An overview of the regulation of virtual assets in the Cayman Islands

Virtual asset laws and regulations in the Cayman Islands

Regulation of virtual assets and offerings of virtual assets in the Cayman Islands

Regulation of VASPs in the Cayman Islands

Regulation of other crypto-related activities in the Cayman Islands

Other relevant regulatory information

Pending litigation and judgments related to virtual assets in the Cayman Islands (if any)

Government outlook on virtual assets and crypto-related activities in the Cayman Islands

Advantages of setting up a VASP in the Cayman Islands

1. Virtual asset laws and regulations in the Cayman Islands

The regulatory landscape governing virtual assets in the Cayman Islands is governed by several key legislative instruments. The Virtual Assets (Service Providers) Law, 2020 which was enacted on May 25, 2020, serves as a foundational framework. Subsequent regulations, including the Virtual Assets (Service Providers) Regulations, 2020 enacted on October 28, 2020, and the Virtual Asset (Service Providers) (Savings and Transitional) Regulations, 2021, introduced on January 11, 2021, provide additional specifications and transitional provisions. The enactment of the Virtual Asset (Service Providers) Act (2022 revision) published on December 31, 2021, further refines the regulatory landscape. Notably, the Virtual Asset (Service Providers) (Amendment) Act, 2023, implemented on May 16, 2023, represents a recent update, reflecting the evolving nature of the virtual asset industry by the inclusion of various corporate structures and the clarification of responsibilities in case of default indicate a minute approach to addressing the complexities within the industry. The amendment also involves modifications to the definition of VASPs and outlines offenses related to incorporation, emphasising the need for accountability and compliance within the sector. This amendment, along with previous acts, regulations, and subsequent changes, will be collectively referred to as the VASP Act here. Complementing these acts are related legislative measures such as the Securities Investment Business (Amendment) Law, 2020 (SIBA), Anti-Money Laundering Regulations (2023 Revision) on January 12, 2023 (AMLR), and the Proceeds of Crime Law (2020 Revision) (POCA). The regulatory framework is further supported by the Mutual Funds Act (2021 Revision), Private Funds (Annual Returns) Regulations, 2021 (PFA), and the Monetary Authority (Administrative Fines) Regulations (2022 Revision) (Fines Regulations 2023). Additionally, the International Tax Co-operation (Economic Substance) Act (ITCESA) complements these regulations, underscoring the comprehensive approach adopted by the Cayman Islands in regulating virtual assets, ensuring compliance, and fostering a robust and transparent financial environment.

What is considered a virtual asset in the Cayman Islands?

The VASP Acts defines virtual assets as digital representations of value that can be digitally traded or transferred. These assets hold utility for both payment and investment purposes. It’s important to note that within this definition, virtual assets exclude digital representations of fiat currencies, further under section 3(2) of VASP Act, explicitly excludes virtual service tokens as well. Virtual services tokens are digital representation of value which is non-transferable, non-exchangeable and non-refundable and their sole function is to provide access to an application or service or to provide a service or function directly to its owner such as credit card awards, or similar loyalty program rewards or points, which an individual cannot sell onward in a secondary market.

The definition of virtual assets specifically excludes a digital representation of fiat currency like Central Bank Digital Currencies (CBDCs) but stablecoins are pegged to the value of dollar or some other asset and are not sanctioned by state machinery, it would likely fall within the definition of virtual asset under the VASP Act. The definition of virtual assets is expansive and can be construed to cover stablecoins and security tokens. However the definition can be stretched to envelope utility tokens only to the extent where they are not covered under the definition of virtual services tokens. Non-Fungible Tokens (NFTs) are not subject to specific regulations under the VASP Act, however it might be covered under the definition of virtual assets on a case to case basis where characteristics of NFTs match with either virtual assets or securities. That said, NFTs that will satisfy and fall within the scope of virtual service tokens will not be considered as virtual assets.

Who do such laws and regulations apply to?

The VASP Act in the Cayman Islands encompasses all entities that are either currently engaged in or have the intention to provide virtual asset services. These services, as defined under the VASP Act, covers a range of activities, including the issuance of virtual assets and the provision of various services related to virtual assets. These services comprise the exchange between virtual assets and fiat currencies, exchange between different forms of convertible and non convertible virtual assets, transfer of virtual assets, virtual asset custody services, and participation in or provision of financial services linked to virtual asset issuance or sale. The definition ensures that it covers a wide range of entities, including issuers of virtual assets, virtual asset custodians, virtual asset trading platforms, and those offering financial services related to the sale of virtual assets, such as virtual asset dealers and intermediaries to the extent they come under the scope of definition under virtual asset services. The VASP Act provides a framework for the conduct of virtual asset business in the Islands, the registration and licensing of persons providing virtual asset services and for incidental and connected purposes.

