Anguilla: A Crypto Regulation Haven for Utility Tokens
Table of Contents
- Overview of Anguilla’s crypto regulation
- Anguilla Utility Token Offering (AUTO) Act
- Anguilla Utility Token Exchange Act
At first glance, Anguilla appears an unlikely safe haven for the fostering of crypto asset projects. However,don’t be fooled by its image as a lazy Caribbean paradise. Since 2018, the Anguillan government has enacted world-leading legislation to advance the cause of Initial Coin Offering (ICO) projects, at a time when these fundraising tools faced increasing animosity from regulators worldwide.
This article takes a closer look at the regulation of cryptocurrencies and ICOs in Anguilla, and takes stock of two cryptocurrency legislative acts that have helped turn this island into a crypto-friendly hub:
- The Anguilla Utility Token Offering (AUTO) Act
- The Anguilla Utility Tokens Exchange Act
In 2018, Anguilla issued world-first legislation for the regulation of cryptocurrencies. The Anguilla Utility Token Offering (AUTO) Act drew a clear distinction between crypto securities and utility tokens in order to provide the latter’s issuers with more regulatory certainty.
In May 2020, Anguilla unveiled the next chapter in the evolution of its utility token regulations. The Anguilla Utility Tokens Exchange Act complements the AUTO Act and brings Anguilla in line with 2019’s “Travel Rule” regulations implemented by the FATF and FinCEN to combat money laundering (ML) and terrorism funding (TF) channeled through virtual asset service providers (VASPs).
Anguilla’s desirability as a progressive cryptocurrency legislation was further boosted in March this year with its Special Economic Zones Act of 2020, which comprises plans for a special economic zones (SEZ) authority, as well as expansive rules and regulations for the development and certification of the Anguilla SEZ.
An overview of Anguilla and its crypto regulation
Anguilla is a self-governing British Overseas Territory in the Caribbean with a rich history and culture. First colonized by British settlers in 1650, the island seceded in 1971 after 2 years of political strife, finally becoming a separate UK dependency in 1980.
Its recent history also intersects with that of cryptocurrency, having served as a base from which many of the first generation of cryptocurrency and cryptography developers operated in the 2000s.
Anguilla and the FATF
Anguilla is a member of the Caribbean Financial Action Task Force (CFTAF), a FATF-style regional body that develops anti-money laundering (AML) and combating the financing of terrorism (CFT) policies in the Carribean in accordance with the Financial Action Task Force (FATF)’s 40 Recommendations, such as its 2019 Travel Rule for exchanges.
The islands’ last Mutual Evaluation by the FATF and CFATF took place in 2010, with 8 follow-up reports in the next 5 years. In November 2015, the FATF plenary found that Anguilla had successfully addressed the AML/CFT deficiencies in its 2010 ME, and allowed it to exit its follow-up process. Currently, the island is in good standing with global financial regulators.
Anguilla’s financial regulator is the Anguilla Financial Services Commission (AFSC), an independent organization that reports directly to the governor of Anguilla.
Interestingly, Anguilla is one of a few Caribbean jurisdictions that have enacted progressive regulatory frameworks in recent times to govern cryptocurrency ownership and trading to help shake their stereotype as illicit tax havens. Earlier this year, the Cayman Islands also updated its blockchain regulation with five innovative new blockchain-targeting acts.
What is Anguilla’s AUTO Act?
In 2018, the Anguillan government enacted its Anguilla Utility Token Offering Act, also known as the AUTO Act. First announced in late 2017, near the height of the Bitcoin and ICO boom, the AUTO Act signified the first ICO registration process in the world. It helped to clearly define the concept of utility tokens, as opposed to securities, and some of the accompanying features it should have.
Why did Anguilla create the AUTO Act?
In 2017, hundreds of new Initial Coin Offerings, a crowd-funded fundraising mechanism popular with blockchain startups, flooded the digital asset market, bringing with it a wave of ICO scams and illicit financial behavior due to a lack of enforced regulations at the time. These fraudulent ICOs cost public investors billions of dollars in the process.
ICOs were easy and straightforward to set up in 2017, leading to hundreds of projects raising $5,6 billion from the public, a number that was eclipsed in 2018’s first quarter alone. Teams of blockchain “experts” would simply draw up a flimsy white paper (essentially a business plan that details how its cryptocurrency will solve an existing market need ), then issue their blockchain-based token in exchange for valuable other cryptocurrency like Bitcoin or Ethereum.
The overwhelming majority of these projects ended failing, for a variety of reasons such as exit scams, hacks or just managerial incompetence, exacerbated by the crash of Bitcoin’s price in 2018.
The Anguillan government became aware of this and identified the need for clear ICO regulations early. It took action to attract and nurture good virtual asset projects and protect public investors ( referred to as “subscribers” by the AUTO act) from ICOs launched by bad actors.
Anguilla also hoped to position itself as a world leader in best practice for crypto offerings, with the goal to attract this disruptive new technology’s developers and investors to its azure shores.
Deputy registrar of commercial activities at the time, Lonnie Hobson, explained Anguilla’s ICO and utility token motives as such:
“We want to be a conduit. If you see Anguilla is a place of a new registration, investors will know that it is in a good jurisdiction and regulated…We want to be the first regulatory regime of specific categories of cryptocurrency and non-security tokens. There are 1,200-plus ICOs that have come out recently and they want a place that is a strong regulatory regime and is more trusted.”
