Botswana -- Custody Regulations Regulatory Overview

Botswana has made significant strides in regulating virtual assets with the promulgation of the Virtual Assets Act, 2022. This Act provides the foundational legal framework, placing the regulation of Virtual Asset Service Providers (VASPs), including those offering custody services, under the purview of the Non-Bank Financial Institutions Regulatory Authority (NBFIRA).

It's important to note that while the Act provides the broad framework, detailed, granular regulations covering every specific aspect of custody (like explicit cold storage mandates or detailed qualified custodian definitions) are often developed through secondary legislation, directives, or guidelines issued by the regulatory authority. As of early 2024, NBFIRA is actively working on implementing the Act.

Here's a breakdown based on the Virtual Assets Act, 2022 and general regulatory principles:

Botswana Cryptocurrency/Digital Asset Custody Regulations

Primary Legislation:

• Virtual Assets Act, 2022 (Act No. 19 of 2022, published in the Botswana Government Gazette on 27th May 2022)

Regulatory Authority:

• Non-Bank Financial Institutions Regulatory Authority (NBFIRA)
  • Website: NBFIRA Website

1. Custodial License Requirements

The Virtual Assets Act, 2022 mandates licensing for all Virtual Asset Service Providers (VASPs) operating in Botswana. "Custody or administration of virtual assets or instruments enabling control over virtual assets" is explicitly defined as a VASP activity requiring a license.

Key Provisions (Virtual Assets Act, 2022):

• Section 5: Prohibits any person from carrying on a virtual asset business or virtual assets service without a license issued by NBFIRA.
• Section 3 (Definitions): Defines a "virtual asset service provider" (VASP) to include any person who, as a business, "provides custody or administration of virtual assets or instruments enabling control over virtual assets."
• Sections 6-10: Outline the application process for a license, including requirements such as:
  • Application in the prescribed form.
  • Payment of prescribed fees.
  • Provision of information on the applicant's business, management, financial resources, operational plan, internal controls, risk management systems, and compliance with anti-money laundering (AML) and combating the financing of terrorism (CFT) obligations.
  • NBFIRA assesses the applicant's "fit and proper" status, ensuring the applicant and its management have the necessary integrity, competence, and financial soundness.

Specific Regulatory Reference:

• Virtual Assets Act, 2022, Part III (Sections 5-13): Licensing of Virtual Assets Service Providers.
• URL: While a direct public URL for the full Act from the Botswana government might require navigating their gazette archives, the Act was published in the Botswana Government Gazette Vol. LX, No. 34, G. 4032 on 27th May 2022. You can often find copies through legal information services or by direct request to NBFIRA.

2. Segregation of Client Assets Rules

The Virtual Assets Act, 2022 lays the groundwork for sound operational practices, which implicitly include the need for proper client asset management. While the Act itself might not contain highly granular rules for asset segregation, it provides NBFIRA with the power to issue such directives.

Key Provisions (Virtual Assets Act, 2022):

• Section 15: Requires a licensed VASP to "at all times maintain adequate and appropriate systems of control and procedures for the proper administration of its affairs." This provision is broad enough to encompass requirements for client asset segregation to prevent co-mingling and protect client funds in case of VASP insolvency.
• Section 18: Grants NBFIRA the power to issue directives and practice notes to VASPs concerning various matters, which would include detailed operational requirements like asset segregation.

It is highly probable that NBFIRA, through subsequent regulations or directives, will mandate clear segregation of client virtual assets from the VASP's proprietary assets. This is a fundamental principle in traditional financial custody and AML/CFT best practices (e.g., FATF Recommendation 15).

3. Insurance/Bonding Requirements

The Virtual Assets Act, 2022, does not explicitly mandate specific insurance or bonding requirements for VASPs.

Key Provisions (Virtual Assets Act, 2022):

• Section 15(1)(d): Requires a VASP to "at all times maintain adequate financial resources for the proper performance of its functions." While not directly mandating insurance, adequate financial resources could implicitly cover potential liabilities.
• Section 18: NBFIRA has the power to issue directives. It could, in the future, introduce requirements for professional indemnity insurance or specific bonding for VASPs handling client assets, especially given the risks associated with virtual assets.

As with segregation, detailed insurance requirements are often developed in subsequent regulatory instruments rather than the primary legislative act.

4. Cold Storage Mandates

The Virtual Assets Act, 2022 does not contain explicit mandates for the use of cold storage (offline storage of private keys) for virtual assets.

Key Provisions (Virtual Assets Act, 2022):

• Section 15(1)(a): Requires a licensed VASP to "implement appropriate measures to safeguard the virtual assets under its custody or control against theft, loss, or damage."
• Section 15(1)(b): Requires a VASP to "implement a robust information technology framework to manage risks, including cybersecurity and operational resilience."

While these provisions don't specifically name "cold storage," they clearly empower NBFIRA to require VASPs to adopt secure storage practices. Given the security benefits, NBFIRA is likely to recommend or mandate specific security measures, which could include the use of cold storage for a significant portion of client assets, through subsequent directives or guidelines. This aligns with global best practices for secure virtual asset custody.

5. Qualified Custodian Definitions

The Virtual Assets Act, 2022 defines "Virtual Asset Service Provider" and specifically includes entities providing "custody or administration of virtual assets." The Act does not create a separate category or definition for a "qualified custodian" distinct from a licensed VASP performing custody services.

Key Provisions (Virtual Assets Act, 2022):

• Section 3 (Definitions): A "virtual asset service provider" is any person who, as a business, performs one or more of several enumerated activities, including "custody or administration of virtual assets or instruments enabling control over virtual assets."

Therefore, under Botswana law, any entity licensed by NBFIRA to provide custody services for virtual assets would effectively function as a "qualified custodian" within the regulatory framework, meeting the requirements set out by the Act and subsequent NBFIRA directives. The "qualification" comes from meeting the licensing and operational standards set by NBFIRA.

6. Any Pending Custody Legislation

The Virtual Assets Act, 2022 is the primary, relatively new legislation. While there isn't typically another Act pending specifically for custody, the implementation and detailed elaboration of the existing Act are ongoing.

Key Pending Regulatory Activity:

• NBFIRA Directives, Regulations, and Guidelines: NBFIRA is mandated by the Act to develop and issue subsidiary legislation, directives, and guidelines to fully implement its provisions. These future instruments are expected to provide the granular detail for aspects like:
  • Specific requirements for risk management in custody (including cybersecurity, disaster recovery).
  • Detailed operational requirements (e.g., specific security measures for private keys, possibly including cold storage ratios).
  • Further clarification on client asset protection and segregation.
  • Specific capital adequacy or insurance requirements.
• Public Consultations: NBFIRA is likely to engage in public consultations as it develops these detailed regulations, allowing industry stakeholders to provide input.

Therefore, while no new Acts are currently pending specifically for custody, the "pending" aspect lies in the development of the secondary legislation and regulatory instruments by NBFIRA, which will flesh out the specific requirements for virtual asset custody in Botswana.

In summary: Botswana has established a clear legal framework with the Virtual Assets Act, 2022, requiring all virtual asset custodians to be licensed by NBFIRA. The Act sets the stage for NBFIRA to implement comprehensive rules for safeguarding client assets, robust cybersecurity, and sound operational practices, through further detailed regulations and directives. Interested parties should monitor NBFIRA's official publications for these upcoming specific requirements.