In accordance with the VASP Act, the term “virtual asset service provider” includes the following types of entities:

1. virtual asset trading platforms;
2. virtual assets custodians such as wallet service providers;
3. virtual asset issuers, whether registered or licensed; and
4. professionals that participate in or provide financial services related to virtual asset issuance or the sale of a virtual asset;
5. existing licensees conducting virtual asset services (including virtual asset custodial services, virtual asset trading platform services and virtual asset issuance); and
6. any person facilitating (a) the exchange or transfer of virtual assets to/from another virtual asset or fiat currency, (b) the transfer of virtual assets, or (c) the exchange between one or more other forms of convertible virtual assets on behalf of another person or entity.

When assessing whether a particular activity qualifies as a virtual asset service in the Cayman Islands, it is crucial to analyse the nature of the service and its practical function. For instance, engaging in activities related to non-fungible tokens or virtual service tokens, even if not explicitly named as such, may still be categorised  as virtual asset services if these tokens are intended for payment or investment purposes in practice. The determination of whether an activity falls under the definition of a virtual asset service should be made on a case-by-case basis, emphasising the practical implications and functions of the services provided, rather than relying solely on specific terminology.

Who are the relevant regulatory authorities in relation to virtual assets in the Cayman Islands?

In the Cayman Islands, the Cayman Islands Monetary Authority (CIMA) plays a crucial role in regulating and supervising the financial services industry, monitoring compliance with anti-money laundering regulations, and providing regulatory guidance through policies, procedures, rules, statements of principle and guidance. Additionally, the regulatory landscape for the FinTech industry is governed by designated authorities with specific responsibilities. The Financial Intelligence Unit (FIU), operating under the Cayman Islands’ Financial Reporting Agency (FRA), is tasked with deterring, preventing, and detecting money laundering, terrorist financing, and proliferation financing. Additionally, the FIU oversees sanctions compliance. Further, the VASP and FinTech sector may encounter additional regulatory oversight from various authorities. The Department for International Tax Cooperation (DITC) supervises economic substance and automatic exchange of information. Beneficial ownership is monitored by the Cayman Islands Registrar, while data protection falls under the purview of the Cayman Islands Data Protection Ombudsman. These ancillary regulations complement the broader regulatory framework, ensuring a comprehensive approach to governing the VASP and FinTech industry in the jurisdiction.

What are the penalties for breaches of virtual asset laws and regulations in the Cayman Islands?

In the Cayman Islands, under section 37 of the VASP Act, individuals contravening any provision of the VASP Act without a specified penalty commit an offence. Upon summary conviction, such individuals may face a fine of four thousand dollars. Offences in the jurisdiction are classified into three levels – very serious, serious, and moderate – based on the severity and nature of the violation. The penalties prescribed under the VASP Act are outlined in the table below:

2. Regulation of virtual assets and offerings of virtual assets in the Cayman Islands

Are virtual assets classified as ‘investments’ or other regulated financial instruments in the Cayman Islands?

In Cayman Islands, virtual assets are not generally classified as ‘investments’ but instead are defined as a digital representation of value that can be digitally traded or transferred and which has the necessary capacity to be used for payment or investment purposes. That said virtual asset may be classified as securities if it demonstrates the characteristics as outlined in SIBA. It is noteworthy that the definition of “securities” within SIBA encompasses virtual assets that can be immediately sold, traded, or exchanged, and either represent or can be converted into traditional securities forms (such as equity interests, debt instruments, options, or futures), or represent a derivative of traditional securities. Any entity established, registered, or operating within the Cayman Islands engaging in the dealing, arranging, managing, or advising on the acquisition or disposal of digital assets may fall under the purview of SIBA to the extent that the involved digital assets qualify as “securities” as defined by SIBA. Such entities might be required to obtain registration or licensing from the CIMA under SIBA framework. That said, this requirement may be in addition to obtaining registration or a license mandated under the VASP Act. Although the CIMA reserves rights to waiver such obligation upon application by an applicant entity to CIMA, if they are satisfied that regulation of such entities is better suited under VASP Act due to the technology involved and complexity of the business activity.

Are stablecoins and NFTs regulated in the Cayman Islands?

