A New Dawn in Crypto-Asset Regulation and Licensing.

The Virtual Assets Act, 2023 is a forward-thinking piece of legislation that was only recently passed into law by the government of Namibia. This forward-thinking law was drafted with the intention of guiding the regulation, licensing, and supervision of virtual asset service providers. As a result, it represents an important milestone in the rapidly developing field of digital finance.

This Act demonstrates Namibia’s commitment to fostering a secure and regulated environment for activities involving virtual assets. It will come into effect at a date determined by the Minister, and it will provide safeguards against the potential exploitation of consumers, manipulation of markets, laundering of illicit funds, and funding of terrorist organisations.

Classes of Licenses under the Virtual Assets Act, 2023.

According to the Act, a “Virtual Asset Service Provider” is a person that as part of their business provides virtual asset services for or on behalf of another person, and a “Virtual Token” is any cryptographically secured digital representation of one or more rights that is provided on a digital distribution ledger platform or similar platform and issued or to be issued by a token issuer.

The Act establishes a meticulous licensing framework, laying out distinct categories each aligned to various services within the virtual asset ecosystem. The licenses range from token issuance, broker-dealer services, marketplace operations, wallet services, custodian services, to advisory roles as illustrated in the below image.

A close-up of a document

Description automatically generated
  1. The “Token Issuer” license, identified in the Virtual Assets Act, 2023, is designated for entities involved in Initial Token Offerings (ITOs). These entities play a crucial role in the landscape of virtual assets, as they introduce new tokens to the market. Initial Token Offerings are a crucial method for token issuers to raise capital, while simultaneously allowing investors to purchase tokens at an early stage, frequently at a lower price than when the token becomes more widely available.

The process of conducting an ITO entails a vast array of tasks, including the development of the token, the creation of a detailed whitepaper outlining the token’s purpose and potential, the establishment of a secure token sale platform, and the observance of all applicable regulations. These activities are explicitly addressed by the Token Issuer licence, which provides a clear regulatory framework for them.

The inclusion of the “Token Issuer” licence in the Act demonstrates that the Namibian government recognises the significance of token issuers within the ecosystem of virtual assets. By classifying them under a specific regulatory category, the Act intends to promote greater transparency and trust in the ITO process, thereby encouraging responsible practices and protecting investors from the potential risks associated with token offerings.

  1. The Class “M” licence, as defined by the Virtual Assets Act of 2023, is for Virtual Asset Broker-Dealers. This category includes entities that play a crucial role in the trading and liquidity of virtual assets. Broker-Dealers of Virtual Assets are intermediaries who purchase and sell virtual assets on their clients’ behalf. They facilitate the conversion between fiat currencies and virtual assets, allowing investors to access and exit the markets for virtual assets. For instance, Broker-dealers can facilitate the purchase of Bitcoin with U.S. dollars and the sale of Ether for Euros, respectively.

Broker-dealers additionally offer services for the exchange of one virtual asset for another. This service is essential for investors who wish to diversify their portfolio of virtual assets or transfer their holdings between digital currencies based on market trends.

The Virtual Assets Act of 2023, by instituting the Class “M” licence, ensures that these broker-dealers adhere to stringent standards of fairness, transparency, and security. This not only strengthens investor protection, but also the integrity of the virtual asset markets. By adhering to a regulatory framework, these broker-dealers can contribute to a robust and trustworthy trading environment for virtual assets.

  1. The Class “S” licence, as defined by the Virtual Assets Act of 2023, is applicable to Virtual Asset Marketplaces. These entities, which are frequently referred to as virtual asset exchanges, constitute a vital node in the digital finance ecosystem.

Virtual Asset Marketplaces are platforms that facilitate the purchase, sale, and exchange of virtual assets. These platforms facilitate the exchange of assets between parties, like traditional stock exchanges, but instead trade in digital or crypto assets. Whether a user wants to buy Bitcoin with fiat currency, trade Ether for another cryptocurrency, or sell their token holdings, the virtual asset marketplace makes these transactions possible. They offer liquidity, price discovery, and a regulated environment for transparent, secure transactions.

