Vanuatu Passes Stricter Crypto Laws to Regulate Digital Assets and Deter Bad Actors

Vanuatu has officially passed comprehensive crypto legislation designed to regulate digital assets and establish a licensing framework for cryptocurrency companies operating in the Pacific island nation. The Virtual Asset Service Providers Act was passed by the local parliament on March 26, marking a significant milestone in Vanuatu’s regulatory approach to the rapidly growing crypto industry.

A Stringent Approach to Crypto Regulation

According to government advisers, the new laws are intentionally strict to prevent bad actors from exploiting the country’s small size and lack of comprehensive regulation. Loretta Joseph, a regulatory consultant who assisted with the legislation, emphasized that the new framework is designed to protect the nation from fraud and scams. She described the laws as “very stringent” and warned that anyone attempting to operate in bad faith could face severe penalties.

“God help any scammer that goes into Vanuatu because you’ll go to jail,” Joseph told Cointelegraph, referring to the tough penalties that come with breaching the new laws. “We don’t want another FTX debacle,” she added, referencing the infamous collapse of the Bahamas-based crypto exchange in 2022 due to widespread fraud committed by its executives.

Vanuatu’s decision to adopt a firm stance comes as smaller jurisdictions are increasingly targeted by unscrupulous actors seeking minimal regulation or a "light touch" approach. “Small jurisdictions are preyed on by the players that are looking for no regulation,” Joseph said, asserting that Vanuatu’s new laws would provide the necessary deterrents. She also expressed pride that the nation became the first in the Pacific region to take such a significant step in digital asset regulation.

Licensing and Reporting Framework for Crypto Companies

The newly passed legislation provides a robust licensing and reporting framework for various types of crypto businesses, including exchanges, non-fungible token (NFT) marketplaces, custody providers, and companies involved in initial coin offerings (ICOs). Under the law, the Vanuatu Financial Services Commission (VFSC) is granted the authority to issue licenses to crypto companies and enforce compliance with international standards on Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF).

One key aspect of the new law is its focus on upholding the Financial Action Task Force (FATF)'s Travel Rule and its international standards for crypto firms, ensuring that they adhere to best practices in combating financial crime. The VFSC has been empowered with extensive investigative and enforcement powers, with penalties for non-compliance that include fines of up to 250 million vatu ($2 million) and potential prison sentences of up to 30 years.

While the legislation covers a wide array of crypto services, it explicitly does not regulate stablecoins, tokenized securities, or central bank digital currencies (CBDCs), although these may share similarities with virtual assets.

A Sandbox Approach for Innovation

The new law also creates a sandbox framework, allowing approved crypto companies to offer their services in a controlled environment for up to a year, with the possibility of extension. This approach is intended to encourage innovation while maintaining regulatory oversight and mitigating risks associated with virtual assets. The VFSC can approve companies to operate within this sandbox, providing them with the opportunity to test their products and services before scaling up their operations.

Joseph noted that before the passage of this legislation, Vanuatu lacked a standalone legal framework specifically tailored to virtual assets, particularly in the areas of AML and CTF compliance. The new laws aim to fill this gap, ensuring that Vanuatu’s crypto industry operates within a structured and transparent regulatory environment.

Economic Impact and Financial Inclusion

The VFSC believes that these regulations will open up significant opportunities for Vanuatu, particularly in terms of improving financial inclusion. The laws are expected to facilitate regulated services for cross-border crypto payments, which could help integrate Vanuatu more effectively into the global financial system and enhance access to financial services for its citizens.

Branan Karae, the VFSC Commissioner, had initially anticipated the bill would pass in September 2022, but delays caused by changes in government, natural disasters, and disruptions related to the COVID-19 pandemic meant that the legislation took several years to finalize. Nonetheless, the VFSC has expressed confidence that the laws will not only bolster the nation’s standing as a crypto-friendly jurisdiction but also provide much-needed protections for consumers and businesses in the digital asset space.

Conclusion

Vanuatu’s newly passed crypto laws are a bold step in the regulation of digital assets, offering a stringent framework to ensure accountability, transparency, and consumer protection. By adopting a strict regulatory approach, the island nation aims to position itself as a secure destination for crypto businesses while safeguarding against the risks of fraud and financial crime. As the first country in the Pacific to introduce such regulations, Vanuatu’s move could set a precedent for other nations in the region to follow as they navigate the rapidly evolving landscape of digital finance.