What does a virtual asset represent

The amendments made to certain legislative acts on 9 September 2022 (such amendments became effective from 1 January 2023, however, they will enter into force gradually) (the “Law Amendments”) have introduced a legal framework for “cryptocurrency”, in particular, it has been named a virtual asset and interpreted as:

• (1) a digital representation of value
• (2) that is interchangeable and non-unique
• (3) can be digitally transferred or traded; and
• (4) can be used for investments and/or payment purposes.

The Law Amendments have further specified that a virtual asset:

• (a) does not represent a legal tender (despite the above a VASP (as defined below) is authorised to receive a commission/interest/fee from the customer in the same virtual asset which was used for the virtual asset service provided); and
• (b) does not include digital representation of fiat currencies, securities, or other financial instruments (for instance, digital Lari will not be a virtual asset).

What does allowed virtual asset service include

The Law Amendments have specified in detail what “virtual assert service” includes, in particular, such service covers:

• (1) exchange (including via kiosks) (a) between convertible virtual asset and fiat currencies (national or foreign), (b) between one or more forms of virtual assets, or (c) between convertible virtual asset and financial instrument;
• (2) transfer of convertible virtual asset; and/or
• (3) safekeeping and/or administration of convertible virtual asset or of the instrument enabling control over virtual asset;
• (4) portfolio management of convertible virtual assets (excluding collective portfolio management); and/or
• (5) administration of the trading platform of the convertible virtual assets; and/or
• (6) lending of convertible virtual asset (it should be noted that lending of convertible virtual asset to individuals is prohibited); and/or
• (7) initial coin offering of convertible virtual asset and/or service related to initial coin offering.

It should be underlined that “virtual asset service” is limited to convertible virtual asset, i.e. virtual asset that has an equivalent value on the market, in national or foreign currency, in another virtual asset, and/or a financial instrument in which it can be exchanged.

Who may provide virtual asset service

Apart from a VASP virtual asset service may be provided by the following representatives of the financial sector: commercial banks, micro banks, microfinancial organizations and brokerage companies.

A person is not allowed to provide virtual asset service, unless it is:

• (a) a VASP registered by the National Bank of Georgia (“NBG”); or
• (b) a representative of the financial sector who is authorized to provide virtual asset service under the laws regulating the scope of its activities.

Furthermore, it should be stressed that while a VASP is entitled to provide any of the allowed virtual asset services stated above, in case of representatives of the financial sector such service is limited to:

• (1) exchange (including via kiosks) between convertible virtual asset and fiat currencies (national or foreign), between one or more forms of virtual assets, or between convertible virtual asset and financial instrument;
• (2) transfer of convertible virtual asset;
• (3) safekeeping and/or administration of a convertible virtual asset or of the instrument enabling control over virtual asset; as well as
• (4) auxiliary activities essential to provide the above listed services.

Who is a VASP

The Law Amendments have introduced the definition of a “virtual asset service provider” (“VASP”) and determined it as a person who provides virtual asset service for the benefit of another person.

Hence, the VASP definition makes it clear that to qualify as such a VASP shall provide virtual asset service in favor of another person (and not for its own benefit).

A VASP shall be a legal entity set up under the laws of Georgia in the form of a limited liability company or a joint stock company and registered with NBG.

Similar to financial institutions a VASP is supervised by NBG. In particular, a VASP shall be registered with NBG and comply with the requirements established by it.

Furthermore, a VASP has no right to exercise any activities other than virtual asset services, auxiliary activities essential to provide such services as well as exchange of its own virtual assets.

The procedure and fee established for a VASP registration

NBG decides on registration or refusal of registration of a VASP within 60 calendar days from filing the respective information/documentation with it. Furthermore NBG is entitled to extend the term established for making a decision on registration by 60 calendar days, should there be a need for it and subject to providing proper substantiation.

NBG issues an individual administrative legal act on registration of a VASP wherein (along with other details) the name, ID number, registration date and number of a VASP are referred to.

Within 2 business days from making a decision on registration of a VASP NBG enters the VASP related registration information in the Registry of VASPs kept by it.

In case of a refusal of registration NBG notifies in writing thereof to the person concerned same time referring to the grounds of such refusal.

The registration fee established for considering the documents submitted for the purpose of a VASP registration amounts to GEL 5,000.

Certain obligations of a VASP

Among those requirements that are set by NBG for VASPs as the entities under its supervision are to mention the following ones:

• (1) a VASP shall possess a head office in the territory of Georgia wherefrom its administrator(s) will exercise the actual management of VASP’s activities;
• (2) one of the authorized representatives of a VASP shall reside in the territory of Georgia no less than 14 calendar days in a calendar month;
• (3) should a VASP have solely one shareholder/partner who is also the VASP director, then a VASP shall have at least 2 directors;
• (4) an administrator as well as holder/beneficial owner of a significant shareholding (more than 10%) of a VASP shall meet the relevant fit and proper criteria;
• (5) a VASP shall provide a schematic description of virtual asset service provision (same time referring to the virtual asset list) that shall include the detailed information re movement of information, virtual asset as well as funds in the process of rendering service from the moment of commencement of such service until its completion and also state all relevant participants, such as, payer/asset transferor, payer/asset transferor provider, payee (including asset transferee), payee provider (including acquirer and sub-acquirer) and intermediary provider, where relevant. Furthermore such schematic description shall be submitted for each virtual asset, where it differs for various virtual assets;
• (6) the transactions performed by a VASP shall be fully recorded, systematized and stored in a manner that will enable (i) logging of any action undertaken towards the information recorded and, where required, (ii) finding and furnishing the information about such actions to the head office of a VASP;
• (7) a VASP shall have in place internal instructions (policy rules) to implement the compliance control system of a VASP for the purpose of prevention of money laundering and terrorism financing. The internal instructions are reviewed by NBG in terms of their completeness, however, it is also entitled to consider the contents of such instructions, should NBG deem it appropriate on a risk-based approach; and
• (8) a VASP shall state (prior to its registration as a VASP by NBG) that it has implemented/will implement (prior to commencement of its activities) the compliance control system to ensure compatibility with the requirements of the laws on facilitation of prevention of money laundering and terrorism financing.

