Seychelles -- Custody Regulations Regulatory Overview

Seychelles has a dedicated regulatory framework for Virtual Assets Service Providers (VASPs), which includes digital asset custody. The primary legislation governing this area is the Virtual Assets Service Providers Act, 2022 (VASP Act, 2022), which came into force in early 2023.

The Financial Services Authority (FSA) of Seychelles is the primary regulator for VASPs in Seychelles.

Here's a breakdown of the custody regulations:

Seychelles Cryptocurrency/Digital Asset Custody Regulations

1. Custodial License Requirements

• Requirement for License: Any person providing "custody or administration of virtual assets or instruments enabling control over virtual assets" as a business in or from Seychelles must obtain a VASP license from the FSA.

  • Regulatory Reference: Virtual Assets Service Providers Act, 2022, Section 5(1).
  • URL: https://fsaseychelles.sc/download/virtual-assets-service-providers-act-2022-2/

• Application Requirements: To obtain a VASP license for custodial services, applicants must satisfy stringent criteria, including:

  • Fit and Proper Test: The applicant, its directors, and senior management must meet "fit and proper" criteria.

  • Business Plan: Submission of a comprehensive business plan detailing operations, strategies, and internal controls.

  • Internal Controls: Adequate internal control systems, accounting systems, and systems for safeguarding virtual assets.

  • AML/CFT Compliance: Robust anti-money laundering (AML) and combating the financing of terrorism (CFT) policies and procedures, in compliance with Seychelles' AML/CFT framework and international standards.

  • Risk Management: Adequate risk management frameworks and internal audit functions.

  • Cybersecurity: Strong cybersecurity and data protection measures.

  • Minimum Capital: Meeting prescribed minimum capital requirements (details usually in subsidiary regulations or FSA directives).

  • Local Presence: Generally, there's a requirement for a physical presence or designated local resident.

  • Regulatory Reference: Virtual Assets Service Providers Act, 2022, Section 7.

  • URL: https://fsaseychelles.sc/download/virtual-assets-service-providers-act-2022-2/

• Application Process: The application process is detailed in the Virtual Assets Service Providers (Application) Regulations, 2023.

  • URL: https://fsaseychelles.sc/download/virtual-assets-service-providers-application-regulations-2023/

• Fees: Fees for application and annual licensing are prescribed in the Virtual Assets Service Providers (Fees) Regulations, 2023.

  • URL: https://fsaseychelles.sc/download/virtual-assets-service-providers-fees-regulations-2023/

2. Segregation of Client Assets Rules

• Mandatory Segregation: A licensed VASP offering custodial services is explicitly required to maintain a clear segregation between the virtual assets of its clients and its own virtual assets. This is a fundamental principle to protect client funds in case of insolvency or operational issues of the VASP.

  • Regulatory Reference: Virtual Assets Service Providers Act, 2022, Section 18(1).
  • URL: https://fsaseychelles.sc/download/virtual-assets-service-providers-act-2022-2/

• Record Keeping: VASPs must keep proper records for all clients' virtual assets held by them.

  • Regulatory Reference: Virtual Assets Service Providers Act, 2022, Section 18(2).

3. Insurance/Bonding Requirements

• The Virtual Assets Service Providers Act, 2022 does not explicitly mandate specific insurance or bonding requirements for custodians in a standalone section.
• However, the Act does require VASPs to have "adequate risk management frameworks and internal audit functions" (Section 7(g)). The FSA, as part of its supervisory powers, may require a VASP to hold professional indemnity insurance or other forms of financial guarantees as part of its ongoing assessment of risk management or "fit and proper" criteria. It is common practice for financial service providers, including custodians, to carry robust insurance coverage to protect against operational risks, cyber risks, and potential losses. The absence of an explicit mandate in the primary Act does not preclude such requirements from being imposed through FSA directives, guidelines, or as part of the licensing conditions based on the nature and scale of operations.

4. Cold Storage Mandates

• The Virtual Assets Service Providers Act, 2022 does not explicitly mandate "cold storage" (offline storage) for client virtual assets.
• Similar to insurance, the Act focuses on broader principles, requiring VASPs to have:
  • "appropriate cybersecurity and data protection measures" (Section 7(g)).
  • "adequate internal control systems, accounting systems and systems for safeguarding virtual assets" (Section 7(d)).
• While not explicitly named, the best practice for safeguarding virtual assets, especially large amounts, typically involves a combination of hot and cold storage solutions. The FSA would expect a VASP to implement industry-standard security measures, which would likely include cold storage for a significant portion of client assets, as part of its compliance with the general cybersecurity and asset safeguarding requirements.

5. Qualified Custodian Definitions

• The Seychelles VASP Act does not define a separate category of "qualified custodian" distinct from a general VASP that offers custody services.
• Instead, any entity that provides "custody or administration of virtual assets or instruments enabling control over virtual assets" as a business is considered a Virtual Asset Service Provider (VASP) and must be licensed as such by the FSA. Therefore, a "qualified custodian" in Seychelles' context is effectively a VASP that holds the necessary license and complies with all the requirements of the VASP Act for providing custody services.
  • Regulatory Reference: Virtual Assets Service Providers Act, 2022, Section 2 (Definition of Virtual Asset Service Provider).

6. Pending Custody Legislation

• The Virtual Assets Service Providers Act, 2022, and its accompanying regulations (Application and Fees Regulations, 2023) are relatively new and represent the current, active regulatory framework.
• While the core legislation is in force, financial regulators typically issue guidelines, directives, circulars, or additional prudential regulations over time to provide more detailed instructions, clarify interpretations, or address emerging risks and market developments. It is always possible that the FSA may introduce further specific requirements related to custody (e.g., explicit cold storage percentages, specific insurance types, or more granular capital requirements based on custody volume) through such subsidiary instruments in the future.
• However, there isn't any major "pending custody legislation" that would overhaul the existing VASP Act framework currently publicized. The framework itself is quite comprehensive for a relatively new area of regulation.

Summary of Key Regulatory References:

• Virtual Assets Service Providers Act, 2022:
  • URL: https://fsaseychelles.sc/download/virtual-assets-service-providers-act-2022-2/
• Virtual Assets Service Providers (Application) Regulations, 2023:
  • URL: https://fsaseychelles.sc/download/virtual-assets-service-providers-application-regulations-2023/
• Virtual Assets Service Providers (Fees) Regulations, 2023:
  • URL: https://fsaseychelles.sc/download/virtual-assets-service-providers-fees-regulations-2023/
• FSA Seychelles Official Website (for general regulatory information):
  • URL: https://fsaseychelles.sc/

Disclaimer: This information is for general informational purposes only and does not constitute legal or professional advice. Compliance with these regulations requires careful consideration of individual circumstances and consultation with legal and regulatory experts.