VOICEOVER:
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INTRO:
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DERREN JOSEPH:
All right, so to those who may be joining us live, and to those who are watching this video, because it is being recorded, welcome to HTJ.Tax, where we talk about all things international tax. We try to demystify the sometimes confusing world of cross-border compliance and tax planning. If you’ve not joined us before, you can have a look at HG taskforce slash events because we do these live streams almost every week, and we try to publish a video every day on YouTube as well as wherever you’d find your favorite podcast. So whichever podcast platform you use, chances are we published there as well. We have over 2000 videos on our YouTube channel. We have no over a thousand videos, sorry, and over 2000 articles on our website, HTJ Tax. So today we have the honor and privilege of having another conversation with the illustrious barrister, Michel Charles Mickel. Please introduce yourself to those who may not already know you. You’d have to unmute yourself because you’re on mute.
MIKHAIL CHARLES:
Derren. Thank you. And good morning, good evening, wherever you are. And to all our followers, I, do know that, whenever we speak about matters, Caribbean Offshore/UK, they’re usually a flurry of questions, and I hope that we can get the discussion kicked off. So my name is Mikhail Charles. I’m a barrister practicing out of three board court chambers in the jurisdiction of England Wales, but I’m also admitted in practicing in most of the Eastern Caribbean, that’s defined as nine member states and territories. I am admitted in and practicing in Grenada, St. Vincent and the Grenadines St. Lucia, St. Kits and Nevis, also known as St. Christopher Nevis, and the British Virgin Islands. I have also been associated with a firm, a leading firm in Antigua and Barbuda, as well as the Turan Caicos Islands and some so practitioners out of the Cayman Islands. All of that to see is that I’m interested in solutions, which is why I continually hang out and do some great work with HTJ.Tax. Today, we were speaking, about the topic for today is the treatment of Crypto or NFTs, or as we would term it, Crypto Assets across the Eastern Caribbean and the Cayman Islands. But I think first to sort of set the set temperature or set the tone for today, we need to understand why Crypto Assets, what they are, why they’re important in society, and how they’re currently being treated, or the regulatory responses. So, I think over the past three years or so, Crypto has further exploded. I mean, thinking back to June 2020, there were well over 5,500 types of Crypto Assets and more than 270 Crypto asset exchanges available online. Now, in almost, a fun way, the amount of Crypto Assets doubles or changes almost every year. And this is us going back as far as January 2008 with the launch of Bitcoin. And they are the most popular type of Crypto out there. And they do hold and Bitcoin holds the majority of global market shares. But why regulate? And you, when we talk about regulation, what does that mean? Now, because digital Assets are increasingly important in modern society, they use for expanding variety of purposes. And that could be paid to be represented or to be linked to other rights of things. Something like Crypto, electronic signatures, cryptography, smart contracts, distributed ledgers, and associated technology. They have broadened the way that digital Assets can be created, accessed, and used. Now, the clash between digital Assets and the law comes in how it is to be treated. Is it property, or is it not? Is it something else? And I think that’s the strength of the Caribbean or the Commonwealth Caribbean jurisdictions that base their legal systems on English law because it has been held to be property, or at least to have the indicia or features of property. Just rounding that thought off the law commission in, let me get my dates correct, the law commission earlier this, well earlier last year, but keep forgetting. In 2023 Law Commission earlier in 2022, July of 2022, put out a digital Assets consultation paper. And that paper was built on the work of the UK judicial task force, which put out a very influential statement as to the status of Crypto Assets. Now, why regulate now? The need for regu regulation is based on the use of Crypto Assets to transfer value. And one of the old illustrations of how to launder money using gold is you have a piece of gold. You say it’s valued like $1, but then you take it to another jurisdiction and cash out a hundred dollars. I, I know that’s a very broad example, but it’s something similar to that Crypto is worth as much as it’s worth because of the people who ascribe value to it. And because that value can fluctuate in a volatile way, it, and because it’s decentralized there, there’s so much potential for misuse and for, for re very real financial and other types of harm to be inflicted on companies and individuals. The failure of Crypto, Assets, and criminal prosecutions surrounding FTX, which I think has been the most prolific thing to happen in the past maybe six weeks or so to Crypto, reinforces the need for active regulation. Now, FTX is an Antigua company that is regulated in The Bahamas, but it’s, its liquidation is being administered in the US. So I’ll immediately, see at least three jurisdictions. And when you look at the court filings, there are well over a hundred different companies associated with FTX spread across the world.
DERREN JOSEPH:
Sorry, just Yep, that’s, that’s an input obviously that that is a high profile scenario. I mean, it’s not the first one, but perhaps it’s the company that, in the Crypto space has had the most far-reaching impact in terms of the number of people that have been inconvenienced in some way, shape, or form impacted. Right. But, the thing is that the Caribbean, as you pointed out, started down the road toward regulation even before that. So, my question is, so was there a particular incident that triggered this desire to regulate? Why not just leave it as is?
MIKHAIL CHARLES:
I, I think look back, to the context of AML CFTs, antimony laundering, counter financing of terrorism regulatory issues surrounding the Offshore space, stretching back into the late 1990s. And that round of blacklisting from the OECD spilling over to FATF spilling over to the EU. But coming back to the FATF in particular, now, the F A T F started recognizing the potential for the misuse of Crypto Assets U with the use of Offshore structures. And I think they, they sort of use the tax transparency initiatives to sort of springboard the need for regulation onto Caribbean governments. So there’s a FATF recommendation 15 out of a report that they did on Crypto, which suggests that regulation or at least regulation by registration should be mandated in Caribbean countries that have, that are popular Offshore centers whose structures are used in the Crypto space. So I, I think that was the impetus and it only came to the four, maybe about 2018 or so. And then we start seeing legislative responses in the Cayman Islands in 2020 where there Cayman Virtual Asset Service Providers Act, which gives a framework for the registration of Virtual asset service providers. And it also makes a series of consequential amendments to the antimony laundering and countering of the financing of terrorism legislation to provide a comprehensive framework for the registration of Virtual asset service providers, the types of, the types of Crypto Assets or Virtual Assets. And they use the term Virtual Assets very broadly because of the different types of Crypto Assets that can be deployed as a result of that. So, just, stepping back to the FATF of guidance for a little bit. Now, the name of that publication, or the name of that set of guidance was the guidance or risk-based approach to Virtual Assets and Virtual Assets service providers. And as recommendation 15. So under rubric new technologies, and deals with the international standards on combating money laundering and the financing of terrorism and proliferation. So that recommendation as well as the fat of guidance was heavily, heavily pushed across the Offshore world. And as a result of that, as we stated before 2020, you see K command bringing in their law. Then we see the Eastern Caribbean Central Bank called ECCB commissioning a consultant to make draft reg regulation or draft legislation called the Virtual Assets Act, which is very similar, if not materially identical in most parts to the Cayman Act. And that purports to be a model piece of legislation across the nine, well, no seven member states of the Eastern Caribbean Currency Union. So you’re talking from Anguilla in the north, even though it’s an overseas territory of Britain to Grenada in the South. But what we see is the politically independent states member states of the East CCB passing in, passing those laws, and bringing those laws into effect. So we see Grenada passing it in 2021 St. Vincent passing it in 2022, Antigua passing it in 2020, and I believe St. Kitson Nevis in 2021 and bringing it into effect more or commencing that law more or less immediately. They’re now into their Second Amendment, I believe.