Class “S” licences are intended to regulate these crucial marketplaces. The Virtual Assets Act of 2023 ensures that these exchanges maintain high standards of security, transparency, and consumer protection through the implementation of regulations. This contributes to the development of a robust and trustworthy ecosystem for virtual assets, while mitigating risks associated with fraud, market manipulation, and cyber threats.

  1. The Class “O” licence under the Virtual Assets Act of 2023 is designated for Virtual Asset Wallet Services. This key category governs entities that offer platforms for storing, administering, and exchanging virtual assets.

Wallet services are indispensable to the ecosystem of virtual assets, serving as the digital equivalent of personal bank accounts. They facilitate the storage of digital assets in a secure manner and facilitate their transmission between parties. In a financial landscape that is becoming increasingly digitised, virtual asset wallet services are an essential connection between virtual asset owners and the broader crypto economy. Wallet services make it possible for users to conduct transactions, invest in tokens, or simply hold their assets.

The Virtual Assets Act, 2023 highlights the significance of wallet service providers in nurturing a robust and secure digital asset ecosystem by incorporating these services within its regulatory purview. It ensures that these essential service providers adhere to stringent operational standards, thereby increasing consumer confidence, promoting transactional integrity, and bolstering the protection against illegal activities.

  1. The Class “R” licence is assigned to Virtual Asset Custodians as per the Virtual Assets Act of 2023. This category includes entities whose primary responsibility is to secure and administer virtual assets or the instruments that provide control over these assets.

In the realm of digital assets, Virtual Asset Custodians perform a comparable function to traditional financial custodians. They provide services comparable to a digital vault for the safeguarding of digital assets. These administrators employ sophisticated security measures, such as encryption and multi-signature wallets, to safeguard the assets against cyber threats, unauthorised access, and fraud. In addition to safeguarding these digital assets, custodians are also responsible for their administration. This may involve facilitating transactions, tracking asset ownership, assisting with asset recovery, and ensuring regulatory compliance.

By incorporating the Class “R” licence for Virtual Asset Custodians into the Act, Namibia ensures that these integral service providers adhere to stringent security, transparency, and operational standards. This not only enhances the security of digital asset holders, but also contributes to the overall trustworthiness and resilience of the nation’s digital asset ecosystem.

  1. The Class “I” license, as laid out in the Virtual Assets Act, 2023, pertains to Virtual Asset Advisory Services. These are entities that provide specialized financial services and advice in connection with a token issuer’s offer and sale of virtual assets.

Within the digital asset industry, virtual asset advisory services inhabit a crucial niche. They provide expertise in the nuances of token issuance and sale, advising issuers on the most effective approaches for introducing their virtual assets to the market. This can include a variety of tasks, such as devising the token’s economic model, developing a solid go-to-market strategy, assisting with regulatory compliance, and advising on investor relations. In addition, these advisory services play a substantial role in investor protection. By ensuring that token issuers comply with best practices and regulatory standards, they protect the interests of investors and cultivate a more transparent and accountable market.

The inclusion of the Class “I” licence in the Act demonstrates Namibia’s dedication to promoting professionalism and ethical behaviour within its burgeoning virtual asset market. By regulating these advisory services, the Act ensures that they adhere to stringent standards of competency, integrity, and transparency, thereby contributing to a healthier and more robust ecosystem for virtual assets.

Understanding Virtual Asset Services.

The Virtual Assets Act, 2023 defines a wide range of services that fall under the umbrella of virtual asset services. These include initial token offerings, exchanging one virtual asset for another, exchanging virtual assets for fiat currencies, transferring virtual assets, operating a virtual asset exchange, safekeeping and administration of virtual assets, and participation in and provision of financial services related to a token issuer’s offer and sale of virtual assets.

