How to set up a Crypto exchange in the Isle of Man.
The Isle of Man is an increasingly popular place to establish a crypto exchange – this is a simple practical guide on the steps required to do it.
Step 1. Understand the Isle of Man regulatory requirements for crypto exchanges.
If you fully understand the requirements for setting up an Isle of Man crypto exchange from a regulatory point of view then the required practical steps set out below will become a bit more obvious.
You can find a detailed overview of the AML/CFT compliance requirements in our article “Isle of Man regulation of virtual currency business” – it’s a short read – but if you are feeling lazy or you don’t like reading about compliance rules, here are the key ‘take-aways’:-
- IOM crypto exchanges are inside the regulated sector for AML/CFT purposes and need to follow the AML / CFT code.
- IOM crypto exchanges – are required to register with the Isle of Man FSA (‘Regulator) as ‘designated’ businesses before they commence business (or ‘hold out’ as undertaking crypto exchange business).
- There are no specific requirements in relation to PII, Capital or Financial resources for crypto exchanges in the Isle of Man.
Step 2. Understand the registration requirements for registering a crypto exchange as a designated business with the Isle of Man FSA.
Registering as a designated business with the Isle of Man FSA is actually quite easy. As well as crypto businesses – lawyers, accountants, tax advisors, payroll agents, moneylenders, leasing businesses, certain types of guarantors, estate agents and high value cash businesses are all required to register.
The FSA has helpfully issued a registration policy which outlines the requirements. It’s well worth a read but a key part to note for Convertible Virtual Currency (CVC) business (including crypto exchanges) is 4.1.1 entitled ‘Real Presence / Substance’ which requires that:
- the CVC business must have (and continue to have) at least 2 IoM resident directors;
- management and control of the CVC business must be in the Island.
So – in practice – this means in order to register and set up as a crypto exchange business – you will need to be a corporate entity with Isle of Man resident directors who control the day to day business and a local Isle of Man based MLRO.
Step 3. Start practical planning to meet the requirements identified in step 2.
- Company formation: You will probably need to form an Isle of Man Company (either 2006 or 1931 Act). If you are not resident on the Island, then you will probably need a corporate services provider for this. See our Article on choosing a corporate service provider. Ask us if you want us to refer you to a good one.
- Appoint directors – ideally either you or your staff will relocate to the Island and act as directors for the company operating the crypto exchange (see our article on relocating to the Isle of Man). If not, then you will need to appoint Isle of Man resident professional directors to manage the Company and the business relating to the exchange. Appointing local professional directors is often problematic – because – finding local persons with sufficient knowledge, expertise and time to genuinely set up and manage your crypto exchange business is both very difficult and rather expensive.
Note – in practice, the identification of directors tends to be the single biggest impediment for people wishing to set up crypto exchanges on the Isle of Man.
On a general note – you may be able to outsource some aspects of the Company’s operations to parties ‘off Island’ but this may require discussion with the FSA (regulator) and we would expect the FSA to require ‘mission critical’ activities to be managed and controlled by staff resident in the Isle of Man.
- Identify Premises etc. If you are moving to the Isle of Man to set up your crypto exchange then you will probably rent an office here on the Island as the registered office. If you require office space – we can help you by referring you to agents or friends that can help you out. There is also an increasing choice of high quality serviced accommodation. We like – The Hubb (we rented an office there ourselves) and Engine House.
- Get compliance matters in order. Your new company will need to prepare its AML / CFT procedures manual and business, customer and technological risk assessments which are required under the Code. Our colleagues at Rowany Solutions are Isle of Man compliance experts and they can assist you with all of this.
Step 4. Apply to FSA for registration as a designated business.
Once you understand the legal requirements, you have formed a company with local directors, you know where you are operating the business from and you have your compliance matters in order then your Company is ready to apply for registration as a designated business.
You can apply online at https://www.iomdnfbp.co.im/ (or ask Rowany Solutions to help you with this)
Registration should be achievable within 2 or 3 weeks. The FSA may require you to provide additional information to support your application. This might include, business plans and sight of policies / procedures and risk assessments.
Essentially they want to have confidence that the business meets the registration criteria, that it will be operating in accordance with the requirements of the Code.
Step 5. Commence business.
Once registered the business is permitted to start advertising and conducting business as a crypto exchange.
Step 6. Ongoing Requirements:
As well as the ongoing AML/CFT requirements under the Code, there are ongoing reporting requirements under the Designated Business Act itself. Specifically:-
- Section 19 requires registered businesses to inform the Authority of any changes in registration details prior to effecting them. This includes changes of Controllers (directors and shareholders controlling >15% of the voting capital.
- There is an annual compliance return to complete and submit before 31 October each year.
- There is an Annual statistical return to completed and submitted annually.
Additionally – the FSA has wide powers of inspection to conduct supervisory compliance visits of business to monitor compliance with the Code. Crypto business is considered higher risk and therefore recently registered crypto exchanges visited within 6 months of registration and fairly regularly thereafter.
DISCLAIMER; THIS ARTICLE IS A GENERAL EDITORIAL COMMENTARY ONLY. IT IS NOT INTENDED TO BE AND DOES NOT CONSTITUTE LEGAL ADVICE.
Contact Martin Katz by telephone on +44 1624 777900 or email – [email protected] if you require assistance with this or other matters relating to the Isle of Man.