BTSE details shift to BVI as UAE central bank tells The Block the crypto exchange startup doesn't fall under its 'jurisdiction and regulations'

Crypto exchange BTSE said earlier this week that it has “been gradually transitioning to the British Virgin Islands” since last fall amid uncertainty around the regulatory environment in Dubai.

That statement – contained in a newly-published blog post – came as The Block sought clarity on the exact nature of the regulatory licenses that BTSE has received to date. These efforts included contacting the central bank of the United Arab Emirates and the Department of Economic Development of the Government of Dubai. 

BTSE’s move is indicative of a wider factor facing many crypto startups today: an ever-shifting regulatory landscape, and the steps taken by some to navigate such an environment. It’s that state of affairs that has made places like the British Virgin Islands (BVI) and the Cayman Islands, among other places, popular destinations for crypto firms. But the opaque nature of regulation in those parts of the world, too, has invited criticism as well.

In response to critics who alleged that BTSE was operating an unlicensed crypto exchange, BTSE posted a blog post on its website on December 28, writing that it is “licensed by the Department of Economic Development, Government of Dubai” and is “under the regulations of the Central Bank of the United Arab Emirates.” BTSE revealed earlier that month that it was seeking to raise $50 million via an exchange token sale on the Liquid Network, a sidechain settlement network created by Blockstream.

As the blog stated:

Source: BTSE blog post 

The BTSE website's footer also previously mentioned that it is "under the regulation" of the central bank.

Notably, this information has since been removed from the footer, as The Block sought clarity. The footer change took place on Thursday.

A representative for the UAE’s central bank told The Block that BTSE is “not licensed” by the central bank and that “it does not fall under CBUAE jurisdiction and regulations.”

When reached for comment about the central bank’s statement, Jonathan Leong, co-founder and CEO of BTSE, told The Block: "BTSE UAE is licensed by the DED (Department of Economic Development) and follows the highest standards of compliance and internal controls by complying with the applicable legislation as well as other AML/CFT [ Anti-Money Laundering and Countering Financing of Terrorism] regulations set forth by the CBUAE."

BTSE, on its website, says it has two licenses: a commercial broker license and a payment services provider license from the DED, Government of Dubai. These licenses, however, do not allow a firm to carry out crypto exchange services, a spokesperson of the DED told The Block.

“No, they [licensed commercial brokers and licensed payment services providers] are not allowed to conduct the business of crypto exchange,” the DED spokesperson said. 

An inquiry from the DED's customer service department confirmed the same: "No, it is not allowed as it is not included in the activity description of their license activities."

BTSE published its newest blog post after The Block followed up and sought comment on the remarks issued by the DED.

Per information published on the DED website, commercial brokers include “firms engaged in bringing sellers and buyers involved in wholesale and retail trade together in return of a commission or remuneration, these firms are neither allowed to trade on own account nor practice brokerage in real estate, services, shares and bonds and finance.”

According to the same documentation, payment services providers include “firms engaged in providing payment services on behalf of payment industry members such as banks, telecommunication companies, public departments and others, whether via payment kiosk or mobile phones, the process involves network establishment and technology provision, supply of payment tools as well as hardware and software, data center setup.”

Leong told The Block that the exchange’s commercial broker license supports “multi-currency order book with eight different fiat currencies, one of the highlight features of BTSE.”

According to information from the DED website, BTSE’s commercial broker and payment services provider licenses expire on Sept. 18, 2020.

Source: DED

Goodbye Dubai?

In the Wednesday blog post, BTSE said that when the exchange company was formed, “we were advised that Dubai was considering a regulatory framework for cryptocurrency exchanges which would be ready within about a year. We were further informed that the Commercial Brokers and Payment Services Provider licenses would suffice in the interim. By September 2018, we had finalized the paperwork for two entities and proceeded to integrate banking solutions to power our fiat on- and off-ramps.”

BTSE went on to note that “as many in the cryptocurrency space are well aware, crypto regulations are far from stable and often very uncertain, even when regulations in a region have already been formed.”

"By mid-2019, while rumors of an upcoming regulatory framework were still circulating, we had not yet seen any concrete progress from Dubai regulators in penning actual legislation," the exchange said its blog post, explaining:

"Since we are constantly working on the development of products and services to enhance the user experience of our customers and grow BTSE’s suite of services, we decided that continuing BTSE’s operations under the existing framework would not be feasible in the long term. That is why in October 2019, we formed BTSE Holdings Limited in the British Virgin Islands, a country that has welcomed cryptocurrency businesses in recent years, thanks to its friendly regulatory environment."

To be sure, there is no dedicated crypto law in the UAE as of today.

The only authority that currently regulates crypto firms in the country is Abu Dhabi Global Market (ADGM)’s Financial Services Regulatory Authority (FSRA), Christopher Gunson, partner at Dubai-based international law firm Amereller, told The Block.

ADGM is an international financial center located in the UAE's capital city, Abu Dhabi. In 2018, ADGM issued a regulatory framework, which requires crypto firms operating in or from the center to get licensed from the FSRA.

