Chambers Global Practice Guide 2020: Fintech – Jersey: Law and Practice
1. Fintech Market
1.1 Evolution of the Fintech Market
Jersey has been a leading international finance centre for more than 50 years. Thanks to a forward-thinking approach, Jersey is at the forefront of wealth management, funds, capital markets and banking, plus the specialist areas of fintech, philanthropy and socially responsible investing.
Recently, Jersey has been at the forefront of innovation and disruption in the fintech sector, with the following initiatives:
- Electronic Communications (Jersey) Law 2000 – blockchain platforms operating in Jersey benefit from the Electronic Transactions (Jersey) Law, 2000 (Electronic Transactions Law) which confirms that, subject to limited exceptions, a contract cannot be denied legal effect, validity or enforce¬ability solely because the contract was made in an electronic form or by electronic means. The Electronic Transactions Law is technology agnostic and can be applied to all forms of digital technology.
- Initial Coin Offering (ICO) Guidance Note – in July 2018, the Jersey Financial Services Commission (JFSC) issued guidance for the path to regulatory approval for ICOs in Jersey. The guidance note represents an innovative and bal¬anced approach to the treatment of ICOs, enabling them to be launched in Jersey with a number of controls in place to help reduce some of the risks associated with them. Under this framework, the JFSC does not regulate the ICOs or the companies that issue them, however, it does require the companies to satisfy certain minimum standards and to appoint a regulated Trust and Company Service Provider to administer the company.
- Binance Jersey – since it came into effect in January 2019, Binance has launched a new platform for fiat-crypto trading of euros (EUR) and British pounds (GBP) to cryptocur¬rency (bitcoin and ethereum), giving investors in Europe and beyond easy access to the rapidly evolving cryptocur¬rency market, and an alternative to standard currency (fiat) exchange.
- Global Financial Innovation Network (GFIN) – formally launched in January 2019 by an international group of financial regulators and related organisations (including the JFSC), the GFIN seeks to provide a more efficient way for innovative firms to interact with regulators, and aims to create a new framework for co-operation between financial services regulators on innovation-related topics, sharing dif¬ferent experiences and approaches.
The industry and regulators are also expected to continue to bal¬ance the opportunities and challenges of cryptocurrencies and fintech, including in relation to anti-money laundering, investor protections, and maintaining Jersey's reputation as a first-class international finance centre.
2. Fintech Business Models and Regulation in General
2.1 Predominant Business Models
With respect to blockchain, Jersey vehicles' involvement is typi¬cally as crypto-funds, such as the world's first regulated bitcoin investment fund, GABI (formerly the Global Advisors Bitcoin Investment fund), funds investing in blockchain projects, and token issuers in the context of ICOs (such as Jersey's first ICO, the AAA Reserve Currency (formerly the ARC Reserve Curren¬cy), and joint-venture vehicles developing blockchain projects.
2.2 Regulatory Regime
The JFSC is responsible for the regulation, supervision and development of the financial services industry on the Island of Jersey, including banking, collective investment funds, fund services businesses, and trust and company service providers.
In summary, the regulatory laws provide for a licensing process whereby entities and individuals conducting regulated activity are required to obtain a licence or be registered with the JFSC in order to conduct regulated activities.
In addition to the regulatory laws generally applicable for regu¬lated activities, Jersey also has specific regulation and/or guid-ance applicable to the fintech sector.
Where a person who, by way of business, meets the definition of carrying on a "virtual currency exchange" (VCE) business, defined in paragraph 9 of Part B of Schedule 2 to the Proceeds of Crime (Jersey) Law 1999 (POCL), that person is required by the Proceeds of Crime (Supervisory Bodies) (Jersey) Law 2008 (2008 Law) to make an application to the JFSC for level 1 registration.
A company engaged in the business of being a VCE would be subject to the JFSC's Sound Business Practice Policy (SBPP) (under Table 2, Activity 8: "Involvement, directly or indirectly, in initial coin offerings or crypto exchanges or providing other services relating to cryptocurrencies"). The SBPP sets princi¬ples regarding the activities that the JFSC considers sensitive and is required to provide additional information and detail to the JFSC.
