Welcome to the virtual currency sandbox: let's play

This article first appeared in Connect magazine October edition.

Virtual currencies divide opinion. You can see them as a currency or an investment; as the next big thing or the next big bubble; as an unfathomable mystery or a familiar part of everyday life in 2016. What you can't deny is that they're booming, and heading into the mainstream.

In the first half of this year, around $4.25 billion in bitcoin was traded in Japan – that's up around 50 times on the previous year. A recent study from Juniper Research has speculated that transaction values may triple to $92 billion this year.

The question of what to do about that, and how to seize the opportunity, is one that falls not just on lawyers, tech firms and service providers, but also on governments and regulators, who have to strike a fine and careful balance between effective oversight and control, and allowing innovation and experimentation in this fast-developing new area to go ahead.

The signs are that Jersey has achieved that balance.

When politicians approved the little-remarked Proceeds of Crime (Miscellaneous Amendments) (Jersey) Regulations 2016 earlier this year, they did so on the basis that a legislative Order would be established to create a "regulatory sandbox" for developers and innovators working with virtual currencies to build, test and experiment with products, services, business models and delivery mechanisms in a live environment without immediately incurring all the normal regulatory consequences and costs.

The proposal for the sandbox was a welcome acknowledgement that to require those developers and innovators to bear the full brunt of compliance with Jersey financial services laws and regulations would limit such activity taking place in the Island. And by setting a turnover threshold of £150,000 (the "economic threshold" test) before they have to be subject to active supervision under the Proceeds of Crime (Supervisory Bodies) (Jersey) Law 2008 and be liable for an annual fee, the government and regulator have created an environment in which testing and development of virtual currency applications can flourish.

That testing opens up all sorts of possibilities: virtual currencies can be transferred across borders almost instantly without bank charges or FX exchange commission; they are much more difficult to steal because the records of who owns what isn't held by one bank, but in lots of places at once; and their value isn't affected by inflation in the same way as state currencies.

The creation of the "sandbox" through the introduction of the economic threshold test is a vital step, and one that marks Jersey out as a testbed for fintech development where innovators can directly reduce the cost and time to get a platform to testing and running phase.

The £150,000 turnover threshold creates a fair balance between giving innovators the opportunity to explore the opportunities created by virtual currencies, while applying a “light” regulatory touch that does not block the development of new concepts before they are fully-formed.

A clear trend is emerging -  virtual currency use is on the rise and is heading into the mainstream. The Jersey regulatory approach places the Island in a strong position to incubate, grow and develop its fintech business community.

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Disclaimer

This client briefing has been prepared for clients and professional associates of Ogier. The information and expressions of opinion which it contains are not intended to be a comprehensive study or to provide legal advice and should not be treated as a substitute for specific advice concerning individual situations.

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