The Financial Technology Law Review: Jersey
In recent years, Jersey has made a concerted effort to position itself as a financial technology hub and provide a supportive eco-system for innovation and growth in fintech. A key factor in this has been the ongoing work of Digital Jersey, an independent body that champions a digital first agenda by facilitating and connecting industry and government and encourages new fintech ventures seeking to locate to the island,2 as well as the ongoing support and work of Jersey Finance, the island's financial services industry body, which also has specific resource to support a fintech agenda.3
Jersey has world-leading digital infrastructure (including a 100 per cent 1GB full fibre point-to-point network), a proactive and supportive government and regulator and a growing skills base boosted by an on-island digital skills academy. As such, Jersey has positioned itself as an ideal environment for fintech to thrive.
The Jersey Financial Services Commission (JFSC) joined the Global Financial Innovation Network (GFIN) in 2019. This is a network of over 60 international organisations that work together and share their experience of financial innovation in their respective markets. They also share developments in regtech/suptech and provide firms with an environment to trial cross-border solutions.
Over the last 12 months, Jersey's financial services industry has proven to be particularly resilient in the face of a global pandemic, easing the transition to remote working as well providing a supportive legal, financial and technical infrastructure. In particular, recent developments that have assisted with this have included the high broadband speed, a new enhanced digital platform for the JFSC registry, proposed further updates to our electronic signatures regime and flexibility from the JFSC in relation to electronic verification methods for anti-money laundering (AML) requirements as well as from other government bodies.
Fintech activity in Jersey has recently tended to focus on token/coin offerings (including security token offerings (STOs) and initial coin offerings (ICOs), fintech (including blockchain and cryptocurrency) focused funds and investment structures, cryptocurrency exchanges and fintech research and development. Jersey vehicles are also starting to utilise forms of institutional cryptocurrency custody. Jersey is a low-tax jurisdiction and there are no specific tax incentives for fintechs. Revenue Jersey has issued guidance on the application of general Jersey taxation principles and provisions to digital assets.
Licensing and marketing
The JFSC oversees the regulation of financial services on the Island. Anyone wishing to conduct financial services business, insurance or deposit-taking business in or from within Jersey will need to register with the JFSC, unless an exemption applies. In addition to the statutory law requirements, the JFSC prepares and issues policy, guides and codes of practice that set out both broad principles and detailed requirements to which those wishing to carry out such business in Jersey must adhere. Generally, businesses carrying on regulated activities in or from within Jersey (or Jersey companies carrying on such business outside of Jersey) must be authorised to do so by the JFSC, unless an exemption applies. Jersey does not have specific blockchain legislation because of the nature of its most prevalent activities.
Based on the most common activities, key regulatory considerations are set out below. These are not intended to be exhaustive. Cryptocurrencies and coin offerings are dealt with in a separate section below.
Financial services business
Article 2 of the Financial Services (Jersey) Law 1998 (FSJL) defines 'financial services business' as follows:
A person carries on financial service business if by way of business the person carries on investment business, trust company business, general insurance mediation business, money service business, fund services business or AIF services business.
The most likely of these categories to be relevant to financial technology businesses are investment business and money service business. We have set out the basic definitions below but, depending on the specific facts of a case, there are various exemptions available that may allow a person to be exempt from the requirement to register under the FSJL. To the extent that a person is carrying out digital asset or cryptocurrency custody, this may also qualify as financial services business.
A person carries on investment business if that person:
- deals in investments, that is, the person buys, sells, subscribes for or underwrites investments, either as principal or as agent;
- undertakes discretionary investment management, that is, the person decides as agent to buy, sell, subscribe for or underwrite investments on behalf of a principal; or
- gives investment advice, that is, the person gives to persons in their capacity as investors or potential investors advice on the merits of:
- the purchase, sale, subscription for or underwriting of a particular investment; or
- the exercise of a right conferred by an investment to acquire, dispose of, underwrite or convert the investment.
An investment includes shares, debentures, instruments entitling to shares or securities, certificates representing securities, units in a collective investment trust, options, futures, contracts for difference, long-term insurance contracts and rights and interests in investments. The JFSC have indicated that security token exchange businesses will be required to be regulated under the FSJL to undertake 'investment business'.
Money service business
A person carries on money service business if they carry on the business of any of the following:
- a bureau de change;
- providing cheque cashing services;
- transmitting or receiving funds by wire or other electronic means; or
- engaging in money transmission services.
