The need for cross-border collaboration on digital assets

Opinion by: Elise Donovan, CEO of BVI Finance

Digital assets are on the rise. The market expects a softer approach to regulation following a surge in value. That has built on mainstream adoption, including a new United Kingdom pilot program to issue digital gilts and the launch of a multitude of exchange-traded funds by global asset managers. 

Growing momentum

As this growing momentum is unlikely to change anytime soon, the rise will drive further demand for a more profound and complex global financial ecosystem to support the proliferation and increasing number of use cases for digital assets. In turn, this creates opportunities for jurisdictions that can meet the unique needs of a new breed of business that delivers on the promise of decentralized finance (DeFi).

As with any innovation in financial services, compounded by the fast-growing nature of the digital assets industry, support for growth must be balanced against mitigating risk. 

With international financial centers well placed to support these businesses’ multinational, decentralized and agile nature, regulators are adopting a cautious, risk-based approach to digital asset business. Cooperation and shared best practices will be central to reducing the influence of bad actors and mitigating the reputational damage to individual jurisdictions resulting from incidents such as the collapse of FTX, Three Arrows Capital or Genesis.

International appeal

Over recent years, the number of virtual asset service providers authorized across international financial centers has soared. Many individual jurisdictions have demonstrated their regulatory strength to be sound hosts for digital asset businesses. 

For example, the British Virgin Islands (BVI) has enacted legislation to become an environment for innovation in financial technology. Through laws such as the Virtual Assets Service Providers (VASP) Act, the regulator has taken a rigorous yet business-friendly approach to supervising digital assets. Speaking to this success, since 2023, the VASP Act was enshrined in law, and the BVI has received over 80 applications for licenses from digital asset businesses. Moreover, the jurisdiction’s regulatory sandbox allows firms to pilot innovative financial services solutions, unlocking new possibilities to address the need for digitization across the sector. 

Recent: The UK’s overlooked regulatory superpowers

It also has robust measures to tackle financial crime, preventing financial system misuse from all businesses, including those in the burgeoning digital asset sector. 

The actions of the Financial Investigation Agency and the Financial Services Commission to increase their internal expertise in digital assets and hire dedicated specialist analysts are just a few steps the BVI has taken to ensure a secure yet attractive proposition to international firms in the sector.

Indeed, the importance of individual jurisdictions creating centers for DeFi companies to securely conduct business cannot be understated. However, they cannot function in a vacuum; international collaboration and global initiatives are crucial, too. 

Cooperation throughout the Caribbean and beyond 

The Financial Action Task Force’s (FATF) standards on VASPs are an example of the international community coming together to address the market’s rapid growth and to ensure digital assets do not contribute to global money laundering and terrorist financing. As a leading member of FATF’s regional body in the Caribbean, the BVI encouraged this step forward. Should every jurisdiction be serious about providing a platform for the digital asset industry?

More can be done, particularly at the regional level. Europe’s Markets in Crypto-Assets (MiCA) regulation has established uniform European Union market rules for digital assets and demonstrated success in collaborating with its neighbors. It sets an example for other regions, including the Caribbean, to follow suit and adopt a cohesive approach to embracing innovations in finance.

The financial services community gathered at the Caribbean Regional Compliance Association Conference in October 2024. It was a discussion hub on the need for innovative, measured regulation that balances growth with security. Excessive legislation can stifle innovation, but thoughtful regulation throughout the region should aim to protect against financial crime and identify bad actors efficiently. 

Addressing these issues requires robust regulatory systems, technological infrastructure and skilled personnel to enforce compliance effectively. These must be shared across jurisdictions, as without the necessary technological and institutional support, even the most well-crafted regulations can become ineffective.

Indeed, technological advancements in financial services’ ability to fight financial crime, particularly in digital assets, have improved drastically with innovations such as artificial intelligence. While AI can complement, not replace, human expertise, it can significantly reduce the time spent on repetitive manual tasks. Instead, it empowers personnel to become increasingly involved in investigative work, Know Your Customer protocols and communication with other compliance professionals in different jurisdictions. Moreover, the continuous education and training of personnel in the region’s financial services industry will not change in importance, no matter the technological improvements.

DeFi has enormous potential in the Caribbean. There needs to be an ongoing commitment in the region toward the sector’s high financial integrity and transparency standards. Without this, the region’s efforts to strengthen its position as an attractive and safe place to do business may fall short.

Opinion by: Elise Donovan, CEO of BVI Finance.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.