Sri Lanka -- Custody Regulations Regulatory Overview

Sri Lanka currently maintains a very cautious and largely prohibitive stance on cryptocurrencies and digital assets. The Central Bank of Sri Lanka (CBSL) has repeatedly issued warnings to the public regarding the risks associated with virtual currencies, emphasizing that they are not legal tender in Sri Lanka and are not regulated.

As a result, there is no specific, dedicated regulatory framework for cryptocurrency/digital asset custody services in Sri Lanka. This means that, unlike jurisdictions with well-developed crypto regulations, Sri Lanka does not have explicit rules for:

1. Custodial License Requirements:

   • No specific license exists for operating a cryptocurrency custody service. The CBSL has explicitly stated that it has not licensed or authorized any entity or company to operate such schemes or to engage in "mining" or "exchanges" of virtual currencies. Any entity offering such services would be operating outside a recognized regulatory framework and could be subject to enforcement actions under general financial laws if their activities are deemed to constitute unlicensed financial services.
   • Regulatory Reference:
     • Central Bank of Sri Lanka - Public Notice on Virtual Currencies (2021): "The Central Bank of Sri Lanka (CBSL) wishes to inform the public that it has not granted any license or authorization to any entity to operate as a Virtual Currency Exchange (VCE) or provide any services related to Virtual Currencies (VCs) in Sri Lanka."
     • CBSL Public Notice on Virtual Currencies - 2021

2. Segregation of Client Assets Rules:

   • No specific rules are in place for the segregation of client cryptocurrency assets by custodians, as the custody service itself is unregulated. In traditional financial services, segregation is a fundamental principle, but it does not apply to unregulated crypto activities in Sri Lanka.

3. Insurance/Bonding Requirements:

   • No specific insurance or bonding requirements exist for cryptocurrency custodians. This is a direct consequence of the lack of a regulatory framework for these services.

4. Cold Storage Mandates:

   • No specific mandates exist regarding the use of cold storage for client assets. While cold storage is a widely recognized best practice for security in the cryptocurrency industry, it is not a regulatory requirement in Sri Lanka due to the absence of a regulatory framework for crypto custody.

5. Qualified Custodian Definitions:

   • No definition of a "qualified custodian" specifically for digital assets exists in Sri Lankan law or regulation. The concept of a qualified custodian applies to regulated financial institutions, which currently does not extend to entities dealing with virtual assets in Sri Lanka.

6. Pending Custody Legislation:

   • While there isn't specific pending custody legislation, the Sri Lankan government and the CBSL have indicated an ongoing review and exploration of broader regulatory frameworks for virtual assets (VAs).
   • In 2021, a multi-agency committee was appointed to study the feasibility of regulating VAs and related services. The aim was to formulate a comprehensive legal and regulatory framework to address the risks associated with VAs and potentially harness their benefits. However, as of late 2023, concrete legislative proposals specifically addressing custody services, with detailed requirements, have not been publicly announced or enacted. The focus appears to be on understanding the landscape and establishing a broader framework first, rather than granular custody rules.
   • Regulatory Reference:
     • Central Bank of Sri Lanka - Statement on appointment of a committee to study virtual assets (2021): "The Government of Sri Lanka has appointed a committee comprising representatives from the Ministry of Finance, Department of Legal Affairs of the Central Bank of Sri Lanka (CBSL), Ministry of Defense, Department of Sri Lanka Customs, Financial Intelligence Unit (FIU), and Securities and Exchange Commission of Sri Lanka (SEC), to formulate a legal and regulatory framework for virtual assets (VAs) in Sri Lanka."
     • CBSL Public Notice on the Appointment of a Committee to Study Virtual Assets - 2021

Summary:

Currently, Sri Lanka does not have a regulatory framework for cryptocurrency/digital asset custody. The Central Bank of Sri Lanka strongly discourages engaging with virtual currencies due to the lack of regulation and associated risks. While discussions about broader virtual asset regulation are ongoing, there are no specific licensing, asset segregation, insurance, cold storage mandates, or qualified custodian definitions for crypto custody services in effect or imminently pending. Any entity offering such services would be doing so in an unregulated environment.

It is crucial for anyone considering offering or utilizing crypto custody services in Sri Lanka to monitor official announcements from the Central Bank of Sri Lanka and the Sri Lankan government, as the regulatory landscape for digital assets is subject to change.