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Vanuatu has passed a bill to institute a regulatory regime for digital assets, including a licensing and reporting framework for exchanges, non-fungible token (NFT) marketplaces, digital asset custody providers and initial coin offerings (ICOs).

The South Pacific Island nation’s Parliament passed the “Virtual Asset Service Provider (VASP) Act” on March 26. Amongst other measures, the framework designated the Vanuatu Financial Services Commission (VFSC) as the licensing authority, with powers to enforce the Financial Action Task Force’s (FATF) Anti-Money Laundering, Counter-Terrorism Financing and Travel Rule standards on digital asset firms.

Under the new law, the regulator was given enhanced investigation and enforcement powers, with potential penalties of up to 250 million vatu (USD $2 million) and up to ten years in prison for offenders.

“Economically, the VASP Act establishes a stable regulatory framework for digital business transactions,” said the VFSC in a March 29 statement, adding that the framework was developed after years of “assessing the risks associated with virtual assets.”

According to the regulator, the new law “opens numerous opportunities for Vanuatu, both economically and socially, while ensuring that international standards are adhered to.”

Key points of the VASP Act

Under the new framework, digital assets were defined as “digital representations of value that may be traded and function as a medium of exchange, a unit of account, or a store of value.”

The legislation also allows for the VFSC’s commissioner to create a “Fintech Sandbox Utility”—a service that uses innovative technology to improve, change or enhance financial businesses—to allow approved companies to offer a range of services, such as digital asset wallet, custodian, advisory, or exchange services, for a year—which can be extended at the end of the period.

However, the VASP Act does not cover digital representations of fiat currencies, securities, and national digital currencies, including central bank digital currency (CBDC), even though they “may in practice share some similarities with virtual assets,” said the VFSC.

In addition, the regulator highlighted that digital assets are still not legal tender in the country and can be a risk to investors.

“Virtual assets and cryptocurrencies are not protected by any statutory compensation arrangements in Vanuatu,” said the VFSC, warning that it “does not recommend them for retail investors without thorough understanding of the associated risks.”

Loretta Joseph, who consulted with the Government and regulator on the framework, praised the VASP Act as “a landmark piece of legislation that marks a bold step forward in embracing the future of digital finance.”

She suggested that the law’s passage proves “emerging markets can lead the way in crafting legislation that not only embraces digital assets but does so while carefully mitigating risks.”

“It is a true testament to how a small island state can move faster than many of its larger neighbours—innovating with purpose, agility, and foresight,” said Joseph.

Watch: Reggie Middleton on DeFi, booms/busts & crypto regulation

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