As stablecoins are pegged to the value of dollar or some other asset, it would likely fall within the definition of virtual asset under the act given that it is not a representation of fiat currency. Non-fungible tokens are regulated under the Cayman Islands regulations to the extent where they fall under the definition provided under the VASP Act. However virtual service tokens which are defined as non transferrable or exchangeable with any third party at any time are outside the ambit of the regulations of Cayman Islands. The exclusion is limited to the scope of virtual service tokens whose sole function is to provide access to an application or services or to provide a service or function directly to its owners.

NFTs are not subject to specific regulations under the VASP Act, however it might be covered under the definition of virtual assets on a case by case basis where characteristics of NFTs match with either virtual assets or securities. That said, NFTs that will satisfy and fall within the scope of virtual service tokens will not be considered as virtual assets. Any NFTs having characteristics of virtual services tokens are not regulated in Cayman Islands nor are the person or legal entity engaged in such business activity  required to have a license or registration under  the VASP Act.

Are decentralised finance (DeFi) activities (e.g. lending virtual assets) regulated in the Cayman Islands?

The Cayman Islands do not aim to regulate the technology behind virtual assets but focus on the individuals or entities using technology or software applications to conduct virtual asset services as a business. Those involved in developing or selling software applications or new virtual asset platforms (such as FinTech service providers) are not considered VASPs solely for developing or selling the application or platform. However, they may be classified as VASPs if they use the application or platform to engage in virtual asset services on behalf of others. Similarly, decentralized finance (DeFi) applications themselves are not VASPs, but individuals or entities involved in creating, owning, operating, or maintaining control over DeFi arrangements may fall under the FATF definition of a VASP if they provide or actively facilitate VASP services. It may fall under the scope of the regulations VASP Act only to the extent they are covered under the definitions of FinTech services. The term ‘FinTech services’ under the VASP Act means services that uses technology to improve, change or enhance financial services but FinTech services are not considered as virtual asset services under the VASP Act. In absence of regulatory guidance on financial services related to virtual assets, entities involved in financial business activities must seek instructions either in form of registration or waiver from CIMA to conduct their business.

The determination of whether an activity falls under the regulations should be made on a casebycase basis, emphasising the practical implications and functions of the business activity.

Are there any restrictions on issuing or publicly offering virtual assets in the Cayman Islands?

Entities seeking to publicly offer Virtual Assets in the Cayman Islands are required to be licensed by the CIMA under the VASP Act. The issuance of virtual assets is subject to restrictions when there is a material risk to the welfare of the public and the stability of the financial services in the Cayman Islands

Under section 7(1) of the VASP Act, a registered person is prohibited from issuing virtual assets directly to the public in excess of the prescribed threshold Restrictions on the public offering of virtual assets are in place to prevent disruption or prejudice to the CIMA’s functions, the public’s interests, or the financial services in the Islands. These measures are designed to regulate and safeguard the issuance of virtual assets, ensuring adherence to established thresholds and maintaining the stability of the financial environment in the Cayman Islands.

In the context of virtual asset issuance, the CIMA’s decisions hinge on whether a sale of newly created virtual assets to the public within the Cayman Islands is deemed applicable. This determination is guided by the assessment of various factors, including:

1. the CIMA evaluates whether the virtual asset sale is advertised through promotional materials, announcements, or statements in a manner accessible to individuals or entities within the Cayman Islands. The participation of local entities or individuals in the issuance, either directly from the issuer or indirectly through a third party facilitating the sale, is a key consideration;
2. for offering from within the Islands, a person or entity listed in section 3(1) of the VASP Act offers newly created virtual assets for sale from within the Cayman Islands, the CIMA examines whether the sale is not advertised locally, and individuals or entities within the Islands are not able to participate in the issuance; and
3. the CIMA distinguishes between a private sale and a public sale. A private sale involves a limited number of persons or entities selected through a private agreement and is not subject to public advertisement. Whereas a public sale of virtual assets are made to the public at large and CIMA requires advertisement of such assets before they are sold to the public.

Where the virtual asset is classified as a ‘securities’ and falls within the scope of the SIBA framework, the entity must acquire a license under SIBA framework or a waiver from CIMA to issue such assets.

Are there any exemptions to the restrictions on issuing or publicly offering of virtual assets in the Cayman Islands?

Despite the provisions in section 7(1) and 7(1A) of the VASP Act, a registered person is permittedto involve one or more virtual asset trading platforms that are either obliged entities or licensed under the VASP Act for the issuance of newly created virtual assets exceeding the prescribed threshold. In this scenario, the issuance of virtual assets is facilitated through these virtual asset trading platforms.

