from Seychelles.

The Government has clarified its stance that these activities will not be categorized as permissible offerings under a VASP license. However, if a VASP chooses to engage in these services, the responsibility lies with the licensee to ensure that they can do so safely and within regulatory guidelines, without jeopardizing their ability to operate legally within Seychelles.

How Seychelles Regulates Decentralized Finance (DeFi)

The Authority is currently examining how DeFi activities and products might impact the jurisdiction. In some places, partly decentralized crypto services need authorization, while fully decentralized services with no intermediaries do not. The level of control and oversight by a formal governance structure is also a key factor.

Seychelles will consider the final report and policy recommendations for DeFi published by the IOSCO in December 2023 when deciding how to handle these products and services. The report highlights the risks of illicit activities like cyberattacks that exploit vulnerabilities in DeFi, leading to losses for investors and other participants. Additional reports also point out that DeFi protocols can be used to convert stolen cryptocurrency into more liquid or less volatile assets and eventually into fiat currencies through centralized VASPs.

To address these issues, the Government will release regulations and guidance outlining the criteria for when a DeFi product or service will need authorization under the proposed VASP Act. This approach aims to ensure that any potential misuse of DeFi to facilitate financial crime is effectively minimized.

7 Key Regulatory Requirements for Virtual Asset Service Providers in Seychelles

The Seychelles Virtual Asset Service Providers Bill sets forth several key regulatory requirements that licensees must adhere to in order to maintain compliance and operate legally. These requirements are designed to ensure that VASPs conduct their business with integrity, financial soundness, and in a manner that protects clients and the reputation of Seychelles as a financial center. 

The 7 main requirements are as follows:

Before appointing any directors, principal officers, or other key personnel, licensees are required to obtain prior approval from the FSA. 

This measure ensures that all appointed individuals meet the established fit and proper standards. It is not just a one-time evaluation; licensees must continuously monitor and ensure that their personnel remain compliant with these standards throughout their tenure. This ongoing assessment helps maintain a high level of competence and integrity within the organization, thus safeguarding the interests of clients and the public.

The FSA will communicate any findings that deem an individual not fit and proper in writing, outlining the reasons for such determinations. This transparency ensures that licensees are aware of the standards expected and the rationale behind any decisions made by the Authority.

The Bill mandates that VASPs conduct their business in a prudent manner, which involves several critical components.

VASPs must maintain a minimum level of net assets as directed by the FSA. This requirement takes into consideration the nature, size, and complexity of the licensee's business, ensuring that sufficient financial resources are available to cover liabilities and operational costs.

Furthermore, adequate accounting systems and controls must be in place to manage business records effectively. This involves developing comprehensive policies and procedures that align with the obligations under relevant laws, facilitating transparency and accountability in business operations.

A policy of insurance is required to cover risks inherent in operating a virtual asset service. The insurance coverage should be proportionate to the scale and nature of the business, providing financial protection against potential losses or claims.

3. Integrity

The integrity of business operations is paramount, and the Bill sets forth specific requirements to ensure that VASPs uphold high ethical standards.

VASPs are required to conduct their business with integrity, demonstrating due care, skill, and diligence that reflects the nature and scale of their activities. This includes making decisions that prioritize the interests of clients and stakeholders.

Licensees must engage fairly with all clients, ensuring transparency and honesty in service provision. Clients should not be misled about the services offered and the licensee's obligations, fostering trust and confidence in the business relationship.

4. Capital, Solvency & Insurance

Financial soundness is a cornerstone of the regulatory framework, and VASPs must adhere to specific requirements to ensure their financial health.

Licensees are required to maintain financial stability by adhering to prescribed capital, solvency, and insurance requirements. This ensures that VASPs have sufficient resources to meet their financial obligations and safeguard the interests of clients and stakeholders.

The decision has been made to specify the capital adequacy and solvency requirements within the accompanying regulations. These regulations will outline what must be maintained for each permissible activity and how these requirements should be applied. Specifically, if a VASP engages in more than one activity, they will need to allocate resources appropriately to meet the prescribed capital requirements for each activity. Before these regulations are issued, the FSA will conduct a comparative analysis of other jurisdictions and carry out an industry-wide consultation to gather input prior to implementation.

5. Conflicts of Interest

Managing conflicts of interest is critical to maintaining the integrity of VASPs. 

VASPs are required to have policies in place that are satisfactory to the FSA, designed to avoid, mitigate, and manage conflicts of interest. These policies must address potential conflicts between the licensee and clients, service providers, third parties, and among the licensee's clients.

6. Cybersecurity

Given the digital nature of virtual assets, robust cybersecurity measures are essential to protect against threats. 

Licensees are required to implement appropriate and effective cybersecurity measures, as prescribed by the regulations. These measures should align with industry best practices to protect systems and data from cyber threats.

VASPs must also regularly submit cybersecurity reports to the FSA, demonstrating compliance with prescribed security standards. These reports provide transparency and accountability in cybersecurity practices.

7. Audited Financial Statements

Transparency in financial reporting is a key regulatory requirement for VASPs.

Licensees must ensure that their financial transactions and balances are audited annually by an approved auditor. The audit must comply with recognized standards, such as the International Financial Reporting Standards (IFRS) or other standards approved by the FSA.

A copy of the audited financial statements must be submitted to the FSA within six months of the financial year-end. Timely submission is critical for maintaining transparency and regulatory compliance.

Guidelines for Promoting ICOs and NFTs in Seychelles

The Seychelles Virtual Asset Service Providers Bill outlines regulations for the promotion and issuance of Initial Coin Offerings (ICOs) and Non-Fungible Tokens (NFTs). 

