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 assets;
- 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 asset.
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 platforms.
All VASPs would be subject to a number of general obligations including:
- 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; and
- The prior approval of CIMA for any issuance of virtual assets.
Importantly, the Bill provides exemptions for certain activities which are not caught by the registration or licensing requirements. These include:
- 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 jurisdictions.
Originally published 7 May 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.