DERREN JOSEPH:
So if I’m following you correctly, caiman was the leader, they were the first jurisdiction in the Caribbean, to come out with something of
MIKHAIL CHARLES:
Some sort of Yes, yes. And interestingly, PVI has not yet passed a primary piece of legislation. They’ve circulated a draft bill, which I can share on-screen if desired. They’ve circulated, a draft bill before the consultation into the industry. But what they’ve done as a stop-gap measure is amended their antimony laundering law as of December of last year. So December 2022, they amended the anti-money laundering law making any Virtual asset service provider. They’ll need to maintain client identification proceeding pro procedures, sorry, keeping KYC suspicious transactions. They need to have internal reporting procedures for suspicious transactions, the usual suite of things that a financial entity would have to do. But most interesting is that in the PVI as of December 2022, any Virtual asset service provider will be required to comply with the travel rule. And the travel rule means that for any transfer, so the originating and beneficiary Virtual asset service providers, you’ll need to obtain, verify, and maintain complete information, on that particular transfer. And intermediaries, you also have obligations to do that to show inflow outflow.
DERREN JOSEPH:
Okay. But does, do, it, does, does it also include audit requirements? So for example, the firm needs to be audited by a recognized practitioner, anything like that?
CHARLES MIKHAIL:
Not, not explicitly, but generally. So when I generally say because you have, you are under an obligation to maintain accurate accounting records for a minimum of seven years or so, your registered agent would be under a duty, to ensure that they have either with them a complete set of records or at your registered office or your place of business or even in electronic format, a complete set of accounts which can be inspected by the equip the local equivalent of the financial intelligence unit or the Offshore regulator. So in any event, that I think brings you within scope to be inspected at the very least.
DERREN JOSEPH:
Hmm. Well, okay, so in 2018, 2019, and 2020, when, the regulators and the various jurisdictions were having a look at this, everything was theoretical, right? So I guess they were looking at what’s going on in the UK or perhaps a less extent the US or whatever. And the discussions happening there. They got in their consultants, as you said, and they drafted what they hoped to be some sort of regulatory framework, but everything was theoretical. Now, suddenly as at the end of 2022, we, having this conversation in only 2023 is no longer theoretical and is real. And if we were to look at what happened in The Bahamas, I know we’re not discussing The Bahamas, but it’s obvious, it’s within the sphere of being in the Caribbean. And if we were to transpose it and to say that FTX or an entity like it was to been located in one of the other jurisdictions, which now have that regulatory framework, would it have been able to be caught? And it seems as if, and correct me if I’m wrong, the answer is no for two reasons. One, they, it’s, it’s not treated in the way like security would be in other jurisdictions where it would be subject to rigorous disclosure, and audit requirements. That’s the first thing. And then the second thing, I guess, when you mentioned that consultants had to be called in, the question is, do the local, the domestic financial services oversight bodies, do they have the skillset in-house in order to understand really what’s going on, far less impose or enforced any governance requirement?
MIKHAIL CHARLES:
Well, I think that’s a very broad question, and I think I’ll answer it this way. Yeah. Cause Crypto doesn’t necessarily display all the features of security. There’s often, the desire, the market desire, to not have a heavy hand in regulation. So for example, if we cast our mind back to, there was a report from Iosco, IOSCO, which is, it’s called the investor educational Crypto Assets. And that was published on the 23rd of December, 2020. They identify, and they and IOSCO is the general securities body. They identify risks within the Crypto asset market being market liquidity, volatility, partial total loss of the invested amount in insufficient information disclosure, and fraud. And their way of seeing, a resolution or solution to that would be for member states to develop educational content, inform the public about unlicensed or fraudulent firms to use a variety of communication channels, et cetera. But that is all broad. It doesn’t make granular recommendations as to how to achieve consumer protection. And I, and I think it, it, it goes back to an almost primal try. How do you regulate human nature, really the, wish, to get rich quickly balanced against, the risk or the need to protect one’s financial interests? And I think more to your point about the capacity of Caribbean regulators, I do think there’s capacity, however, even on, on a good day, onshore regulators aren’t able to necessarily have a microscope on the activities of, large Crypto asset exchange platforms. So take, for instance, Binance. Binance is, is a keyman-domiciled exchange. It’s one of the world’s largest, however, the FCA in the UK would’ve, from time to time imposed withdrawal bans in the United Kingdom, stopped notices required more information or other assurances to be given as a regulatory response that has been mirrored in keyman, that has been mirrored in St. Vincent, that has been mirrored in if memory serves the BVI, where the regulators in each of those islands upon a complaint, a substantiated complaint from a consumer client have made changes or have made regulatory responses to the activity of a particular Crypto exchange or a Crypto trader. So I think that broadly, I think, answers your question in terms of capacity. I mean, there’s always a need for more technical capacity, but really and truly, there isn’t much that can be done even in onshore jurisdictions to, control the actions of or ramifications of a Crypto exchange acting in a particular manner.
DERREN JOSEPH:
So, you, I guess you can probably guess where I’m going with this. I mean, within recent memory alone, we’ve had 2016, the Panama Papers, 2017, the Paradise Papers, and 2021 Pandora papers. So the Caribbean is an Offshore jurisdiction as a whole. I know that they’re very different in independent jurisdictions, but in the mind, of other geographies, they see it as one amorphous space. And, and it, the, the impact on reputation has been severe, has, has been incredibly severe. And one can argue that it doesn’t show any, signs, of turning around itself. Because even though, you know, I just noticed that in the, in the, in the press coverage of the FTX situation, and again, I, I don’t want to cast this Persians because it’s, it’s subject to review and, you know, there’s an independent investigation and so on, going forth, going on. But there is a sense that things weren’t quite correct. And as part of that reporting, they’d never failed to mention that he was in the Caribbean. And as if, as if somehow being located in the Caribbean made, created a predisposition for irregularities, you know, the why, why wasn’t he onshore? He’s American, and his team and his leadership team are all American. Why didn’t they come onshore? They went to the Caribbean for a reason. And yeah. And it just seems, and, and some, and some parts of the Caribbean have been damaged irreparably. I think, and, again, I’m not casting as Persians just anecdotally of, of course, thinking of Belize and Panama’s jurisdiction. Yes, you can, you can create entities, but good luck in finding a reputable bank, willing to deal with them. And that, that contagion is, you know, I guess as someone with an interest in the jurisdiction, it just seems to me cause for concern. And if it is, okay, so their regulation is relatively fresh on the books, and looking at it, we know, or I mean we don’t know, but we can speculate that it has no teeth in the sense that it would not prevent something like that from reoccurring then yeah, it doesn’t look good. And when I was on a call yesterday, another one of these, and we were discussing other jurisdictions and we note, the ascent of the United Arab Emirates, and they had similar reputational challenges. They were on a blacklist. I think they’re still maybe on a gray list depending on which gray list you’re looking at the list, I think. But they seem to be taking decisive steps to turn it around, you know, the oversight, even in the free zones, you, there’s some reporting required all of a sudden where historically there wasn’t that 9%, the 9% corporate tax, I think, yeah, the 9% corporate means that they’re playing ball. They’re, you know, they’re, they’re listening to what they’re being told by, by OECD countries and banking, because it, it’s like a pairing, right? Like, like, like wine and meal. You need to pair them together. And entity formation and banking, index, index, inextricably linked, I’m sorry. And I note that the UAE banks are, they’re perhaps overreacting, but they are trying hard to get their act together and, and to be, you know, more mindful of the type of clients they’re onboarding and so on. Now that stands in sharp contrast, and I’m sorry to join the comparison, but I do think it’s relevant. It stands as a shop contrast to what’s going on in the Caribbean. There’s been reputational slippage over the past few years. And then in tandem with that, we’ve seen press coverage of the exodus of banks. So at least from the English-speaking Caribbean, which is what we’re talking about. So mainly car Canadian banks and, you know, squish bank, commerce Royal Bank, they are heading in the opposite direction rather than investing in words, they are packing up shop, doing fire sales, and they’re running for the hills. So yes, there’s regulation I, and so I’ve said all that, there’s context, right? So yes, there’s regulation, but, I don’t mean to be too contentious, but how useful would this regulation be if the intent is to nurture and grow a struggling Offshore financial services center?