“Crypto Asset Exchanges are regulated in a similar manner to how the FSRA regulates ‘Multilateral Trading Facilities’ (MTFs), and are required to have in place, among other things, the following: Market surveillance; Fair and orderly trading; Settlement processes; Transaction recording; A rulebook(s); Transparency & public disclosure mechanisms; and Exchange-like operational systems and controls," per the framework.

When asked if BTSE planned to get a license from ADGM’s FSRA, Leong told The Block: “BTSE maintains open communication channels with regulatory bodies and will continue to ensure its structure constantly evolves for the benefit of the security and safety of its users.”

Indeed, another crypto exchange in the region – the venture-backed BitOasis – operates in a similar kind of limbo. 

BitOasis, which received a preliminary nod from the FSRA of ADGM last April, is also not officially licensed yet.

“We are expecting to have the green light to operate under the licenses from ADGM as an exchange and custodian this year as we're still working closely with the regulators to finalize our licensing,” the company told The Block, adding: “Our aim is to migrate all our activities under ADGM in 2020 while assessing other jurisdictions for expansion to serve customers outside the Middle East region. We're also currently looking at Singapore given its friendly regulations and the proximity to our market.”

In spite of the current climate, BTSE indicated in its post that it wasn’t closing the door on Dubai entirely.

"The atmosphere in any country can rapidly change from friendly to unfriendly, and vice versa," said BTSE, adding that it has been "gradually transitioning" to the British Virgin Islands. "We do not rule out the possibility of continuing to utilize certain Dubai entities for ancillary offerings unrelated to that of a cryptocurrency exchange," it concluded.

Crypto in BVI

BTSE noted the fact that it is incorporated in the British Virgin Islands (BVI) in its December blog post, stating that this approach was taken to carry out ITS crypto exchange business. BTSE wrote that it “does not require a license” in the region because “digital assets traded on BTSE do not meet the definition of ‘investment’ under the Securities and Investment Business Act (SIBA) of the BVI.

"The major mission of BTSE UAE is to provide relevant services to support the crypto exchange business of BTSE BVI, i.e., BTSE Holdings Limited (Registration No.: 2023577), which is a company incorporated in the British Virgin Islands and owning and operating the BTSE VFA Exchange Platform, as we already addressed in our Terms and Conditions," BTSE wrote at the time. "As long as the digital assets traded on BTSE do not meet the definition of “investment” under the Securities and Business Act of the BVI, such crypto exchange business does not require a license in the British Virgin Islands."

It is a “legal opinion from BTSE's external legal counsel,” Leong told The Block.

An independent verification appears to be confirming the claim. "Generally speaking, if the asset does not meet the definition of an 'investment' then dealings in it itself should not be caught by SIBA. However, one needs to be careful as derivative instruments (futures, options, CFDs [contract for differences] etc., sometimes SAFTs [Simple Agreement for Future Tokens]) relating to crypto assets might be caught as investments (even if the underlying token isn't one)," Michael J. Killourhy, a partner at BVI-based award-winning law firm Ogier, told The Block.

Source: BTSE blog post 

Like the UAE, the BVI also does not operate under dedicated crypto laws at this time.

Simon Gray, head of business development and marketing at government agency BVI Finance, told The Block: “The BVI Government and the Financial Services Commission (FSC) have adopted a ‘wait and see’ approach to regulation which continues to be the best approach as the sector matures and develops itself. Indeed the FSC announced its new progressive FinTech and Sandbox regime in 2019, and is designed to build on this growing trend. Ultimately, the BVI is dedicated to ensuring that the great minds looking to develop smart assets are not stymied by unnecessary bureaucracy in this process."

Killourhy told The Block that whether a crypto exchange is subject to regulation in the BVI "would chiefly depend on the nature of the items being traded."

According to law firm Appleby, exchanges of "pure utility tokens do not generally require licensing in the BVI," while for security token exchanges, the act provides a "regulatory regime for obtaining a license to operate an investment exchange that follows the same, oft-used path as other investment businesses."

Appleby added that "most security tokens would be expected to fall within the SIBA. However, as a result of the act’s more prescriptive approach to defining investments (in particular when compared to more generalized tests such as the US Howey Test), certain tokens deemed generally as security tokens may, in fact, not fall within the SIBA’s ambit."

The BVI is currently one of the more popular locations for crypto firms to set up shop. Lax regulations and several advantages, such as the absence of capital control and tax neutrality as compared to other regions, have led several firms in the sector to incorporate in the BVI, including crypto exchange Bitfinex, and most recently, non-custodial exchange KyberSwap. 

Dubai-based BitOasis is also incorporated in the BVI but confirmed that it does not have a license in this region as well when reached.

“While we're compliant we do not have crypto specific exchange licenses as the jurisdictions we operated in did not have crypto licensing frameworks for our activities until recently (ADGM). ADGM's licenses would be the first crypto exchange specific licenses we would acquire,” BitOasis said.

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