The first category of money service business is bureau de change, which is generally taken to mean an office that allows consumers to exchange one currency for another, and charges a commission for the currency exchange service. There is debate as to whether virtual currencies and digital assets comprise currency, a commodity, goods or services, and a view may need to be taken in respect of the particular virtual currency or digital asset if exchange services are being provided in or from within Jersey.
The Financial Services (Money Service Business (Exemptions)) (Jersey) Order 2007 (Exemptions Order) (the MSB Order) sets out certain exemptions from the money service business provisions of the FSJL. These are contained in Article 3(2) of the Exemptions Order (the Full Exemptions) and the principal one is in relation to a person who carries on money service business consisting of the transmission or receipt of funds by wire or other electronic means, or the provision of money transmission services, by the person for the sole purpose of any of the following:
- enabling another person to pay for goods or services;
- enabling another person to access that other person's funds or that other person's money.
There is no case law and little guidance around the application of the Full Exemptions, but a virtual currency exchange or similar financial technology business may in certain circumstances be able to rely on the Full Exemptions.
A limited exemption is set out in Article 4 of the MSB Order and broadly, a person is exempt from having to register to conduct money service business if:
- that person notifies the Commission in writing that he or she intends to carry on money service business; and
- the turnover for the last completed financial period for the money service business carried on by that person is less than £300,000.
If a financial technology business were to engage in money service business, they would be exempt from the requirement to register with the JFSC until their turnover exceeded the £300,000 threshold, as detailed above (but, as noted above, the JFSC will need to be notified irrespective of turnover).
Funds regulatory framework
The Jersey fund structures most utilised in the fintech space tend to be the Jersey Private Fund and the Jersey Expert Fund and they have to comply with the current regulatory framework.
Both regulatory types provide fast establishment times together with proportionate regulation for professional or expert investors respectively (i.e., non-retail). The Jersey Private Fund has a variety of investor criteria of which the main one tends to be an investment of £250,000. While it offers very flexible structuring, it cannot be listed and the number of offers that can be made is limited to 50. A Jersey Expert Fund is a more regulated vehicle that qualifies as a regulated 'collective investment fund' but has an ability to make unlimited offers. It also has multiple possible investor qualification criteria, including a $100,000 minimum investment level.
Jersey has put in place all of the infrastructure needed to allow funds and other similar investment structures launched in Jersey to be marketed to both UK and European Union (EU) investors. Jersey has implemented a voluntary regime that mirrors the requirements of the Alternative Investment Fund Managers Directive (AIFMD). While the full AIFMD passport has not yet been extended to non-EU third countries, Jersey funds are able to market to EU investors through the National Private Placement Regimes of EU Member States and in the UK through post-Brexit arrangements with the UK Financial Conduct Authority. Jersey has never been a Member State of the European Union.
Jersey is a leading centre in the funds industry, which in recent years has included a focus on technology funds. Notably, SoftBank Group raised its US$100 billion Jersey domiciled technology fund in 2016.
Virtual currency exchange
If an entity will be exchanging fiat currency for cryptocurrency (or vice versa) (for example as part of STO or ICO, or as a stand-alone virtual currency exchange), then it will need to consider if it needs to register with the JFSC as a virtual currency exchange under the Proceeds of Crime (Jersey) Law 1999. Procedures in relation to AML and countering the financing of terrorism (CFT) will need to be put in place. In practice, where a Jersey corporate services provider (CSP) has been appointed we would normally expect the AML or CFT process to be set up and administered with compliance staff provided by the CSP, rather than by the victual currency exchange or STO or ICO issuer itself.
While the general rule is that virtual currency exchanges will be required to register with the JFSC, there is flexibility for exchanges with a turnover of less than £150,000 (exempt exchanges). Exempt exchanges simply have to notify the JFSC that they are exchanging virtual currency but will not be required to register or pay annual fees to the JFSC. This approach has created a regulatory sandbox, which is targeted at encouraging innovation, allowing new business models, services and products to be tested without undue regulatory burden.
In any event, any person conducting virtual currency exchange business in Jersey will be required to comply with the requirements of the Jersey AML/CFT Handbook.
Control of Borrowing (Jersey) Order 1958
The Control of Borrowing (Jersey) Order 1958 (COBO) requires that the consent of the JFSC be obtained for various activities, including:
- to allow a Jersey company to issue shares (in practice this means that every company incorporated in Jersey must have valid COBO consent);
- to allow a foreign body corporate to register shares or other securities in Jersey;
- to allow a Jersey company to issue any securities other than shares; or
- to circulate a prospectus or offer of securities in Jersey.