VASP related changes

A VAPS, in case of certain thereto related changes, shall notify NBG of such changes prior or subsequent to their occurrence.

From the perspective of VASP related changes are to mention those significant changes that affect the increase of risks related to money laundering and terrorism financing. In particular, in case of such significant changes a VASP shall provide NBG with the respective information and documents describing the changes in question at least 30 calendar days before the changes take place.

Certain grounds for cancellation of a VASP registration

Among the grounds for cancellation of a VASP registration are to note the grounds listed below that stress the significance of regulating the activities of a VASP, especially from the perspective of prevention of money laundering and terrorism financing. In particular, NBG has the right to cancel the registration of a VASP, should:

• (a) continuation of the activities by a VASP may pose threat for financial sector stability and/or reliability;
• (b) a VASP failed to provide in a due course to NBG (in the form and/or term as established by the latter) twice consecutively the report required under the laws on facilitation of prevention of money laundering and terrorism financing;
• (c) a VASP failed to implement the electronic system ensuring revealing of suspicious/unusual transactions in an automatic mode;
• (d) continuation of the activities by a VASP poses increasing risks related to money laundering and terrorism financing and/or preclusion of international financial sanctions, prevents to trace the performed transactions and/or carry out supervision.

Law Amendments related to money laundering

From the point of view of the policy on the prevention of money laundering the following provisions provided by the Law Amendments should be underlined:

• (1) a VASP has been added to the list of accountable persons and similarly to financial institutions NBG has been defined as its supervisory body;
• (2) entities entitled to provide virtual asset service are prohibited from providing such service by means of those virtual assets (anonymity-enhanced coin/privacy coin) and/or technological methods/mechanisms that prevent them from receiving information re transactions and parties to the transactions as well as traceability based on DLT;
• (3) entities entitled to provide virtual asset service shall implement (prior to commencement of their activities) the electronic system enabling revealing of suspicious/unusual transactions in an automatic mode through processing the information available via DLT;
• (4) all accountable persons, who have to study (as a part of monitoring of business relationships) the transactions prepared, entered into and/or exercised within the scope of a business relationship, have been assigned to establish (where necessary) whether such transactions are compatible with the origin of not only a client’s assets and funds, but also its convertible virtual assets;
• 
• (5) all relevant accountable persons (in particular, accountable persons who are allowed to provide virtual asset service) have been assigned to perform preventive measures in case of entering into a one-off transaction related to convertible virtual asset service where the amount of such one-off transaction or the total amount of related transactions exceeds USD 1,000, EUR 1,000 or GEL 3,000 (it is to note that in case of a national or foreign currency the threshold set for taking preventive measures is GEL 15,000 or the equivalent of GEL 15,000 in a foreign currency that demonstrates using a stringent approach in case of convertible virtual asset);
• (6) while entering into business relationship entities entitled to provide virtual asset service are restricted to those virtual asset provider and/or financial institution:
  • (a) who is licensed/registered by NBG and/or licensed/registered in a foreign country;
  • (b) who is subject to regulation/supervision from the perspective of prevention of money laundering and terrorism financing;
  • (c) where the laws of the jurisdiction it belongs to provide for identical or stricter requirements than those set by the laws of Georgia in line with the FATF recommendations for the purpose of prevention of money laundering and terrorism financing.

Furthermore it should be noted that NBG is entitled to prevent or restrict a VASP or a representative of the financial sector who has the right to provide virtual asset service from certain types of activities/transactions (including depending on virtual asset types) as well as business relationship with other VASP(s), should such activities/transactions pose increasing risks related to money laundering and terrorism financing and/or preclude international financial sanctions, prevent to trace the performed transactions and/or carry out supervision.

All above referred provisions create quite an efficient legal framework for preventing money laundering and terrorism financing in the field of virtual asset service.

Transition period requirements

A person who, prior to entry into force of the Law Amendments, performed the activities that meant provision of virtual asset service for the benefit of another person, had to submit to NBG the respective registration documents/information before 29 September 2023.

Such person had to continue its virtual asset service for the benefit of another person from submission to NBG of the respective registration documents/information until adoption of the respective decision of NBG on registration. A person had to cease provision of virtual asset service in case of failure to file the registration documents/information prior to 29 September 2023 or refusal of registration by NBG.

Furthermore it should be noted that so far neither of VASPs have completed the procedure of registration with NBG.

Same time a VASP shall ensure (within one year from the registration with NBG, however, no later than 1 July 2024) extension of the requirements under Chapter III (Preventive Measures) and Chapter IV (Intensified Preventive Measures and Simplified Preventive Measures) of the Law of Georgia on Facilitation of Prevention of Money Laundering and Terrorism Financing to those clients with whom they entered into business relationship before registration with NBG.

Summary

Regulation of a virtual asset brought more clarity on the thereto related issues and made Georgia an attractive jurisdiction for investors interested in this field.

Furthermore, it should be noted that despite the newly introduced regulations have not been implemented in practice, it is to expect that the knowledge and experience accumulated with respect to representatives of the financial sector will be taken into account while providing virtual asset services same time considering the specific characteristics of such services.

Apart from the above, it is worth to note the efficiency of legislative framework targeting at prevention of money laundering and terrorism financing in the process of providing virtual asset service and ensuring traceability of transactions made by means of virtual assets.