While not regulating initial coin offerings, the JFSC's ICO Guid¬ance Note places certain conditions on ICO issuing companies, including their compliance with relevant anti-money launder¬ing and countering the financing of terrorism (AML/CFT) requirements and a requirement for ICO issuing companies to have their annual accounts audited and filed with the Registrar of Companies in Jersey (irrespective of their status as either a public or a private company).
Furthermore, in 2018 the JFSC amended its SBPP to reflect that ICOs (while not regulated by the JFSC) constitute a "sensitive activity". Accordingly, ICO issuing companies are required to maintain and adopt systems, controls, policies and procedures for customer take-on and redemption, profiling and transaction monitoring at enhanced levels, ensuring internal and external reporting of suspicions of money-laundering and financing-terrorism activity.
2.3 Compensation Models
There are no prescribed models for charging customers in Jersey. However, industry participants are typically required to disclose to their customers in writing all fees and charges, together with the basis of their calculation, before entering into an agreement with customers to provide services. Industry participants may also be required to disclose any remuneration to be received in connection with a transaction prior to the execution of the transaction. If the amount of the remuneration is not known, the basis of its calculation should be disclosed.
2.4 Variations Between the Regulation of Fintech and Legacy Players
The JFSC does not differentiate between fintech participants and legacy participants. The applicability of the JFSC's licensing structure centres on the activities conducted by the participant. A fintech participant falls within the JFSC's regulatory scope if it conducts a licensed activity.
2.5 Regulatory Sandbox
An exemption to the level 1 registration requirement is avail¬able if a person meets the conditions set out in Article 2(1) of the Proceeds of Crime (Supervisory Bodies) (Virtual Currency Exchange Business) (Exemption) (Jersey) Order 2016 (Exemp¬tions Order). In brief, this requires that a VCE's turnover should be less than GBP150,000 in the calendar year immediately pre¬ceding the notification of its exemption to the JFSC.
Once the conditions of the Exemptions Order are met, such a person is:
- not required to make a level 1 registration application;
- not required to pay any fees to the JFSC; but
- is still considered to be a registered person for some parts of the 2008 Law, most notably Part 5.
Part 5 of the 2008 Law addresses the supervision of schedule 2 business and provides the JFSC with its supervisory powers, such as the power to issue a code of practice, make public state¬ments and issue directions to a person requiring anything to be done, or not done.
The conditions set out in Article 2(1) of the Exemptions Order require a person to notify the JFSC:
- that the person intends to carry on VCE business;
- that the turnover of that business has been less than GBP150,000 in the calendar year immediately preceding the notification date (current year); and
- the amount of turnover.
The JFSC reserves the right to request additional information as it thinks fit under its general powers provided by the 2008 Law. Jersey's sandbox approach fosters innovation by lowering the compliance burden on start-ups, and allows such VCEs to test their exchange mechanisms without a heavy regulatory burden.
2.6 Jurisdiction of Regulators
The JFSC is responsible for the regulation, supervision and development of the financial services industry on the Island of Jersey for the following:
- collective investment funds;
- fund services business;
- insurance business;
- general insurance mediation business;
- investment business;
- money service business; and
- trust and company service providers.
The JFSC has entered into Memoranda of Understanding (or statements of co-operation/letters of intent) on regulatory mat¬ters with a number of fellow regulatory authorities. These Mem¬oranda cover regulatory assistance to be given in the context of:
- new applications for licensing by financial institutions;
- investigations into regulatory offences such as insider deal¬ing; and
- general enquiries that are relevant to the fitness and proper¬ness of registered institutions.
The JFSC has entered into such Memoranda with a wide range of countries, from Australia and Gibraltar to Luxembourg and the United States of America.
The JFSC does not require a Memorandum of Understanding to be in place with an overseas regulatory authority before it will co-operate with, or share information with, that authority. The purpose of a Memorandum of Understanding is to establish an agreed mechanism under which the signatories commit to using their statutory powers of co-operation to assist each other.
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Originally published Apr 27, 2020.
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