June 26, 2023

Dear partners, last week we announced about the adoption of the Law regulating VASP on the territory of Georgia.

The article has been prepared by the legal team of Rokhvadze&Partners and is protected by copyright law. Any unauthorized copying, reproduction, or distribution of the article without the explicit consent of the website owner is prohibited.

Georgia has been undertaking a progressive and systematic approach to the regulation of Virtual Asset Service Providers (VASPs) within its jurisdiction. Drawing upon international best practices, Georgia has diligently worked towards the adoption of legislative measures over the past two years, establishing comprehensive rules and requirements governing activities in the VASP sector.
On June 13, 2023 the President of the National Bank of Georgia issued Order No. 94/04, which, pursuant to the authority vested in them, sets forth the rules and requirements for the accreditation of Virtual Asset Service Providers (VASPs) before the supervisory authority. This Order serves as a regulatory instrument governing the process of VASP registration and establishes the necessary criteria and procedures to be followed. In this article we will provide an in-depth analysis of the aforementioned document, offer legal commentary on its provisions, and present a comprehensive step-by-step plan for the registration of a VASP with the National Bank of Georgia.
This regulatory legal act defines the general requirements that must be adhered to in the conduct of VASP activities. Its purpose is to ensure transparency, security, and efficiency within the operations of VASPs, while also safeguarding the interests of clients and the broader society. The Order contains specific prohibitions that must be strictly observed during the course of VASP activities, as prescribed by law.
CORPORATE ISSUESBefore commencing operations, it is mandatory to register a legal entity within the territory of Georgia. Pursuant to paragraph 5 of Article 1 of Order No. 94/04, VASPs are exclusively permitted to conduct their activities in compliance with the applicable legislation of Georgia by registering either a Limited Liability Company (LLC) or a Joint Stock Company (JSC) and obtaining the necessary authorization from the Regulatory Authority to engage in such activities.
It is crucial to note that the selection of the legal form for the company entails specific obligations, thus seeking legal advice prior to registration is advisable. For instance, the new legislation imposes a requirement for JSCs to establish a minimum charter capital of 100,000 Georgian Lari (approximately 27,000 US dollars) by the end of 2023, while there are no specific charter capital requirements for LLCs.
UBOsEvery business is ultimately owned by its ultimate beneficial owner (UBO). Therefore, in the case of a business with a complex corporate structure, it becomes necessary to disclose comprehensive information about all owners and managers of the company. Georgian legislation distinguishes between various types of participants in a company, as there exist both direct and indirect forms of corporate control. The subjects of corporate control encompass both natural and legal persons - participants in the company who possess the ability to exert influence over its entrepreneurial activities (affiliated entities). The new Order establishes the procedure for scrutinizing such individuals within the company and necessitates the submission of separate documentation for each of them, with the purpose of promoting disclosure and enhancing transparency. Consequently, it is strongly advised to compile the relevant documentation regarding the company's owners prior to commencing the document submission process to the supervisory authority.
ADMINISTRATORSThe Order identifies a specific group of individuals who have access to the operational activities of the VASP and whose work directly impacts the achievement of their assigned tasks. Certain requirements are outlined that must be documented in order to obtain the relevant registration. This pertains to information and documentation regarding the education and professional skills of the individuals responsible for management. Documents verifying knowledge in the field of modern technologies must be provided. Additionally, certificates of criminal record from all countries where the employee has been a tax resident for the past 10 years must be submitted. Furthermore, the company must provide information from verified sources, credit bureaus, and financial institutions regarding the financial well-being index of all company participants.
ECONOMIC SUBSTANCEThe requirement for an economic presence and an effective management body within the territory of the state where the VASP entity is registered is a prevalent and standardized provision. The regulatory framework sets forth stringent criteria for complying with the economic substance requirements for conducting activities within the jurisdiction of the state. The Order specifically outlines the conditions for the physical location of the VASP and its branches, as well as the necessary equipment and the implementation of robust monitoring and security systems. Furthermore, the Regulator retains the right to expediently access any form of information that is recorded and registered by the VASP business entity.
ORGANIZATION OF VASP OPERATIONAL ACTIVITIESUnder the applicable legislation of Georgia, the organizational activities of a VASP encompass tax, legal, financial, and technical aspects. Each of these components requires compliance with the relevant laws and regulations. For instance, since 2022, most companies utilize a standardized form of Articles of Association, which does not include specific provisions regulating key aspects of VASP operations. To accurately define the company's activities, it is necessary to establish priorities, structure of operations, and document all conditions in the company's founding document. The Regulator may adopt an existing model of Articles of Association, which has been developed by the Ministry of Justice as a template. However, in the event of specifying certain conditions, the supervisory authority retains the right to request the incorporation of specific amendments in accordance with administrative and technical regulations.
IMPLEMENTATION OF THE TRAVEL RULEAccording to the rule established by the Financial Action Task Force (FATF) and known as the "Travel Rule," Virtual Asset Service Providers (VASPs) are required to exchange information that allows for the identification of personally identifiable information (PII) and undergo Know Your Customer (KYC) procedures between relevant institutions when conducting transactions between senders and recipients.
The company must also prepare a package of documents that regulate relationships with clients and establish the principles of VASP operations. These documents should include measures for conducting Enhanced Due Diligence (EDD) to mitigate potentially higher risks associated with the activity.
FINANCIAL MATTERSThe company is required to maintain financial accounting, conduct audits, and keep records of all transactions in a manner that allows for individual transactions to be properly retrieved, and all required information to be promptly provided to the Regulator.
FATF recommends that countries establish a de minimis transaction threshold, within which cryptocurrency transactions are not subject to regulation. The Regulator has set the threshold between 1000 and 3000 Georgian Lari. However, this amount may be adjusted by the Regulator over time.
VASPs are obligated to retain records of transactions and information obtained through Customer Due Diligence (CDD) procedures. This information includes:
● Identification data of the relevant parties, such as public keys or equivalent identifiers.● Addresses and accounts associated with the equivalent identifiers.● Nature, date, and amount of the transaction.● Accounting can be conducted based on publicly available information about a specific Virtual Asset (VA) accessible in the blockchain or other relevant distributed ledger, provided that companies are able to adequately identify their customers.
PROHIBITIONSThe directive imposes the following legally precise prohibitions and restrictions on Virtual Asset Service Providers (VASPs) in their operations:
● Prohibition on engaging in lending activities, including extending loans or providing credit facilities, for both individuals and legal entities.● Prohibition on offering rewards or referral-type payments as incentives for attracting new users or customers.● Prohibition on engaging agents or intermediaries to provide services on behalf of the VASP.● Prohibition on providing services related to virtual assets that utilize anonymity-enhanced coins/privacy coins or employ technologies/mechanisms that hinder the identification and detection of transaction information and participants within the context of Distributed Ledger Technology (DLT).
It is important for VASPs to adhere to these prohibitions and restrictions to ensure compliance with the regulatory framework and foster the stable and compliant development of their business operations.
In conclusion, we would like to emphasize that despite the high attractiveness of this business, the sector involves various regulated and unregulated risk factors from different sources. We recommend ensuring the high quality of your capabilities and resources, as well as a genuine desire to comply with regulatory requirements for the stable development of your business.