MIKHAIL CHARLES:
Well, I think firstly, and, and maybe putting my pride aside as a Caribbean practitioner, I would agree there has been some reputational slippage. But what I don’t agree is with, the legal arbitrage that has arisen. I’ve been in practice now for 10 years, and what I, can see comparatively between Offshore and onshore is that the Caribbean is a well-regulated and well-run set of jurisdictions. So take for example, the BVI, the BVI has the boss system, or the beneficial ownership search system, which is disclosable only to authorized persons. And that sort of thing is replicated throughout the Eastern Caribbean. In St. Vincent in particular, you are not able to get information a, on the beneficial ownership of companies unless that information is requested either by court order or by the unauthorized law enforcement authority. So we have moved away from being the traditional secrecy jurisdictions to one-off, I would say benevolent privacy. And I think that is a fact that is not trumpeted more, a lot of these assumptions on a lot of these, what I would term aspersions against Caribbean jurisdictions, are not grounded. What it is grounded, it is feeling this is very motivating to say, oh, a billionaire is using a Caribbean jurisdiction to stash money away. And that’s taking money away from hospitals and the rebuilding of roads and the feeding of small children in remote parts of an onshore country. Sympathetic as that argument may be, it’s not bare b born out on the facts and the many different, more esteemed practitioners than I am, especially since there’s a chap in the B V I who’s of Canadian extraction, and, and he has for the past, I think 20 years or so, I’ve been following his, his writings, he has been consistent in demonstrating that the drum that most of these NGOs are banging is simply hollow and it is hollow because of the type of regulation and the type of capacity that exists on the island. And that is something that is demonstrated in c FATF reports, FATF reports, or OECD reports. But, but, but conversely, the EU doesn’t seem to have that position and the EU cog seems, to have a position that is purely political as opposed to empirical and, to come home to the Crypto point, the feelings of a particular exchange as a result of the actions or the nefarious actions of a set of individuals. Fraud is fraud. That is individual responsibility. That is the misuse of the corporate form. That is a deliberate crime. Now you may say, well why the Caribbean as opposed to elsewhere? But that doesn’t, that’s not an empirical answer in my view, because in the Caribbean you have had maybe two or three Crypto exchanges failing versus the Crypto exchange is failing in us in the UK, elsewhere in the commonwealth world like Singapore. Yeah, yeah. I mean, financial failure is not unique to the Caribbean. Financial fraud is not unique to the Caribbean. What seems to be unique is the type of press coverage. What seems to be unique is the lack of a thorough investigative approach. And what seems to be unique is the description of the investigations and the outcome of those investigations by leading, leading newspapers and leading commentators. Look, let’s get done. Let’s be frank. You come to the Caribbean because you want light touch regulation, you want the benefit of the climate and the location, and you want that cool factor. There’s a reason why you come to the, and the Caribbean has been at the center of international finance and commercial commerce since the years of slavery. That’s how the Czech start got its popularity, the bill of sale, Lloyds of London. That’s how they all got their popularity through the use of the Caribbean. So we are not a newcomer to international finance, but what we have been known for is the ability to stick to the rule of law. And that ranks certain, I would say, I would say left-wing, but this is the political shoe, but it, it, it disturbs certain, certain sectors of non-Caribbean society.
DERREN JOSEPH:
Okay, f fair enough, fair point. So we are where we are and even though the actual, you know, the actual management and control of these entities, well the FTX is kind of like an exception. They tend to be elsewhere. They, the structures do take advantage, of what you, of what you’ve said, what the Caribbean has to offer that light touch. And that’s, that has its pros and that has its cons. So, we have this regulation and it will, it will do what it does which will continue, the philosophy of being light touch as we go forward.
MIKHAIL CHARLES:
And I think let’s, let’s not, let’s take view that legislation is not fixed in stone. So I mean, look, the BVI has circulated a draft bill, it’s now for the industry to comment on that and then to have a finalized version, which will be brought into effect. The ml set of laws has already been amended as of December 2022. Now let’s look at St Kit and Nevis. They passed their Virtual Assets act and brought it into effect in 2020, but they have already amended that twice, right? The last time was in 2021. And that was to streamline Virtual Assets. So what are the reporting requirements for a Virtual asset service provider in respect of AMLCFT? Cuz it wasn’t clear. So, this legislation is not set in, in stone. And I think that’s, it’s a testament to our legislative responses. I mean, I would critique most of the Caribbean as being slow in terms of legislative responses, but the point is that there is a response that can be made where there is risk and that’s why the FATF has labeled any legislative response to be risk-based. Now naturally as a result of the fix, that risk is now going to be heightened. But that is why every two years or so, there’s a wrong of evaluations by the F A T F whereby, the local authorities for each island are evaluated and can raise or lower legislative responses if necessary.
DERREN JOSEPH:
Okay, so,
MIKHAIL CHARLES:
So there is a range of things that can be done and will be done in respect of the handling of Crypto or the treatment of Crypto Assets. Crypto, I think as we’ve spoken privately, Crypto is, is a leveler at the legislative level and even at the practitioner level cuz it’s something completely new. It, resembles the old in that the indicia of what it means to be property, what it means to be, sorry, what it means to be property, what, what, how can it be held?
Is it solid, or is it gas? That kind of thing. But then, the common law, the strength of the common law has shown through and there’s a, there a wide range of things that you one can do as an individual either at the regulatory level or the litigation level if you want a remedy.
DERREN JOSEPH:
So I have a question, could I follow each of these jurisdictions in question that have approached it in their way? So what distinguishes one jurisdiction from another? So for example, if someone is an entrepreneur or a trader or they wanna set up an exchange or, whatever it may be, why should they choose one jurisdiction over the other? So for example, in Dubai, in the emirate, sorry, all in, you probably have like 45 free zones, but you know that certain free zones are good for this. If I wanted to set up this type of project, this is the free zone I need to go to. If I want this type of structure, I need to go to the other and, and so on. Is there any such distinction within, these Caribbean jurisdictions?
