A Global Guide for In-House Counsel: Doing business in a rapidly changing world

Categories:

Commercial – Crypto & NFTs

What are the biggest investment opportunities in digital – and how can clients decide on the best entry point for them?

There are many investment opportunities. An investor can purchase digital assets directly on crypto exchanges or through brokers. Choosing the right investment is the main challenge. These assets have no track record or history. It is more speculating of what is going to happen. An investor may be found with more than 15,000 cryptocurrencies and obviously not all of them will stay for long. Even the popular ones have had price swings. Bitcoin was as high as USD 69,000 in 2021 and went down by more than 50%.

There are several factors to be considered – One of the main factors is to check how liquid the digital assets are. Cryptos are known for their illiquidity or even if they are liquid, they may become illiquid. Not to say that some investors will tell you they have made good money out of digital assets. But is this good as an encouragement? The answer is not a straightforward yes or no.

There has been an immense evolution in the FinTech sector in Mauritius, from the introduction of the Regulatory Sandbox Licence for FinTech projects years back to having enacted the Virtual Asset and Initial Token Offering Services Act 2021(the Act). The Act provides for five types of licences which are crypto-broker, crypto exchange, advisory in the crypto world, custodian of digital assets and wallet services. Investors should deal with those brokers or other professionals who are regulated.

The Financial Services Commission (FSC) which is the financial regulatory body in Mauritius has issued different guidelines for the Fintech sector to ensure most of the crypto and digital assets businesses are covered under either an act of law, a rule or a guideline. This is very interesting. The guidelines recently issued by the FSC are for securities token offerings and securities taken trading system. Mauritius has increased the viability of its jurisdiction by issuing a guidance note on Recognition of Digital Assets as an asset class for investment by some categories of investors.

In considering the best entry point, it is very important to invest in digital assets on exchanges which are regulated. There is no better comfort especially as it’s already a volatile investment. Therefore, the liquidity and regulations surrounding digital assets stand out as an entry point.

Crypto can be a volatile market: how do you advise your clients to mitigate risk when trading in digital currencies?

Crypto has always been considered volatile, with the potential for significant upward and downward movements over shorter time periods. It is not surprising that you see all new concepts take time to settle and be accepted, and the same holds true for crypto. Cryptos attract a lot of investors but the high volatility in prices is a key element to consider and this risk needs to be reduced or managed. The recent decline in Bitcoin value is an example but it went high as well. Clients should follow the market tendencies, take expert advice and be ready for risks. It is not as stable as traditional assets such as gold. Cryptocurrencies can be extremely risky for investors and it is to be considered for high-risk takers.

How is your jurisdiction managing the legal challenges of NFTs: for instance, taxation on purchases, IP, ownership and theft?

Non-Fungible Tokens (NFTs) are a new concept and it has not yet been fully circled in terms of legislation.

Mauritius has recently introduced rules regarding NFTs whereby the regulatory position of NFTs has been clarified. Each NFT is recorded as distinguishable from any other NFT and allows each NFT to be given unique features and to be associated with physical or virtual assets. This avoids theft. NFTs usually take different forms and must have different regulatory treatment.

The Financial Services Commission in Mauritius has clarified the following about NFTs:

  • NFTs as digital representations of collectables but not used for payment on investment purposes. This type of NFT, which is linked to an underlying asset, may be used and marketed to the member of the public.
  • NFTs displaying characteristics of securities. This type of NFT has the characteristic of a transferable financial asset and is fractional, which means that numerous purchasers can acquire partial ownership or interest in the underlying financial asset and it is considered as securities.

Other NFTs under the Virtual Assets and Initial Tokens Offerings (VAITOS) Act in Mauritius.

  • Issuers of NFTs which fall under such category (not digital collectables and not securities) shall apply for registration under the VAITOS Act.

Mauritius has positioned itself as a first-mover regulatory jurisdiction for NFTs where these can either be regulated under the Securities Act or the VAITOS Act.

On the other hand the rules regarding taxation on purchase, IP and ownership is not explicitly there but are covered in a way. Specific tax rules should follow soon as there have been talks to include digital assets in our Income Tax Laws.