Cayman Proposes Virtual Assets Framework
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In recent years the Cayman Islands has become an attractive
destination for technology entrepreneurs, particularly those
connected with virtual assets. While much of Cayman’s financial
services legislation was written before the recent blockchain
revolution began, recent years have seen the Cayman Islands take a
number of legal and regulatory steps to make the jurisdiction one
that will allow such innovation to thrive. The Virtual Asset
(Service Providers) Bill 2020 (“VASP
Bill”) is the latest legislative development in
Cayman’s ambition to become a global technology hub.
The VASP Bill aims to promote the use of new technology and
innovative enterprise in the Cayman Islands while complying with
newly adopted international standards set by the Financial Action
Task Force (FATF).
Key definitions and requirements
The VASP Bill defines a “virtual asset” as a digital
representation of value that can be digitally traded or transferred
and used for payment or investment purposes, but does not include
digital representations of fiat currencies.
“Virtual asset services” are businesses providing one
or more of the following services or operations:
- exchange between virtual assets and fiat currencies;
- exchange between one or more other forms of convertible virtual
- transfer of virtual assets;
- virtual asset custody service; or
- the participation in, and provision of, financial services
related to a virtual asset issuance or the sale of a virtual
Under the VASP Bill, virtual asset service providers
(VASPs) would need to register with, or be
licensed by, the Cayman Islands Monetary Authority
(CIMA). A separate licence from CIMA would be
needed for virtual asset custodial services and exchange or trading
All VASPs would be subject to a number of general obligations
- Anti-money laundering obligations;
- Strict data protection and cyber security obligations in
connection with the personal data they process;
- The filing of annual accounts with the Cayman Islands Monetary
Authority (CIMA) as the regulator of VASPs;
- The requirement for senior officers and beneficial owners to be
fit and proper persons;
- The prior approval of senior officer appointments by CIMA;
- The prior approval of CIMA for any issuance of virtual
Importantly, the Bill provides exemptions for certain activities
which are not caught by the registration or licensing requirements.
- Platforms which are mere meeting places, where sellers and
buyers may post bids and offers and where the parties trade in a
peer-to-peer environment only; and
- FinTech service providers that use innovative technology to
improve, change or enhance financial services but which are not
virtual asset services.
For entities or individuals providing a virtual asset service
that represents an innovative use of technology or uses an
innovative method of delivery that requires supervision and
oversight that is not offered by a an existing licence or
registration, the VASP Bill allows those providers to apply to sit
in a new regulatory sandbox. A sandbox licence is a temporary
licence granted for a period of up to one year.
To qualify for the sandbox, CIMA will consider whether the
service, technology or method of delivery improves the provision of
financial services in the Cayman Islands and complies with global
standards and best practices for combating money laundering,
terrorist financing and proliferation financing.
A note of caution
The Cayman Islands proved a popular choice for issuers of
virtual assets during the initial coin offering boom of 2017 to
2018. During the “Crypto Winter” that followed,
Cayman’s flexible business-orientated legislation, multitude of
potential issuer vehicle types, and internationally recognised
securities regulatory regime enabled the Islands to pivot away from
crowdfunded platforms towards security tokens and stable coins
which provided greater value stability and more predictable
investment returns. This same flexibility means that Cayman is
ideally placed to take advantage of the latest shift towards
securitising common assets and decentralised finance
(De-Fi) products, with Cayman already being the
offshore centre of choice for other securitisation issuers.
Virtual asset providers and those carrying on certain virtual
asset activities will wish to take note of the following aspects of
the VASP Bill (which is still in the consultation phase and
therefore potentially still subject to change) as the proposed
framework may not be suitable for all providers. With our global
network, Appleby is well placed to assist those providers find an
alternative jurisdiction if the new Cayman framework is not suited
to their business.
- The advantage of the VASP Bill is that it creates a
registration and licensing regime that is comprehensive and robust.
Those seeking to show the highest level of regulatory compliance
and good governance will find this appealing. However, it must be
noted that the regime exceeds the requirements of some other
leading financial centres, such as the UK’s FATF-compliant
framework. The FATF’s recommendations refer to a requirement
for licensing and/or registration of VASPs to enable appropriate
AML/CTF supervision only. The obligations under the VASP Bill go
far beyond this.
- The VASP Bill is crafted to deter bad actors and carries
serious penalties, including imprisonment, for those who fail to
comply. Taking high quality, specialised legal advice will be
absolutely paramount for clients in this space. In particular,
virtual asset service providers will want to be very clear on their
registration requirements, which may not always be straightforward
in a fast-moving, innovative business sector. For bad actors, there
is also a body of criminal law which deals with fraudulent and
similar activities, particularly those connected with AML/CTF.
- Some token issuers may not wish to use a licensed trading
platform to launch their virtual assets. Such exchange offerings
have already fallen out of favour in other jurisdictions due to
high fees and other issues and we expect that industry response to
this requirement will be negative. We are advocating for a
reconsideration of this proposal.
- The prior approval of CIMA must be obtained where ten per cent
or more of the total shares or interests (as applicable) in a
company or partnership which is a virtual asset service provider
are to be issued or transferred. This strict change of control
restriction is a common feature under Cayman’s other regulatory
laws and will be primarily a data collection exercise for licensees
and potential transferees. However, it will need to be seen whether
the additional administrative burden this requirement creates will
deter prospective clients and make Cayman less competitive in this
fast moving sector.
- While we await further details, it will be important to ensure
that application fees and annual fees – which are not detailed in
the VASP Bill – are no higher than those levied in competing
Originally published 7 May 2020
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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