The JFSC may refuse to grant a COBO consent or may attach such conditions to the COBO consent as it sees fit, and there are a number of exemptions to the above requirements.
COBO contains a broad definition of securities, which includes shares, bonds, notes, debentures and debenture stock. The JFSC has issued a separate guidance note where virtual tokens are issued in connection with an STO or ICO (see below).
Under COBO, an exemption is potentially available from the requirement for a non-Jersey entity to obtain a COBO consent for the circulation of an offer (prospectus) in respect of securities in Jersey where the body corporate issuing the securities has no relevant connection with Jersey.
Issuing a prospectus
The Companies (Jersey) Law 1991 (the Companies Law) is Jersey's primary piece of legislation relating to Jersey companies and sets out the requirements for a Jersey company to issue a prospectus in Jersey. A prospectus is defined as an invitation to the public to become a member of a company or to acquire or apply for any securities, for which purposes:
- an invitation is made to the public where it is not addressed exclusively to a restricted circle of persons; and
- an invitation is not addressed to a restricted circle of persons unless:
- the invitation is addressed to an identifiable category of persons to whom it is directly communicated by the inviter or the inviter's agent;
- the members of that category are the only persons who may accept the offer and they are in possession of sufficient information to be able to make a reasonable evaluation of the invitation; and
- the number of persons in Jersey or elsewhere to whom the invitation is so communicated does not exceed 50.
If a prospectus is being issued by a company in respect of its own securities, the issuing company must be a public company.
A prospectus must comply with certain content requirements set out in the Companies (General Provisions) (Jersey) Order 2002 (CGPO).
Digital identity and onboarding
The JFSC recently updated its AML/CFT Handbook for regulated financial services businesses (the Handbook) to more widely permit evidence of identity to come from electronic sources (eID) as an alternative to original 'wet ink' documents. An eID is described in the Handbook as 'the use of smart phone and tablet applications to capture information, copy documents and take photographs of customers as part of [a relevant person's] CDD processes'.
The changes to the Handbook include the addition of a reference to eID in the list of acceptable sources of evidence of identity, alongside original wet ink documents, certified copy documents and external data sources.
This update has proved invaluable during the covid-19 pandemic, allowing clients to be onboarded when the exchange of wet ink documents became difficult or impossible.
There is not currently any form of generally recognised digital identity. Projects are currently underway to assess the viability of more centralised and efficient forms of eID, particularly in the funds space.
Digital markets, payment services and funding
The JFSC has clarified that in most cases crowdfunding is not a regulated activity. There are, however, a number of legal considerations to take into account before an entity can engage in crowdfunding. As set out above, the kind of issues that would need to be addressed would be whether a prospectus is required pursuant to the CGPO, or whether additional consents are required pursuant to COBO or whether these would be deposit taking business under the Banking Business (Jersey) Law 1991 (which is outside the scope of this chapter).
ii Digital markets and payment services
Save as might otherwise constitute a regulated activity in Jersey as set out in this chapter, generally, digital marketplaces are not specifically regulated in Jersey. Please see above in relation to virtual currency exchanges. Jersey participates in the Single Euro Payments Area and adopted the EU Legislation (Payment Services – SEPA) (Jersey) Regulations 2015 and Community Provisions (Wire Transfers) (Jersey) Regulations 2007 to closely align with the EU. Non-banks can provide payment services but may be subject to regulation as a 'money services business' (see above).
Cryptocurrencies, initial coin offerings (ICO) and security tokens
The JFSC has published guidance on how ICOs will be approved in Jersey through existing laws and regulation (the Guidance), which has been endorsed by the Jersey government.
As with all Jersey companies (and as set out above), a proposed ICO issuing company will require a consent from the Jersey Companies Registry under COBO, and in considering an application the Registry will have regard to the Registry's Processing Statement (RPS) and the Sound Business Practice Policy (SBPP). In addition to publishing the Guidance, the JFSC has published updated versions of the RPS and the SBPP to specifically address ICOs and classify digital assets and cryptocurrencies as a sensitive activity, as well as set out the approach that the JFSC will take in considering applications to form an ICO issuer in Jersey.
The Guidance provides that, as a general rule, Jersey-based ICO issuers will be required to be incorporated in Jersey and administered through a licensed CSP in Jersey.
An application to the JFSC must address whether the tokens are a 'security' or not for the purposes of COBO. If the tokens are a security, then absent an exemption, an additional consent under COBO will be required for the issue of securities other than shares. If the tokens are not a security, then the additional COBO consent will not be required and the JFSC may consider relaxing some of the conditions that are set out in the Guidance.
