Rapid innovation in Financial Technology (FinTech) causes as much disruption as it holds great promise for the future of the financial services sector. The burgeoning of various FinTech tools has the potential of fundamentally changing the way in which financial institutions can provide, and consumers can use, financial services. It is common knowledge that investment in FinTech is on the rise and that people are now more than ever willing to use FinTech in their daily lives. While there is no doubt that FinTech could transform the traditional financial services system by making it more efficient, effective and resilient, FinTech also poses certain challenges. At the heart of these challenges, lies that of effective regulation. Over-regulation may stifle innovation and insufficient regulation may put investors and consumers at risk. This is the conundrum faced by most, if not all, countries trying to ride the FinTech wave.
The situation in Mauritius has been no different. Attempting to regulate this area has not been an easy task for the Mauritian legislators or regulators in a bid to drawing a fine line in regulatory scope and freedom to innovate. In this article, we aim to provide a high level overview of the key recent developments in the legal and regulatory framework governing the FinTech industry.
Regulatory Sandbox Licence
Prior to 2016, there was hardly any regulatory framework to assist the development of the FinTech industry in Mauritius. In 2016, the Government introduced the Regulatory Sandbox Licence (RSL) to allow companies to invest in innovative projects with a bespoke set of terms and conditions, even in the absence of a formal licensing framework.
In February 2018, in order to establish Mauritius as a FinTech hub for Africa, a ‘Fintech and Innovation-Driven Financial Services Regulatory Committee’ was set up to elaborate the regulatory framework for the development of the FinTech industry in Mauritius.
Furthermore, to partly hone the RSL into a regulatory tool specific to FinTech activities, a National Regulatory Sandbox Licence Committee (National RSL Committee) was established to consider all issues relating to the Sandbox licensing for FinTech activities. Under the administration of the Financial Services Commission (FSC)1, the National RSL Committee operates as an independent committee to coordinate the processing of all FinTech related RSL applications made to the Economic Development Board (EDB). The licensing modalities are determined by the National RSL Committee which itself comprises of representatives of the EDB, the FSC, the Bank of Mauritius (BOM), The Ministry of Finance and Economic Development, the Financial Intelligence Unit, the Ministry of Financial Services and Good Governance and the State Law Office.
Recognition of Digital Assets
As part of its new ‘Fintech Series’, the FSC issued its first guidance note on “Recognition of Digital Assets as an asset-class for investment by Sophisticated and Expert Investors” on 17 September 2018 (Guidelines). Therein, the FSC recognised Digital Assets including Cryptocurrencies (considered as a sub-category of Digital Assets) as an asset-class for investment by, inter alia, sophisticated investors and expert investors.
The FSC considers as a Digital Asset, any token, in electronic/binary form, which is representative of either the holder’s access rights to a service or ownership of an asset and includes a digital representation of value which:
i.is used as a medium of exchange, unit of account, or store of value but which is not legal tender, even if it is denominated in legal tender;
ii.represents assets such as debt or equity in the promoter; or
iii.provides access to a blockchain-based application, service or product.
The Guidelines exclude from the definition of Digital Assets:
i.any transaction in which a business, as part of an affinity or reward programme, grants value which cannot be exchanged for legal tender, bank credit or any Digital Asset; or
ii.a digital representation of value issued for use within an online gaming platform.
Digital Assets Custodian
Following the issue of the Guidelines, to continue building an enabling framework for FinTech in Mauritius, the Financial Services (Custodian Services (Digital Asset)) Rules 2019 (Rules) were issued on 6 March 2019. Under the Rules, the objects of an applicant for a Custodian Services (Digital Assets) Licence (Licence) must be limited to the safe-keeping of digital assets and operations arising directly from it. The FSC, if satisfied that an application meets the requirements of the Financial Services Act 2007 and the Rules, may issue a letter of intent to the applicant who is then required to demonstrate that it has in place the required resources, infrastructure and staffing to commence business within 6 months from the date of the letter of intent. Where the FSC is satisfied with the arrangements of the applicant, it may then grant the Licence.
The registered office and place of business of a custodian of digital assets (Custodian) should at all times be maintained in Mauritius. A Custodian should always have a representative which has sufficient knowledge in operations of the custodian, in Mauritius. The minimum capital requirement of a Custodian should all times be the higher of:
a.35 million Mauritian rupees (amounting roughly to US $1 Million) or an equivalent amount in foreign currency; or
b.an amount representing 6 months? operating expenses as reported in the audited financial statements submitted to the FSC. The Custodian must also have a redundancy system in place to ensure continuity of its operations in the event of any unavailability of equipment, software or primary staff, appropriate disaster recovery facilities, a risk management framework and appropriate infrastructure to ensure continuous operations.
Securities Token Offering
Finally, the latest regulatory action by the FSC in the FinTech domain has been the issuance of the second Guidance Notes in the FinTech series on Securities Token Offering. This crucial note clarifies the FSC’s interpretation of “securities” as defined in the Securities Act 2005. It is now clear that “Securities tokens” represented in digital format are “securities” and their offering is subject to the Securities Act 2005.
The existing framework then is the result of a balancing exercise between finding legal certainty and promoting innovation and new business ventures. While the Rules provide stringent standards for safekeeping, they also position Mauritius at the forefront of the FinTech revolution given that it is among the first countries in the world to provide for a regulated environment for the custody of Digital Assets.
1 FSC is the integrated regulator for the non-bank financial services sector and global business.
*This article should not be construed as legal advice and is made for information purposes only. Should you require legal advice on AML/CFT related matters please contact chambers@blc.mu