MIKHAIL CHARLES:
I would think not really. I and I explain why. So for example, the distinction would come from not necessarily legislative response because the laws are broadly identical anyway, Keyman, B v i, the, Model East, and the Caribbean central bank bill, all have a common definition of what a digital, what a Virtual asset is, being a digital representation of value that can be digitally traded or transfers and can be used for payment or investment purposes, but does not include a digital representation of fiat currencies or a digital record of a credit against a financial institute of fiat currency. So that excludes CBDs. So for example, in the eastern Caribbean, you have the cash, which is digital cash, which is a digital representation of the Eastern Caribbean dollar, or in The Bahamas, you have the sand dollar, and so on. So, so broadly they have the same definition. They cover the same thing. So Virtual asset service provider, VASP, that’s a common acronym between Cayman and the BVI and it’s a v an I think versus Virtual Assets VPI think in the Eastern Caribbean. So it’s, they’re broadly similar. So the differences come in terms of what exactly is the aim of the person who is setting up a Virtual asset service provider. So for example, in Cayman and BVI, you initially brand name value. So Cayman and BVI, I have the largest amount of ancillary support services in the Caribbean, Offshore world Cayman, you have the big six also big firms that also span Bermuda, London, Singapore, Hong Kong, and the BVI themselves shall the big law firms and the brand name value of Cayman and BVI. But if you are looking to be more of the, of, of the books, or lemme not, lemme not say off the books, see I’ve already said fraud, but off the beaten path you have the more, I would say the more gem-like, or the poorer like jurisdictions, St Vincent, St Kitan, nivas that is smaller. You, tend to find more traders, you tend to find much more traders in these jurisdictions as opposed to Crypto exchange platforms which are bigger and would require naturally something of a more brand name. So I think that’s a central difference as to the effect of deregulation. What I’ve noticed is that Nevis in particular, Nevis has a very high fee, I think it’s something like 55,000 Eastern Caribbean dollars for the application fee and a hundred and something thousand for the license. St. Vincent has not yet commenced its application for the Virtual Assets Act. So we don’t know what, the application fees are. Antigua is roughly the, roughly the same. So it’s roughly about maybe what’s that conversion like about 25,000, about 25,000 us. So less than what’s Bitcoin at now? That’s like 1.5 bitcoins for the application fee and maybe, maybe roughly about nine bitcoins for, for an annual license. So, you know, it, it’s, it’s not that unmanageable for, for successful traders depending on the market is, not notwithstanding its volatility. But there are opportunities for the discerning trader and of course consumer protection. A big aspect of the regulation is about consumer protection. And you could only get your license under the act if you provide a prospectus with details of dispute resolution mechanisms. And of course, there’s also a statutory bond. So in the Eastern Caribbean, there’s also a statutory bond. So if the trade or the corporate entity goes bust, there’s at least some money available to go out, in a liquidation. So, the state isn’t left high and dry so to speak. So for example, in St Vincent, that statutory bond is a hundred thousand Eastern Caribbean dollars, which is about 50,000 us. So that’s, that’s just held in escrow by the state and you get that back when, when you wind up your business. So, the range of things that the legislation provides for, which I think are a useful response to the more shady side of the Crypto asset world. So maybe let’s just signpost and say the treatment of Crypto Assets in the Eastern Caribbean and broader Caribbean is that, well it’s recognized, it’s regulated and it’s used and it’s a matter of an individual taking legal advice which would be tailored to their particular instances to understand the pros and cons for them.
DERREN JOSEPH:
Okay, all, all, all feeling good. This perfection doesn’t exist. There’s no situation that is perfect anywhere, but at least concrete indecisive steps have been taken and, and continue to be taken because as you said, it’s not static. So steps continue to be taken to provide the protection and regulation that is quite needed.
MIKHAIL CHARLES:
I think maybe going back to an earlier point on amendments to, the laws, what I think industries looking at, at least for two clients who have, who have advised u European Union is coming out with markets and Crypto Assets regulation Mik and they’ve published a lot of documentation on that. And just, just to show, the parallel between the EU and the Caribbean at the moment now Mica defines a Crypto asset as a digital representation of value or rights that may be transferred and stored electronically using distributed leisure technology or similar technology. Now that’s almost parallel to what the Eastern Caribbean central banks model legislation has. That’s almost parallel to what the draft B v I legislation is. And it’s almost identical to what the Cayman lawyers do, so I think EU regulation and EU case law are going to be looked at because there’s more volume in the EU, to be frank. There are more people in Luxembourg and Estonia, France, Switzerland, et cetera, who interface more with Crypto than in the Caribbean by my count at least. So that sort of regulation and re-regulatory responses, to that particular set of affairs, I think is going to impact any likely amendment to practice and or procedure in the Eastern Caribbean.
DERREN JOSEPH:
Okay, all good. I think these are all good, but you know, my original concerns remain about the reputational risk and especially in light of what happened recently. I know that obviously as you, as you pointed out, other jurisdictions have had other controversies as well, but somehow because of, the unique history of the Caribbean, things are being painted differently. And, and hopefully, this would mark the beginning of a step change, but, but, but we’ll see. I’m looking for any questions and I’m not seeing any questions either here or on Facebook.
MIKHAIL CHARLES:
Anything on LinkedIn or
DERREN JOSEPH:
No, nothing on LinkedIn either. So what, any parting remarks as we wrap up?
MKHAIL CHARLES:
I think apart from fraud, the biggest area of concern would be insolvency. Mm. And you know, when an exchange collapses, what happens? So for example, Crypto, the Crypto asset of claims in New Zealand where New Zealand’s high code of memory serves held at cryptocurrencies were properly held on trust for the depositors and were not available for distribution to unsecured creditors generally. So there, there would be disputes there, but that has already been addressed in the Eastern Caribbean. And there there’s a case called, I think I would’ve written four HTJ.tax in respect of this, the Phillip Smith and Jason Cardi joint liquidators of talk group holdings. And in that case, justice Wall Bank more or less held that Crypto Assets are to be considered Assets for liquidation. Cuz when I exchange collapses, there isn’t going to be much fiat what’s going to be, they’re going to have a lot of wallets with public addresses that hold the proceeds and those wallets could be accessed by private keys. So what, what Justice Walbank held in that case, and that’s in paragraphs 30 to 32. And at Reid now applying the analysis, and this is Justice Wayback speaking, employed by the United Kingdom Judicial taskforce, this would indicate that the Crypto Assets in the user trading wallet are Assets of the company within the estate. In giving this indication, it’ll be open to any stakeholder with an interest in the user trading wallets to seek to have this quote come to an alternative conclusion. By contrast, the user personal wallets did not involve users transferring Crypto Assets to wallets that were controlled by or that belonged to the company. The provision of the user’s wallets was a separate service offered by the company to its users. The users utilize the company’s platform as a hosting service and the company would not have access to a knowledge of the private key despite the private key being generated by the company’s platform. I find it likely that the owners of the Crypto Assets within the personal user wallets are or are the individual users. So basically, what does this Wall Bank saying that look, this exchange, you have user trading and a user personal, what’s in the user trading that could be split up used by the estate, insolent estate? What’s in the personal because the company didn’t have any direct knowledge of what was in there, that’s to be out. So this demonstrates the ability of the Eastern Caribbean Supreme Court p v I division by analogy because it’s one court, but with each circuit where the judges rotate, and of course, each of the member states and territories has access to the commercial division. What this demonstrates is that our courts as a leading common law court can give remedies in insolvency to those exchanges that may go bust to individuals who may have issues with or that require remedies under the common law to an exchange or against an exchange or to a trade or against a trader. So I think apart from fraud, insolvency would be big, would be big so to speak going forward over the next year or so. And finally, consumer protection. Now in St. Vincent and the GRA Edens, we have seen a lot of complaints against LLCs and BIBCs or BCS as you know who engage in trading and there isn’t much recourse apart from getting a judgment against them in the high court. But once a Virtual Assets act comes on stream or is commenced because it’s already passed and those exchanges are trades are regulated because of the prospectus that they would have to give and because of the statutory bond, et cetera, there is a greater chance of a remedy to a consumer of that entity. And I think that two ladders in solvents and consumer protection, I think those two things are going to be great benefits as a result of the regulatory responses to Crypto across the Eastern Caribbean and further in the Commonwealth Caribbean. But hey, take advice, take legal advice, and of course, take proper accounting and structuring advice from, you know who I wish, I wish, I wish all well. It’s a new and exciting time in the common law world and of course, I’m indeed very curious about accounting issues, especially in transfer pricing, et cetera that I know. I’ll leave that in your capable hands and I’ll hand.
DERREN JOSEPH:
Thank you very much for your candid and insightful exploration. Indeed what is controversial, is topical, but it is necessary. Thank you very much. And thank you to those who have joined us on the various streaming platforms. We appreciate your time. Feel free to reach out to us at HTJ.Tax should you have any questions, comments, or ideas. Thank you very much. See you next time.