In classifying an ICO, the Guidance provides that the JFSC will focus on the economic functions and purpose of the token to be issued and whether the tokens are tradeable or transferable. The definition of security in COBO is broad, and the Guidance states that a token will be considered a security token for Jersey law purposes if it has characteristics usually associated with an equity or debt security, including:
- a right to participate in the profits or earnings of the ICO issuer or a related entity;
- a claim on the issuer or a related party's assets;
- a general commitment from the ICO issuer to redeem tokens in the future;
- involvement in the ownership or running of the ICO issuer or a related party; and
- expectation of a return of the amount paid for the tokens, with or without interest or other form of gain.
If a token is deemed not to be a security token, it will typically be either:
- a utility token, in other words, a token that merely confers on the holder the right to use or access a product or service, with no economic rights or any right to redeem the token for value; or
- a cryptocurrency token, in other words, the token is designed to behave like a currency, referred to in some jurisdictions as a payment token.
i General requirement for all ICO issuers
To ensure consistency and provide a streamlined COBO application process, the Guidance requires all ICO issuers to:
- be incorporated as a Jersey company (i.e., not be a foundation or limited partnership or other form of vehicle);
- receive a consent under COBO before undertaking any activity;
- apply relevant AML or CFT requirements to persons that either purchase tokens from or sell tokens back to the issuer of those tokens;
- appoint and maintain a duly regulated Jersey CSP;
- appoint and maintain a Jersey resident director on the board of the ICO issuer, where the Jersey resident director is also a principal person or key person of the CSP;
- obtain the JFSC's prior approval to any change either to the issuer's administrator or the Jersey resident director of the issuer;
- prepare and file annual audited accounts with the Jersey Companies Registry;
- have procedures and processes in place to (1) mitigate and manage the risk of retail investors investing inappropriately in the ICO; and (2) to ensure retail investors understand the risks involved;
- prepare and submit to the JFSC for its approval an Information Memorandum (which may be in the form of a White Paper) that complies with certain content requirements of a prospectus issued by a company under the Companies (Jersey) Law 1991; and
- ensure that any marketing material (including the information memorandum) is clear, fair and not misleading.
As with all new incorporations, the JFSC has reserved the right to consider each application on its own merits, so while the conditions set out above offer helpful guidance on the approach the JFSC is likely to take, they are by no means definitive.
ii Jersey legal advice
The Guidance provides that an application under COBO in respect of an ICO issuer must be accompanied by analysis prepared by a Jersey law firm outlining:
- the proposed activity including relevant timelines;
- details of the issuer and the ICO;
- the rationale for the ICO, amount to be raised and use of proceeds;
- a summary of the features of the tokens;
- a summary of purchase and redemption processes;
- service providers to the issuer;
- the relationship between the issuer and the holder of the tokens;
- the management of underlying assets and security rights over such assets for holders of the tokens;
- how the activity will be wound up or dissolved and assets distributed to the holders of the tokens; and
- a Jersey legal and regulatory analysis considering applicable law and regulation (including laws in respect of investment funds, financial services, banking, AIFMD, proceeds of crime and AML).
iii CSP requirements
The Guidance provides that, prior to a Jersey CSP agreeing to act as the administrator of an ICO, and on an ongoing basis, it must take steps to satisfy itself as to a number of factors, including:
- the honesty and integrity of the issuer and the persons associated with it;
- the issuer's approach to acting in the best interests and needs of each and all of its customers;
- the adequacy of the issuer's financial and non-financial resources;
- how the issuer will manage and control its business effectively, and ensure that it will conduct its business with due skill, care and diligence;
- the effectiveness of the issuer's arrangements in place for the protection of client assets and money when it is responsible for them;
- the effectiveness of the issuer's corporate governance arrangements;
- what systems the issuer has in place to prevent, detect and disclose financial crime risks such as money laundering and terrorist financing; and
- the issuer's marketing strategy, including the types of persons to whom the ICO will be marketed, how it will be marketed, and the jurisdictions in which it will be sold or marketed (including consideration of any relevant laws or restrictions that may apply in other jurisdictions).
The Guidance also summarises the JFSC's expectations in relation to ICO issuers mitigating the risk of anti-money laundering and countering the financing of terrorism.
iv Retail investors
The Guidance provides that an ICO issuer must take appropriate steps to mitigate and manage the risks of retail investors investing inappropriately in ICOs. In this regard, the Guidance contains a safe harbour process including an approved risk warning that must be actively confirmed by each investor as being understood and accepted.
v Marketing and offer document
All marketing materials must be clear, fair and not misleading, and contain prescribed wording in respect of the role of the JFSC in approving the ICO. In particular, the JFSC does not regulate an ICO issuer as such, although the approval procedure set out in the Guidance mandates a set of conditions designed to ensure that the issuer meets specific standards in terms of governance, investor disclosure, anti-money laundering and countering the financing of terrorism.