Anguilla’s AUTO Act was authored by leading Anguillan finance and tax lawyers Ravi Bahadursingh and Randall W. Johnson, their raison d’être the separation of utility token projects from those that touted unregulated securities, which were in clear violation of security laws. The latter had started to to evolve from a minor irritation to an increasing AML threat for securities regulators like the United States’ Securities and Exchange Commission.
This caused increasing fear and uncertainty among token issuers at the end of 2017, who were desperate to stay out of the crosshairs SEC and other financial regulators. Adding to the confusion was the great disparity and lack of clarity in the definition of securities across the Atlantic, with the SEC using a very broad definition based on its Howey Test, while the UK’s Financial Conduct Authority (FCA) took a more measured approach.
Token issuers also believed that if their ICO could be proven to not be a legally defined “security”, they would be able to proceed freely. Unfortunately, global regulators didn’t share their enthusiasm for a clear definition of what constitutes a crypto security, resulting in a regulatory standoff between token issuers and authorities.
This is where Anguilla seized its opportunity.
“In drafting this Act, we saw that tokens that were in effect “securities” are required to comply with the same international regulatory regime as all other securities offerings. However, there remained a large swath of non-security tokens with no clear guidance as to where they would fit in the emerging blockchain economy. Therefore, we focused our efforts on creating a safe and effective regulatory framework for non-security token offerings, which appear to represent a majority of the current capital raising activity within the blockchain community.”
Ravi A. Bahadursingh Esq
What is the purpose of the Anguilla AUTO Act?
The AUTO Act aims to effect a clear regulatory framework by which utility token issuers can be registered and supervised by the Anguilla Financial Services Commission (AFSC). This will help establish a strong structuring of the offering and ensure that potential subscribers are adequately informed and protected.
It does this by obligating token issuers to disclose relevant financial information about their project, ensuring that due diligence is performed by both subscribers and utility token issuers, and that investors are covered by certain protections.
Main Objectives of the AUTO Act
- To clearly classify a digital token as a security or non-security (utility token)
- To establish a regulatory framework in which Initial Utility Token Offerings can function.
This included the following requirements:
-Identifying the ICO initiators
-Giving investors/subscribers enough information to make an informed decision
-Legal remedies for investors mislead by false information
-AML/CFT compliance information about subscribers on a tiered system
-Escrow arrangements to protect subscribers’ investment until the ICO’s completion.
-Updated info on the projects’ developing platform following the ICO’s completion
How does Anguilla define a “Utility Token”?
Anguilla defined utility tokens to help ICO investors distinguish whether an offered token falls within boundaries of the AUTO Act or not.
The AUTO Act defines a utility token as any token that does not:
- Have ownership or equity interest in the issuer;
- Provide entitlement to share of profits of the issuer;
- Have legal status as a creditor;
- Have the right to the distribution of profits from the issuer
A utility token must also have one or more specified utility token features.
Who has to register their utility token offerings in Anguilla?
The AUTO Act requires a person that is a “qualified company” to apply for registration with the AFSC for the issuing of an initial or secondary utility token offering.
A qualified company is an entity incorporated under Anguilla’s International Business Companies (IBC) Act or Limited Liability Companies (LLC) Act, or as specified by regulators.
What does the AUTO ACT require of Utility Token Offerings?
Anguilla’s Utility Token Act obligates specific domestic entities to submit a registration application in order to undertake an Utility Token Offering. This includes a strict disclosure, approval and registration process.
The AUTO Act also required a comprehensive technical and legal review of the applicant’s white paper (which has to be published online) and other financial documents, a vital regulatory innovation as most ICOs’ vague or overly technical white papers exploited investors’ lack of understanding blockchain technology.
The AUTO Act required applicants to disclose:
- Company structure and location
- Company status
- Detailed project description
- History and background of the management team
- Technical and legal description of project’s tokens
- How proceeds would be used and protected
- Beneficial ownership
- AML program
- Risk issues for buying these tokens
Anguilla Utilities Exchange Act of 2020
In May 2020,the Revised Statutes of Anguilla enacted the Anguilla Utilities Tokens Exchange Act. The latest Act builds on the AUTO Act by establishing a comprehensive framework for the licensing of Utilities Token Exchanges (referred to as VASPs by the FATF).
In short, it covers the following requirements pertaining to Utility Token Exchanges:
Part 1: Interpretation of general provisions
-defines various blockchain concepts such as distributed ledger, smart contracts, utility token and stable tokens.
Part 2: Utility token exchanges
-This section lays out the application process for a license, as well as the rules and duties for a utility token exchange license holder and possible amendments.
Part 3: Auditing
Covers audit reporting, employment of auditors and powers of commission
Part 4: Disclosure
Aims to ensure that the public is well-informed when purchasing from an exchange, and covers requirements for listing and token information
Part 5: Short Selling, Insider Dealing and other market abuses
Insider trading and false information that lead crypto assets to pump and dump has been a thorn in the side of both regulators and public investors for years. This part of the Act targets inside information, false trading, trade rigging, market manipulation and penalties and liability for damages that stem from these actions.
From its regulatory actions since 2017, it’s clear that Anguilla has a well-thought out roadmap to ensure that it attracts cryptocurrency projects without drawing the ire of global regulators. With a flexible and quick-acting government, the Caribbean jurisdiction is now positioned to extend its role as a blockchain regulation pioneer.