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Treatment of Virtual Assets (Crypto and NFTs)
VOICEOVER:
We invite you to attend the January 2023 Nomad Offshore Summit here in Lisbon, Portugal,
INTRO:
This podcast’s channel is about you, successful international Entrepreneurs, successful Expats, and successful Investors sponsored by HTJ.tax
DERREN JOSEPH:
All right, so to those who may be joining us live, and to those who are watching this video, because it is being recorded, welcome to HTJ.Tax, where we talk about all things international tax. We try to demystify the sometimes confusing world of cross-border compliance and tax planning. If you’ve not joined us before, you can have a look at HG taskforce slash events because we do these live streams almost every week, and we try to publish a video every day on YouTube as well as wherever you’d find your favorite podcast. So whichever podcast platform you use, chances are we published there as well. We have over 2000 videos on our YouTube channel. We have no over a thousand videos, sorry, and over 2000 articles on our website, HTJ Tax. So today we have the honor and privilege of having another conversation with the illustrious barrister, Michel Charles Mickel. Please introduce yourself to those who may not already know you. You’d have to unmute yourself because you’re on mute.
MIKHAIL CHARLES:
Derren. Thank you. And good morning, good evening, wherever you are. And to all our followers, I, do know that, whenever we speak about matters, Caribbean Offshore/UK, they’re usually a flurry of questions, and I hope that we can get the discussion kicked off. So my name is Mikhail Charles. I’m a barrister practicing out of three board court chambers in the jurisdiction of England Wales, but I’m also admitted in practicing in most of the Eastern Caribbean, that’s defined as nine member states and territories. I am admitted in and practicing in Grenada, St. Vincent and the Grenadines St. Lucia, St. Kits and Nevis, also known as St. Christopher Nevis, and the British Virgin Islands. I have also been associated with a firm, a leading firm in Antigua and Barbuda, as well as the Turan Caicos Islands and some so practitioners out of the Cayman Islands. All of that to see is that I’m interested in solutions, which is why I continually hang out and do some great work with HTJ.Tax. Today, we were speaking, about the topic for today is the treatment of Crypto or NFTs, or as we would term it, Crypto Assets across the Eastern Caribbean and the Cayman Islands. But I think first to sort of set the set temperature or set the tone for today, we need to understand why Crypto Assets, what they are, why they’re important in society, and how they’re currently being treated, or the regulatory responses. So, I think over the past three years or so, Crypto has further exploded. I mean, thinking back to June 2020, there were well over 5,500 types of Crypto Assets and more than 270 Crypto asset exchanges available online. Now, in almost, a fun way, the amount of Crypto Assets doubles or changes almost every year. And this is us going back as far as January 2008 with the launch of Bitcoin. And they are the most popular type of Crypto out there. And they do hold and Bitcoin holds the majority of global market shares. But why regulate? And you, when we talk about regulation, what does that mean? Now, because digital Assets are increasingly important in modern society, they use for expanding variety of purposes. And that could be paid to be represented or to be linked to other rights of things. Something like Crypto, electronic signatures, cryptography, smart contracts, distributed ledgers, and associated technology. They have broadened the way that digital Assets can be created, accessed, and used. Now, the clash between digital Assets and the law comes in how it is to be treated. Is it property, or is it not? Is it something else? And I think that’s the strength of the Caribbean or the Commonwealth Caribbean jurisdictions that base their legal systems on English law because it has been held to be property, or at least to have the indicia or features of property. Just rounding that thought off the law commission in, let me get my dates correct, the law commission earlier this, well earlier last year, but keep forgetting. In 2023 Law Commission earlier in 2022, July of 2022, put out a digital Assets consultation paper. And that paper was built on the work of the UK judicial task force, which put out a very influential statement as to the status of Crypto Assets. Now, why regulate now? The need for regu regulation is based on the use of Crypto Assets to transfer value. And one of the old illustrations of how to launder money using gold is you have a piece of gold. You say it’s valued like $1, but then you take it to another jurisdiction and cash out a hundred dollars. I, I know that’s a very broad example, but it’s something similar to that Crypto is worth as much as it’s worth because of the people who ascribe value to it. And because that value can fluctuate in a volatile way, it, and because it’s decentralized there, there’s so much potential for misuse and for, for re very real financial and other types of harm to be inflicted on companies and individuals. The failure of Crypto, Assets, and criminal prosecutions surrounding FTX, which I think has been the most prolific thing to happen in the past maybe six weeks or so to Crypto, reinforces the need for active regulation. Now, FTX is an Antigua company that is regulated in The Bahamas, but it’s, its liquidation is being administered in the US. So I’ll immediately, see at least three jurisdictions. And when you look at the court filings, there are well over a hundred different companies associated with FTX spread across the world.
DERREN JOSEPH:
Sorry, just Yep, that’s, that’s an input obviously that that is a high profile scenario. I mean, it’s not the first one, but perhaps it’s the company that, in the Crypto space has had the most far-reaching impact in terms of the number of people that have been inconvenienced in some way, shape, or form impacted. Right. But, the thing is that the Caribbean, as you pointed out, started down the road toward regulation even before that. So, my question is, so was there a particular incident that triggered this desire to regulate? Why not just leave it as is?
MIKHAIL CHARLES:
I, I think look back, to the context of AML CFTs, antimony laundering, counter financing of terrorism regulatory issues surrounding the Offshore space, stretching back into the late 1990s. And that round of blacklisting from the OECD spilling over to FATF spilling over to the EU. But coming back to the FATF in particular, now, the F A T F started recognizing the potential for the misuse of Crypto Assets U with the use of Offshore structures. And I think they, they sort of use the tax transparency initiatives to sort of springboard the need for regulation onto Caribbean governments. So there’s a FATF recommendation 15 out of a report that they did on Crypto, which suggests that regulation or at least regulation by registration should be mandated in Caribbean countries that have, that are popular Offshore centers whose structures are used in the Crypto space. So I, I think that was the impetus and it only came to the four, maybe about 2018 or so. And then we start seeing legislative responses in the Cayman Islands in 2020 where there Cayman Virtual Asset Service Providers Act, which gives a framework for the registration of Virtual asset service providers. And it also makes a series of consequential amendments to the antimony laundering and countering of the financing of terrorism legislation to provide a comprehensive framework for the registration of Virtual asset service providers, the types of, the types of Crypto Assets or Virtual Assets. And they use the term Virtual Assets very broadly because of the different types of Crypto Assets that can be deployed as a result of that. So, just, stepping back to the FATF of guidance for a little bit. Now, the name of that publication, or the name of that set of guidance was the guidance or risk-based approach to Virtual Assets and Virtual Assets service providers. And as recommendation 15. So under rubric new technologies, and deals with the international standards on combating money laundering and the financing of terrorism and proliferation. So that recommendation as well as the fat of guidance was heavily, heavily pushed across the Offshore world. And as a result of that, as we stated before 2020, you see K command bringing in their law. Then we see the Eastern Caribbean Central Bank called ECCB commissioning a consultant to make draft reg regulation or draft legislation called the Virtual Assets Act, which is very similar, if not materially identical in most parts to the Cayman Act. And that purports to be a model piece of legislation across the nine, well, no seven member states of the Eastern Caribbean Currency Union. So you’re talking from Anguilla in the north, even though it’s an overseas territory of Britain to Grenada in the South. But what we see is the politically independent states member states of the East CCB passing in, passing those laws, and bringing those laws into effect. So we see Grenada passing it in 2021 St. Vincent passing it in 2022, Antigua passing it in 2020, and I believe St. Kitson Nevis in 2021 and bringing it into effect more or commencing that law more or less immediately. They’re now into their Second Amendment, I believe.