The offering document must comply with the content requirements set out in the CGPO, and contain the specific statements set out in the Guidance. In addition, prior to the issuance of any tokens, the JFSC must confirm that it has no objection to the issue of the offer document.
Potential issuers will also be required to complete a memorandum of compliance in a form appended to the application form for any information document or white paper produced in respect of the ICO, which includes a checklist containing various information statements that must be included pursuant to the CGPO.
Other new business models
The Electronic Communications (Jersey) Law 2000 (the Communications Law) was amended in October 2019 to provide additional clarity that Jersey law-governed documents can be signed using an electronic signature. The Communications Law allows for contractual offer and acceptance to take place by way of an electronic communication (which includes electronic signatures).
The Communications Law gives the attributes of an electronic signature as a 'signature in electronic form attached to or logically associated with an electronic communication or electronic record'.
Where a person is required by statute to provide a signature (for example, pursuant to the provisions of Jersey companies or securities laws), they will have met that requirement if:
- a method is used to identify the person and to indicate the person's approval of the information communicated;
- the method used is as reliable as is appropriate for the purposes for which the information is communicated; and
- the person to whom the signature is to be provided consents to the method of providing the electronic signature (consent).
The Communication Law states that an electronic communication would not be sufficient to effect offer and acceptance in a contract where the law expressly or impliedly provides otherwise. Certain transactions may require a wet ink signature, or have other formality requirements; for example, the transfer of Jersey real property.
In addition to providing new sources of business for technology businesses providing electronic signing services, this has also made doing business easier and more streamlined. These updates to Jersey law have been particularly helpful in managing the impact of the disruption caused during the covid-19 crisis, allowing Jersey businesses and counterparties to continue to transact when exchanging hard-copy documents with wet ink signatures became in some cases impossible. Further updates are expected in 2021 to the Communications Law to keep track with developing commercial practice.
Intellectual property and data protection
Copyright applies in Jersey as soon as a work is created and is recorded in some way; for example, on paper or as a digital file. It is not possible to make a formal registration in Jersey as there is no national register for copyright. In Jersey there is a secondary registration system under which patents, trademarks and registered designs which have been granted or registered in the UK can be registered in Jersey. EU trademarks apply in Jersey without the need for registration.
Jersey has had data protection legislation since 2005. Following the introduction of the General Data Protection Regulation (GDPR) and the Law Enforcement Directive (LED), Jersey brought in two pieces of legislation to ensure that the Jersey data protection regime maintains equivalence with the EU data protection laws. The legislation is:
- the Data Protection (Jersey) Law 2018 (DPJL); and
- the Data Protection Authority (Jersey) Law 2018 (DPAJL).
The DPJL deals with duties of data controllers (including the data protection principles), duties of data processors, conditions for processing, obligations to appoint data protection officers, rights of data subjects, exemptions to parts of the law, cross-border transfers and exemptions to the adequacy requirements and remedies and enforcement. Although largely consistent with the GDPR, there are some minor differences.
The DPAJL establishes the data protection authority in Jersey, and includes powers allowing it to investigate complaints and undertake inquiries along with granting it powers of sanction following a finding of a breach (including fines).
Year in review
Following an overhaul of the JFSC's approach to STOs and ICOs in recent years, 2020 has been a year of growth for Jersey's technology sector and a massive acceleration in the digitisation of financial services generally. Jersey has seen a steady increase in the number of technology-focused investments structured through the island, in the form of (among others) ICOs, STOs, joint ventures and funds. As a well-regulated jurisdiction, Jersey and its regulator aim to take a pragmatic and flexible approach to new fintech products, recognising that where these products are backed by a credible promoter and consumer protection and anti-money laundering challenges are addressed, a cost efficient and user-friendly environment should be available.
Outlook and conclusions
Jersey continues to develop as a leading fintech jurisdiction, and has looked to innovate further to build on Jersey's existing success in establishing itself as a leading fintech, STO and ICO jurisdiction. Jersey's success as a technology-friendly jurisdiction is underlined by the presence of major global technology businesses calling Jersey home, in particular in recent years with Global Advisors, a leading crypto fund manager; and SoftBank, the world's largest technology fund, having established themselves in Jersey.