3. Regulation of VASPs in the Cayman Islands

Are VASPs operating in the Cayman Islands subject to regulation?

Yes, a person who wishes to carry on in or from within the Cayman Islands involved in the business of providing virtual asset services must apply to the CIMA for registration as a VASP. Licensed VASPs are able to (i) carry on the business of providing a virtual asset service; (ii) engage in the business of providing a virtual assets custody service; or (iii) operate a virtual asset exchange.

Are VASPs providing virtual asset services from offshore to persons in the Cayman Islands subject to regulation in the Cayman Islands?

Yes, any offshore VASP that wishes to provide virtual asset services to persons in the Cayman Islands will need to be registered or licensed with the CIMA based on the nature of services rendered by VASP and the requirements associated with it the VASP Act.

What are the main requirements for obtaining licensing / registration as a VASP in the Cayman Islands?

Section 6(1) of the VASP Act outlines the relevant requirements and fee for registration of VASPs along with procedures and documents required by the CIMA. CIMA requires that entities engaged in or wishing to engage in virtual asset services must complete the two application forms for VASPs [(APP-101-84 and APP-101-84a)] which are available on `REEFS’ portal. The applicant, as part of outlining the requirements, is mandated to furnish details such as its name, any previous names or trading names, date and places of formation, legal entity identifier, legal structure, and registration number. The applicant is also required to disclose its licensing or registration status in other jurisdictions, including relevant details such as the date of commencement, licensing authority, and any associated requirements or restrictions. Additionally, the applicant must provide information about its involvement or control over other entities engaged in virtual asset services in various jurisdictions. The applicant further needs to highlight any virtual asset services provided in jurisdictions outside those listed initially. Lastly, the applicant is obligated to acknowledge and disclose any penalties or enforcement actions imposed in other jurisdictions.

The application for registration as a VASP requires the submission of various documents along with application forms APP-101-84 and APP-101-84a.

The application for applying to the CIMA to be registered as a VASP must include, amongst others, the following information:

1. the nature, function and purpose of the virtual asset service;
2. the revenue for the prior twelve months or, if unavailable, the projected revenue for the twelve month period following an application for each virtual asset service to be provided;
3. the manner in which the virtual asset service will be provided to the public; and
4. identified risks associated with the virtual asset service, including data security risks and steps put in place to mitigate these risks, including any insurance arrangements;
5. provide an outline of internal safeguards and data protection systems that will be put in place to protect the assets and data of clients;
6. copies of cyber security policies following CIMA’s guidance on cyber security;
7. copies of Anti-Money Laundering/Counter Financing of Terrorism (AML/CFT) policies in line with the Anti-Money Laundering Regulations and Guidance Notes;
8. comprehensive business plan;
9. transaction flow charts;
10. details of outsourced arrangements and related agreements.
11. completed Declaration of Source of Funds/Source of Wealth form with supporting evidence for major shareholders;
12. list of the applicant’s blockchain addresses (per coin);
13. details of all shareholders with more than a 10% shareholding along with a completed CIMA personal questionnaire;
14. information on Chief Information Officer/Chief Information Security Officer;
    1. certified copies of academic and professional qualification certificates of senior management staff;
    2. police Clearance certificate or affidavit of no criminal convictions;
    3. a fully completed Personal Questionnaire;
    4. two character references;
    5. one financial reference;
    6. an updated and comprehensive curriculum vitae;
15. details of each Anti-Money Laundering Compliance Officer, Money Laundering Reporting Officer, and Deputy Money Laundering Reporting Officer;
16. if the service provider be issuing virtual assets, the entity shall complete an issuance request form and include it with this application.

Apart from the VASP Act, entities offering virtual asset services in the Cayman Islands are obligated to adhere to Anti-Money Laundering, Countering the Financing of Terrorism, and Countering Proliferation Financing (AML/CFT/CPF) requirements, as well as sanctions obligations outlined in the AMLR and the CIMA’s Guidance Notes.

Every application for registration requires a KYD 1,000 assessment fee, payable through the REEFS portal at the time of submitting the application. It should be noted that the assessment fee paid to the CIMA is non-refundable. Additionally, registrants are obliged to pay the application fee upon approval of their registration application as per the specifications provided by the CIMA. The table below provides for fee as required to be paid by applicant/approved entity as the case may be;

What are the main ongoing requirements for VASPs regulated in the Cayman Islands?

4. Regulation of other crypto-related activities in the Cayman Islands