DERREN JOSEPH:
So if I’m following you correctly, caiman was the leader, they were the first jurisdiction in the Caribbean, to come out with something of
MIKHAIL CHARLES:
Some sort of Yes, yes. And interestingly, PVI has not yet passed a primary piece of legislation. They’ve circulated a draft bill, which I can share on-screen if desired. They’ve circulated, a draft bill before the consultation into the industry. But what they’ve done as a stop-gap measure is amended their antimony laundering law as of December of last year. So December 2022, they amended the anti-money laundering law making any Virtual asset service provider. They’ll need to maintain client identification proceeding pro procedures, sorry, keeping KYC suspicious transactions. They need to have internal reporting procedures for suspicious transactions, the usual suite of things that a financial entity would have to do. But most interesting is that in the PVI as of December 2022, any Virtual asset service provider will be required to comply with the travel rule. And the travel rule means that for any transfer, so the originating and beneficiary Virtual asset service providers, you’ll need to obtain, verify, and maintain complete information, on that particular transfer. And intermediaries, you also have obligations to do that to show inflow outflow.
DERREN JOSEPH:
Okay. But does, do, it, does, does it also include audit requirements? So for example, the firm needs to be audited by a recognized practitioner, anything like that?
CHARLES MIKHAIL:
Not, not explicitly, but generally. So when I generally say because you have, you are under an obligation to maintain accurate accounting records for a minimum of seven years or so, your registered agent would be under a duty, to ensure that they have either with them a complete set of records or at your registered office or your place of business or even in electronic format, a complete set of accounts which can be inspected by the equip the local equivalent of the financial intelligence unit or the Offshore regulator. So in any event, that I think brings you within scope to be inspected at the very least.
DERREN JOSEPH:
Hmm. Well, okay, so in 2018, 2019, and 2020, when, the regulators and the various jurisdictions were having a look at this, everything was theoretical, right? So I guess they were looking at what’s going on in the UK or perhaps a less extent the US or whatever. And the discussions happening there. They got in their consultants, as you said, and they drafted what they hoped to be some sort of regulatory framework, but everything was theoretical. Now, suddenly as at the end of 2022, we, having this conversation in only 2023 is no longer theoretical and is real. And if we were to look at what happened in The Bahamas, I know we’re not discussing The Bahamas, but it’s obvious, it’s within the sphere of being in the Caribbean. And if we were to transpose it and to say that FTX or an entity like it was to been located in one of the other jurisdictions, which now have that regulatory framework, would it have been able to be caught? And it seems as if, and correct me if I’m wrong, the answer is no for two reasons. One, they, it’s, it’s not treated in the way like security would be in other jurisdictions where it would be subject to rigorous disclosure, and audit requirements. That’s the first thing. And then the second thing, I guess, when you mentioned that consultants had to be called in, the question is, do the local, the domestic financial services oversight bodies, do they have the skillset in-house in order to understand really what’s going on, far less impose or enforced any governance requirement?
MIKHAIL CHARLES:
Well, I think that’s a very broad question, and I think I’ll answer it this way. Yeah. Cause Crypto doesn’t necessarily display all the features of security. There’s often, the desire, the market desire, to not have a heavy hand in regulation. So for example, if we cast our mind back to, there was a report from Iosco, IOSCO, which is, it’s called the investor educational Crypto Assets. And that was published on the 23rd of December, 2020. They identify, and they and IOSCO is the general securities body. They identify risks within the Crypto asset market being market liquidity, volatility, partial total loss of the invested amount in insufficient information disclosure, and fraud. And their way of seeing, a resolution or solution to that would be for member states to develop educational content, inform the public about unlicensed or fraudulent firms to use a variety of communication channels, et cetera. But that is all broad. It doesn’t make granular recommendations as to how to achieve consumer protection. And I, and I think it, it, it goes back to an almost primal try. How do you regulate human nature, really the, wish, to get rich quickly balanced against, the risk or the need to protect one’s financial interests? And I think more to your point about the capacity of Caribbean regulators, I do think there’s capacity, however, even on, on a good day, onshore regulators aren’t able to necessarily have a microscope on the activities of, large Crypto asset exchange platforms. So take, for instance, Binance. Binance is, is a keyman-domiciled exchange. It’s one of the world’s largest, however, the FCA in the UK would’ve, from time to time imposed withdrawal bans in the United Kingdom, stopped notices required more information or other assurances to be given as a regulatory response that has been mirrored in keyman, that has been mirrored in St. Vincent, that has been mirrored in if memory serves the BVI, where the regulators in each of those islands upon a complaint, a substantiated complaint from a consumer client have made changes or have made regulatory responses to the activity of a particular Crypto exchange or a Crypto trader. So I think that broadly, I think, answers your question in terms of capacity. I mean, there’s always a need for more technical capacity, but really and truly, there isn’t much that can be done even in onshore jurisdictions to, control the actions of or ramifications of a Crypto exchange acting in a particular manner.
DERREN JOSEPH:
So, you, I guess you can probably guess where I’m going with this. I mean, within recent memory alone, we’ve had 2016, the Panama Papers, 2017, the Paradise Papers, and 2021 Pandora papers. So the Caribbean is an Offshore jurisdiction as a whole. I know that they’re very different in independent jurisdictions, but in the mind, of other geographies, they see it as one amorphous space. And, and it, the, the impact on reputation has been severe, has, has been incredibly severe. And one can argue that it doesn’t show any, signs, of turning around itself. Because even though, you know, I just noticed that in the, in the, in the press coverage of the FTX situation, and again, I, I don’t want to cast this Persians because it’s, it’s subject to review and, you know, there’s an independent investigation and so on, going forth, going on. But there is a sense that things weren’t quite correct. And as part of that reporting, they’d never failed to mention that he was in the Caribbean. And as if, as if somehow being located in the Caribbean made, created a predisposition for irregularities, you know, the why, why wasn’t he onshore? He’s American, and his team and his leadership team are all American. Why didn’t they come onshore? They went to the Caribbean for a reason. And yeah. And it just seems, and, and some, and some parts of the Caribbean have been damaged irreparably. I think, and, again, I’m not casting as Persians just anecdotally of, of course, thinking of Belize and Panama’s jurisdiction. Yes, you can, you can create entities, but good luck in finding a reputable bank, willing to deal with them. And that, that contagion is, you know, I guess as someone with an interest in the jurisdiction, it just seems to me cause for concern. And if it is, okay, so their regulation is relatively fresh on the books, and looking at it, we know, or I mean we don’t know, but we can speculate that it has no teeth in the sense that it would not prevent something like that from reoccurring then yeah, it doesn’t look good. And when I was on a call yesterday, another one of these, and we were discussing other jurisdictions and we note, the ascent of the United Arab Emirates, and they had similar reputational challenges. They were on a blacklist. I think they’re still maybe on a gray list depending on which gray list you’re looking at the list, I think. But they seem to be taking decisive steps to turn it around, you know, the oversight, even in the free zones, you, there’s some reporting required all of a sudden where historically there wasn’t that 9%, the 9% corporate tax, I think, yeah, the 9% corporate means that they’re playing ball. They’re, you know, they’re, they’re listening to what they’re being told by, by OECD countries and banking, because it, it’s like a pairing, right? Like, like, like wine and meal. You need to pair them together. And entity formation and banking, index, index, inextricably linked, I’m sorry. And I note that the UAE banks are, they’re perhaps overreacting, but they are trying hard to get their act together and, and to be, you know, more mindful of the type of clients they’re onboarding and so on. Now that stands in sharp contrast, and I’m sorry to join the comparison, but I do think it’s relevant. It stands as a shop contrast to what’s going on in the Caribbean. There’s been reputational slippage over the past few years. And then in tandem with that, we’ve seen press coverage of the exodus of banks. So at least from the English-speaking Caribbean, which is what we’re talking about. So mainly car Canadian banks and, you know, squish bank, commerce Royal Bank, they are heading in the opposite direction rather than investing in words, they are packing up shop, doing fire sales, and they’re running for the hills. So yes, there’s regulation I, and so I’ve said all that, there’s context, right? So yes, there’s regulation, but, I don’t mean to be too contentious, but how useful would this regulation be if the intent is to nurture and grow a struggling Offshore financial services center?