This exhaustive list reflects the law’s comprehensive coverage of the dynamic virtual assets landscape, affirming Namibia’s resolve to build a regulated and transparent digital financial ecosystem. For clarity, the Namibia Virtual Assets Act, 2023 considers any one or more of the following activities or services to be virtual asset services:

  1. Initial token offering.
  2. Exchanging one virtual asset for another virtual asset.
  3. Exchanging virtual assets for fiat currencies or fiat currencies for virtual assets.
  4. Transfer of virtual assets.
  5. Operating a virtual asset exchange.
  6. Safekeeping of virtual assets or instruments enabling control over virtual assets.
  7. Administration of virtual assets or instruments enabling control over virtual assets.
  8. Participation in and provision of financial services related to a token issuer’s offer and sale of virtual assets, or the token issuers offer or sale of virtual assets.

Excluded Services and Activities.

In defining what constitutes virtual asset services, the Act is equally clear in identifying those activities that are excluded. Exemptions include closed-loop items which are non-transferable and non-exchangeable, professional persons acting on behalf of financial service providers, and entities providing ancillary services such as logistics, technical assistance, hardware manufacture, software engineering, network and telecommunication services, and others related to the creation, encryption or digital transfer of virtual assets. Such explicit demarcation ensures a thorough and balanced approach to regulation, ensuring clarity while fostering innovation.

For clarity purposes and as per the Namibia Virtual Assets Act, 2023, the following activities are not virtual asset services:

  1. Closed-loop items which are non-transferable, non-exchangeable, and cannot be used for payment or investment purposes, and which a person cannot sell onward on a secondary market outside of the closed-loop system.
  2. A person acting in a professional capacity on behalf of persons engaged in the provision or participation of financial services procuring the organisation, promotion, issuance, sale or trade of virtual assets.
  3. Provision of the following ancillary services or products to a virtual asset service provider: 
  1. supply of logistics and technical assistance services;
  2. manufacture of hardware and engineering of software services;
  3. network and telecommunication services;
  4. information technology services in respect to the creation, encryption or digital transfer of virtual assets;
  5. Services to hardware wallet manufacturers or non-custodial wallets; or
  6. validation, nodes operation and virtual mining services.

The Virtual Assets Act, 2023 represents a significant milestone on Namibia’s path towards a secure and regulated digital financial ecosystem. This piece of legislation has successfully created a framework that fosters innovation while protecting consumer interests and preserving market integrity. The Act outlines a comprehensive licensing system, establishing distinct categories aligned with diverse virtual asset ecosystem services. It demonstrates Namibia’s belief in the potential of virtual assets and its willingness to embrace the future of finance.

The Act provides a clear and robust regulatory environment by defining the functions of Token Issuers, Broker-Dealers, Asset Marketplaces, Wallet Services, Asset Custodians, and Asset Advisory Services. It endeavours to foster a trustworthy, transparent, and secure digital financial landscape.

This comprehensive regulation is a signal to global investors, entrepreneurs, and innovators that Namibia is prepared to take the lead in the digital finance era. It promises to further fuel the development of the crypto economy by encouraging responsible behaviour in the ecosystem of virtual assets.

Whether you are a token issuer planning an Initial Token Offering, a virtual asset service provider, an investor, or merely a crypto enthusiast, our experienced team can help you understand its implications. At CRYPTOVERSE, we assist Blockchain, Web3 and Crypto start-ups in navigating the opportunities and challenges presented by new legislations governing emergent technologies.

The world of digital finance is evolving swiftly, and the future is full of opportunities. CRYPTOVERSE is here to guide you every step of the way.

Visit our website at www.cryptoverselawyers.io to learn more about our legal services for Blockchain, Web3 and Crypto start-ups and how we can help you to achieve your business objectives.

Leave a Reply

Your email address will not be published. Required fields are marked *