Before any entity can issue or promote an ICO or a NFT in or from Seychelles, they must be registered with the FSA. 

Registration Requirements

Entities wishing to promote ICOs or NFTs must meet one of the following criteria:

• They must be licensed under the Virtual Asset Service Providers Act to provide virtual asset services.
• Alternatively, they can hold a license under the Securities Act, 2007, which allows them to offer related services.

It's important to note that individual persons (natural persons) are not eligible to promote ICOs or NFTs in Seychelles. Only legally recognized entities with the appropriate licenses can engage in these activities.

To issue or promote an ICO or NFT, an entity must submit a formal application for registration to the FSA. This application should be completed before any issuance or promotional activity begins and must comply with the prescribed requirements.

Approval Process

Once an application for the issuance or promotion of an ICO or NFT is submitted to the FSA, specific steps must be followed to ensure compliance and authorization.

Initially, the applicant must await written confirmation from the FSA, which indicates that there are no objections to the proposed issuance or promotion. This written approval is essential for moving forward with the activities outlined in the application.

In the absence of a written notice of objection from the FSA, the applicant can proceed with their proposed activities after a period of thirty working days from the date of application submission. This 30-day waiting period provides the FSA with the necessary time to evaluate the application and identify any potential concerns.

Conditions for Objections

Despite receiving initial approval, there are circumstances under which the FSA may later raise objections. If certain issues are identified, the Authority has the right to intervene.

• One such issue could be the inconsistency between the advertising method used and the information provided in the application. If the promotion of the ICO or NFT does not align with what was originally outlined, the FSA may object. 
• Similarly, if there are significant deviations from the ICO or NFT's described nature or characteristics as detailed in the application, the FSA may find grounds to object.
• Improper marketing of the ICO or NFT is another critical concern for the FSA. If there is evidence that the ICO or NFT is being misrepresented to investors, the FSA can raise objections to protect the public and maintain market integrity.
• Finally, if the issuance or promotion is deemed detrimental to the public interest, the FSA may intervene. This is a broad measure designed to protect the market and its participants from potential harm.

In any of these situations, the FSA may require corrective actions to address the issues or even halt the promotion altogether. The ability to object and intervene underscores the importance of compliance with the initial application and maintaining transparency and consistency in all promotional activities.

Restricted Terminology for Virtual Asset Services in Seychelles

In addition to the approval process and conditions for objection, the Bill also restricts the use of certain words associated with virtual asset services. These restrictions are intended to prevent unauthorized entities from falsely presenting themselves as legitimate service providers in the industry.

An individual or entity is considered to be engaged in virtual asset services, or in the issuance of ICOs or NFTs, if they:

• Utilize words in their business description or title that imply involvement in virtual asset services, ICOs, or NFTs. This includes terms in English or any other language that suggest participation in these activities.
• Present themselves in any form or through any medium as being engaged in providing virtual asset services or issuing ICOs or NFTs.
• Indicate or suggest in any other way that they are offering virtual asset services or issuing ICOs or NFTs.

Additionally, it is prohibited for anyone other than a licensed or registered entity from using a name that includes terms such as “cryptocurrency,” “virtual,” “currency,” “virtual coin,” “ICO,” “NFT,” “Exchange,” “Digital Wallet,” “Blockchain,” “hot/cold Wallet,” “DeFi,” “Web 3,” or any similar combination of words that might imply the provision of services licensed under this Bill.

Anti-Money Laundering (AML) Regulations for Virtual Assets in Seychelles

The amendments to the Anti-Money Laundering and Countering the Financing of Terrorism Act, 2020, introduce specific changes to accommodate the increasing relevance of virtual assets and virtual asset service providers in Seychelles. These changes aim to enhance the regulatory framework, ensuring that the country's financial system remains robust against money laundering and terrorist financing risks associated with virtual assets.

The Anti-Money Laundering and Countering the Financing of Terrorism Act, 2020 applies to all licensees. Key amendments include:

• Prior to launching new products or technologies, entities must identify and assess the associated money laundering and terrorist financing risks. This proactive approach ensures that risks are managed from the onset
• The term "virtual asset transfer" is added alongside wire transfers, requiring entities to report virtual asset transfers that meet specific thresholds. This change enhances the ability to track suspicious activities related to virtual assets 
• References to electronic wallets and virtual asset transfers are included, emphasizing the need to monitor these new forms of transactions alongside traditional ones .
• Detailed requirements for collecting and verifying information related to virtual asset transfers are introduced. This includes names, wallet addresses, and transaction identifiers .
• Virtual asset service providers are prohibited from applying simplified due diligence measures, reflecting the complex risks associated with virtual assets .
• Obligations extend to financial institutions when handling virtual asset transfers, aligning their responsibilities with those of VASPs .
• A specific reporting threshold is set for virtual asset transfers, aligning them with wire transfers in terms of reporting obligations.

Conclusion

The Seychelles Virtual Asset Service Providers Bill 2024 represents a significant leap forward in the country's efforts to regulate the virtual asset industry. By implementing a comprehensive legal framework, this bill seeks to address the challenges and risks associated with the rapid and previously unregulated growth of virtual asset service providers. Historically, such unregulated environments have been vulnerable to financial crimes, including money laundering and terrorist financing. The introduction of this legislation underscores Seychelles' proactive stance in combating these risks and demonstrates a strong commitment to creating a secure and transparent crypto ecosystem.

The Bill is more than just a regulatory measure; it is a strategic initiative that aligns Seychelles with global standards and best practices in the virtual asset industry. This alignment not only enhances the integrity of the Seychelles virtual asset sector but also strengthens its reputation as a safe and attractive destination for legitimate businesses and investors.