MIKHAIL CHARLES:
Well, I think firstly, and, and maybe putting my pride aside as a Caribbean practitioner, I would agree there has been some reputational slippage. But what I don’t agree is with, the legal arbitrage that has arisen. I’ve been in practice now for 10 years, and what I, can see comparatively between Offshore and onshore is that the Caribbean is a well-regulated and well-run set of jurisdictions. So take for example, the BVI, the BVI has the boss system, or the beneficial ownership search system, which is disclosable only to authorized persons. And that sort of thing is replicated throughout the Eastern Caribbean. In St. Vincent in particular, you are not able to get information a, on the beneficial ownership of companies unless that information is requested either by court order or by the unauthorized law enforcement authority. So we have moved away from being the traditional secrecy jurisdictions to one-off, I would say benevolent privacy. And I think that is a fact that is not trumpeted more, a lot of these assumptions on a lot of these, what I would term aspersions against Caribbean jurisdictions, are not grounded. What it is grounded, it is feeling this is very motivating to say, oh, a billionaire is using a Caribbean jurisdiction to stash money away. And that’s taking money away from hospitals and the rebuilding of roads and the feeding of small children in remote parts of an onshore country. Sympathetic as that argument may be, it’s not bare b born out on the facts and the many different, more esteemed practitioners than I am, especially since there’s a chap in the B V I who’s of Canadian extraction, and, and he has for the past, I think 20 years or so, I’ve been following his, his writings, he has been consistent in demonstrating that the drum that most of these NGOs are banging is simply hollow and it is hollow because of the type of regulation and the type of capacity that exists on the island. And that is something that is demonstrated in c FATF reports, FATF reports, or OECD reports. But, but, but conversely, the EU doesn’t seem to have that position and the EU cog seems, to have a position that is purely political as opposed to empirical and, to come home to the Crypto point, the feelings of a particular exchange as a result of the actions or the nefarious actions of a set of individuals. Fraud is fraud. That is individual responsibility. That is the misuse of the corporate form. That is a deliberate crime. Now you may say, well why the Caribbean as opposed to elsewhere? But that doesn’t, that’s not an empirical answer in my view, because in the Caribbean you have had maybe two or three Crypto exchanges failing versus the Crypto exchange is failing in us in the UK, elsewhere in the commonwealth world like Singapore. Yeah, yeah. I mean, financial failure is not unique to the Caribbean. Financial fraud is not unique to the Caribbean. What seems to be unique is the type of press coverage. What seems to be unique is the lack of a thorough investigative approach. And what seems to be unique is the description of the investigations and the outcome of those investigations by leading, leading newspapers and leading commentators. Look, let’s get done. Let’s be frank. You come to the Caribbean because you want light touch regulation, you want the benefit of the climate and the location, and you want that cool factor. There’s a reason why you come to the, and the Caribbean has been at the center of international finance and commercial commerce since the years of slavery. That’s how the Czech start got its popularity, the bill of sale, Lloyds of London. That’s how they all got their popularity through the use of the Caribbean. So we are not a newcomer to international finance, but what we have been known for is the ability to stick to the rule of law. And that ranks certain, I would say, I would say left-wing, but this is the political shoe, but it, it, it disturbs certain, certain sectors of non-Caribbean society.
DERREN JOSEPH:
Okay, f fair enough, fair point. So we are where we are and even though the actual, you know, the actual management and control of these entities, well the FTX is kind of like an exception. They tend to be elsewhere. They, the structures do take advantage, of what you, of what you’ve said, what the Caribbean has to offer that light touch. And that’s, that has its pros and that has its cons. So, we have this regulation and it will, it will do what it does which will continue, the philosophy of being light touch as we go forward.
MIKHAIL CHARLES:
And I think let’s, let’s not, let’s take view that legislation is not fixed in stone. So I mean, look, the BVI has circulated a draft bill, it’s now for the industry to comment on that and then to have a finalized version, which will be brought into effect. The ml set of laws has already been amended as of December 2022. Now let’s look at St Kit and Nevis. They passed their Virtual Assets act and brought it into effect in 2020, but they have already amended that twice, right? The last time was in 2021. And that was to streamline Virtual Assets. So what are the reporting requirements for a Virtual asset service provider in respect of AMLCFT? Cuz it wasn’t clear. So, this legislation is not set in, in stone. And I think that’s, it’s a testament to our legislative responses. I mean, I would critique most of the Caribbean as being slow in terms of legislative responses, but the point is that there is a response that can be made where there is risk and that’s why the FATF has labeled any legislative response to be risk-based. Now naturally as a result of the fix, that risk is now going to be heightened. But that is why every two years or so, there’s a wrong of evaluations by the F A T F whereby, the local authorities for each island are evaluated and can raise or lower legislative responses if necessary.
DERREN JOSEPH:
Okay, so,
MIKHAIL CHARLES:
So there is a range of things that can be done and will be done in respect of the handling of Crypto or the treatment of Crypto Assets. Crypto, I think as we’ve spoken privately, Crypto is, is a leveler at the legislative level and even at the practitioner level cuz it’s something completely new. It, resembles the old in that the indicia of what it means to be property, what it means to be, sorry, what it means to be property, what, what, how can it be held?
Is it solid, or is it gas? That kind of thing. But then, the common law, the strength of the common law has shown through and there’s a, there a wide range of things that you one can do as an individual either at the regulatory level or the litigation level if you want a remedy.
DERREN JOSEPH:
So I have a question, could I follow each of these jurisdictions in question that have approached it in their way? So what distinguishes one jurisdiction from another? So for example, if someone is an entrepreneur or a trader or they wanna set up an exchange or, whatever it may be, why should they choose one jurisdiction over the other? So for example, in Dubai, in the emirate, sorry, all in, you probably have like 45 free zones, but you know that certain free zones are good for this. If I wanted to set up this type of project, this is the free zone I need to go to. If I want this type of structure, I need to go to the other and, and so on. Is there any such distinction within, these Caribbean jurisdictions?
MIKHAIL CHARLES:
I would think not really. I and I explain why. So for example, the distinction would come from not necessarily legislative response because the laws are broadly identical anyway, Keyman, B v i, the, Model East, and the Caribbean central bank bill, all have a common definition of what a digital, what a Virtual asset is, being a digital representation of value that can be digitally traded or transfers and can be used for payment or investment purposes, but does not include a digital representation of fiat currencies or a digital record of a credit against a financial institute of fiat currency. So that excludes CBDs. So for example, in the eastern Caribbean, you have the cash, which is digital cash, which is a digital representation of the Eastern Caribbean dollar, or in The Bahamas, you have the sand dollar, and so on. So, so broadly they have the same definition. They cover the same thing. So Virtual asset service provider, VASP, that’s a common acronym between Cayman and the BVI and it’s a v an I think versus Virtual Assets VPI think in the Eastern Caribbean. So it’s, they’re broadly similar. So the differences come in terms of what exactly is the aim of the person who is setting up a Virtual asset service provider. So for example, in Cayman and BVI, you initially brand name value. So Cayman and BVI, I have the largest amount of ancillary support services in the Caribbean, Offshore world Cayman, you have the big six also big firms that also span Bermuda, London, Singapore, Hong Kong, and the BVI themselves shall the big law firms and the brand name value of Cayman and BVI. But if you are looking to be more of the, of, of the books, or lemme not, lemme not say off the books, see I’ve already said fraud, but off the beaten path you have the more, I would say the more gem-like, or the poorer like jurisdictions, St Vincent, St Kitan, nivas that is smaller. You, tend to find more traders, you tend to find much more traders in these jurisdictions as opposed to Crypto exchange platforms which are bigger and would require naturally something of a more brand name. So I think that’s a central difference as to the effect of deregulation. What I’ve noticed is that Nevis in particular, Nevis has a very high fee, I think it’s something like 55,000 Eastern Caribbean dollars for the application fee and a hundred and something thousand for the license. St. Vincent has not yet commenced its application for the Virtual Assets Act. So we don’t know what, the application fees are. Antigua is roughly the, roughly the same. So it’s roughly about maybe what’s that conversion like about 25,000, about 25,000 us. So less than what’s Bitcoin at now? That’s like 1.5 bitcoins for the application fee and maybe, maybe roughly about nine bitcoins for, for an annual license. So, you know, it, it’s, it’s not that unmanageable for, for successful traders depending on the market is, not notwithstanding its volatility. But there are opportunities for the discerning trader and of course consumer protection. A big aspect of the regulation is about consumer protection. And you could only get your license under the act if you provide a prospectus with details of dispute resolution mechanisms. And of course, there’s also a statutory bond. So in the Eastern Caribbean, there’s also a statutory bond. So if the trade or the corporate entity goes bust, there’s at least some money available to go out, in a liquidation. So, the state isn’t left high and dry so to speak. So for example, in St Vincent, that statutory bond is a hundred thousand Eastern Caribbean dollars, which is about 50,000 us. So that’s, that’s just held in escrow by the state and you get that back when, when you wind up your business. So, the range of things that the legislation provides for, which I think are a useful response to the more shady side of the Crypto asset world. So maybe let’s just signpost and say the treatment of Crypto Assets in the Eastern Caribbean and broader Caribbean is that, well it’s recognized, it’s regulated and it’s used and it’s a matter of an individual taking legal advice which would be tailored to their particular instances to understand the pros and cons for them.
DERREN JOSEPH:
Okay, all, all, all feeling good. This perfection doesn’t exist. There’s no situation that is perfect anywhere, but at least concrete indecisive steps have been taken and, and continue to be taken because as you said, it’s not static. So steps continue to be taken to provide the protection and regulation that is quite needed.
MIKHAIL CHARLES:
I think maybe going back to an earlier point on amendments to, the laws, what I think industries looking at, at least for two clients who have, who have advised u European Union is coming out with markets and Crypto Assets regulation Mik and they’ve published a lot of documentation on that. And just, just to show, the parallel between the EU and the Caribbean at the moment now Mica defines a Crypto asset as a digital representation of value or rights that may be transferred and stored electronically using distributed leisure technology or similar technology. Now that’s almost parallel to what the Eastern Caribbean central banks model legislation has. That’s almost parallel to what the draft B v I legislation is. And it’s almost identical to what the Cayman lawyers do, so I think EU regulation and EU case law are going to be looked at because there’s more volume in the EU, to be frank. There are more people in Luxembourg and Estonia, France, Switzerland, et cetera, who interface more with Crypto than in the Caribbean by my count at least. So that sort of regulation and re-regulatory responses, to that particular set of affairs, I think is going to impact any likely amendment to practice and or procedure in the Eastern Caribbean.
DERREN JOSEPH:
Okay, all good. I think these are all good, but you know, my original concerns remain about the reputational risk and especially in light of what happened recently. I know that obviously as you, as you pointed out, other jurisdictions have had other controversies as well, but somehow because of, the unique history of the Caribbean, things are being painted differently. And, and hopefully, this would mark the beginning of a step change, but, but, but we’ll see. I’m looking for any questions and I’m not seeing any questions either here or on Facebook.
MIKHAIL CHARLES:
Anything on LinkedIn or
DERREN JOSEPH:
No, nothing on LinkedIn either. So what, any parting remarks as we wrap up?
MKHAIL CHARLES:
I think apart from fraud, the biggest area of concern would be insolvency. Mm. And you know, when an exchange collapses, what happens? So for example, Crypto, the Crypto asset of claims in New Zealand where New Zealand’s high code of memory serves held at cryptocurrencies were properly held on trust for the depositors and were not available for distribution to unsecured creditors generally. So there, there would be disputes there, but that has already been addressed in the Eastern Caribbean. And there there’s a case called, I think I would’ve written four HTJ.tax in respect of this, the Phillip Smith and Jason Cardi joint liquidators of talk group holdings. And in that case, justice Wall Bank more or less held that Crypto Assets are to be considered Assets for liquidation. Cuz when I exchange collapses, there isn’t going to be much fiat what’s going to be, they’re going to have a lot of wallets with public addresses that hold the proceeds and those wallets could be accessed by private keys. So what, what Justice Walbank held in that case, and that’s in paragraphs 30 to 32. And at Reid now applying the analysis, and this is Justice Wayback speaking, employed by the United Kingdom Judicial taskforce, this would indicate that the Crypto Assets in the user trading wallet are Assets of the company within the estate. In giving this indication, it’ll be open to any stakeholder with an interest in the user trading wallets to seek to have this quote come to an alternative conclusion. By contrast, the user personal wallets did not involve users transferring Crypto Assets to wallets that were controlled by or that belonged to the company. The provision of the user’s wallets was a separate service offered by the company to its users. The users utilize the company’s platform as a hosting service and the company would not have access to a knowledge of the private key despite the private key being generated by the company’s platform. I find it likely that the owners of the Crypto Assets within the personal user wallets are or are the individual users. So basically, what does this Wall Bank saying that look, this exchange, you have user trading and a user personal, what’s in the user trading that could be split up used by the estate, insolent estate? What’s in the personal because the company didn’t have any direct knowledge of what was in there, that’s to be out. So this demonstrates the ability of the Eastern Caribbean Supreme Court p v I division by analogy because it’s one court, but with each circuit where the judges rotate, and of course, each of the member states and territories has access to the commercial division. What this demonstrates is that our courts as a leading common law court can give remedies in insolvency to those exchanges that may go bust to individuals who may have issues with or that require remedies under the common law to an exchange or against an exchange or to a trade or against a trader. So I think apart from fraud, insolvency would be big, would be big so to speak going forward over the next year or so. And finally, consumer protection. Now in St. Vincent and the GRA Edens, we have seen a lot of complaints against LLCs and BIBCs or BCS as you know who engage in trading and there isn’t much recourse apart from getting a judgment against them in the high court. But once a Virtual Assets act comes on stream or is commenced because it’s already passed and those exchanges are trades are regulated because of the prospectus that they would have to give and because of the statutory bond, et cetera, there is a greater chance of a remedy to a consumer of that entity. And I think that two ladders in solvents and consumer protection, I think those two things are going to be great benefits as a result of the regulatory responses to Crypto across the Eastern Caribbean and further in the Commonwealth Caribbean. But hey, take advice, take legal advice, and of course, take proper accounting and structuring advice from, you know who I wish, I wish, I wish all well. It’s a new and exciting time in the common law world and of course, I’m indeed very curious about accounting issues, especially in transfer pricing, et cetera that I know. I’ll leave that in your capable hands and I’ll hand.
DERREN JOSEPH:
Thank you very much for your candid and insightful exploration. Indeed what is controversial, is topical, but it is necessary. Thank you very much. And thank you to those who have joined us on the various streaming platforms. We appreciate your time. Feel free to reach out to us at HTJ.Tax should you have any questions, comments, or ideas. Thank you very much. See you next time.
OUTRO:
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Table of Contents: Treatment of Virtual Assets (Crypto and NFTs)
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