Crypto-certainty comes to the Cayman Islands
11 November 2020
On 31 October 2020 certain provisions of legislation came into force in the Cayman Islands ("Cayman") relating to regulation, registration and licencing of Virtual Asset Service Providers ("VASPs") by the Cayman Islands Monetary Authority ("CIMA"). The legislation creates a robust but flexible regulatory framework for entities that provide business services which use or rely on virtual assets.
The framework provides certainty for investors and VASPs on how the Cayman legal system will treat and regulate virtual assets, whilst a new Sandbox licence has been introduced to create a carefully regulated environment which encourages innovation.
What is the new framework?
The framework is being implemented in two phases.
The first phase of the new framework requires VASPs to register with CIMA by 31 January 2021. This 'registration' stage will focus on VASPs' compliance with international standards on anti-money laundering ("AML"), countering the financing of terrorism ("CFT") and counter proliferation ("CPF"). CIMA has advised that registration applications should be received by 12 December 2020 to allow for registration before 31 January 2021.
The second phase is expected to come into force in June 2021 and will include licensing requirements and prudential supervision. VASPs which are ultimately required to be licensed (see further below) will initially be required to be registered, with licensing to follow as part of this second phase.
What is the new legislation?
The primary legislation is the Virtual Asset (Service Providers) Law, 2020, as amended, (the "Law"), parts of which came into force on 31 October 2020, with further provisions coming into force on 31 January 2021 (or later as part of the second phase). The Virtual Asset (Service Providers) Regulations, 2020 (the "Regulations") set out definitions, the forms to be used for applications to register and a schedule of fees. Existing Cayman legislation on regulation and supervision has been amended to take account of the new framework.
Provisions in the Law relating to enforcement, penalties and offences will come into force from 31 January 2020.
VASPs will also need to consider the application of the Securities Investment Business Law (2020 Revision, as amended) to their activities.
What is a virtual asset?
The Law defines "virtual assets" as a digital representation of value that can be electronically traded or transferred and used for payment or investment purposes. That definition includes all transferrable/tradeable digital assets but expressly excludes non-transferable and non-exchangeable assets such as virtual service tokens or "digital representations of fiat currencies". The Law describes "fiat currency" as one issued by a country or government which is designated by decree or law as legal tender in that country.
What are virtual asset services?
The Law defines "virtual asset services" as the issuance of virtual assets or providing, as a business, on behalf of a third-party entity or individual, one or more of the following services:
- 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
- participation in, and provision of, financial services related to a virtual asset issuance or the sale of a virtual asset.
Issuing virtual assets is subject to CIMA's approval, and the Law sets out the relevant factors CIMA must consider before giving such approval.
The Law defines a "virtual asset custody service" as the business of safekeeping or the administration of virtual assets (for example in a "wallet") or the instruments that enable the holder to exercise control over virtual assets (such as security keys and codes).
What about trading platforms?
A VASP will require a licence from CIMA if they operate a "virtual asset trading platform", which for the purposes of the Law would be if, for reward or benefit, it operates a centralised or decentralised digital platform which facilitates third parties exchanging virtual assets for fiat currencies or other virtual assets where the VASP holds custody of or controls virtual assets on behalf of clients, or purchases virtual assets to sell them to a buyer as part of a process of matching bids or transactions.
Who can be registered/licensed as a VASP?
The Law expressly provides that individuals may not carry on virtual asset service as a business, nor purport to do so. Cayman incorporated/registered entities can register and/or apply for a licence as necessary. This includes Cayman incorporated/registered companies, limited liability companies, foreign companies registered under Part IX of the Companies Law (2020 Revision), partnerships, limited partnerships, exempted limited partnerships and limited liability partnerships.
Who needs to be registered/licensed?
Any Cayman incorporated/registered entity which issues virtual assets or which provides virtual asset services on behalf of third parties in or from within Cayman (which expression includes the fact of using a Cayman registered/incorporated entity) as a business or in the course of a business will need to be registered or licensed as a VASP with CIMA. Existing CIMA licensees can apply to CIMA for a waiver on the basis that their virtual asset business does not materially change the business for which they are licenced and that they already have in place sufficient supervision and oversight.
Schedule 1 of the Regulations has the Form to apply to CIMA with the details which CIMA will require on the entity and the virtual asset service to be offered. Details required for the application include the procedures (and officers) the entity has put in place to meet AML/CFT and CPF standards, its internal safeguards and data protection systems and the qualifications, expertise and relevant experience of its directors and senior officers.
Directors, senior officers and beneficial owners of applicants will be required to satisfy CIMA's 'fit and proper' standards.
How will the Sandbox licence help promote innovation?
The new framework will allow CIMA to grant a VASP a temporary "Sandbox" licence for a period of up to one year, where the VASP proposes a virtual asset service which represents an innovative use of technology or uses an innovative method of delivery that CIMA considers will require a level of supervision and oversight not offered by registration under the Law (or any other existing Cayman legislation) or by CIMA granting a licence.
How will a Sandbox licence work?
During the licence year CIMA will assess, monitor and supervise the innovative use to ensure that the service complies with its principles, including standards of honesty, integrity, and fair treatment of customers and that it protects customers' data and assets. CIMA will also monitor to ensure the service meets Cayman and international financial regulations, in particular those for AML/CFT and CPF and also with a view to developing best practices and guidance for the future. A Sandbox licence may be subject to restrictions or allow exemptions depending on the nature of the innovative use. CIMA will retain the power to review, amend or revoke licences (on notice).
If you would like any further information or advice on Cayman's new framework and/or you need to apply to CIMA to register as a VASP or for a licence, please contact your usual Bedell Cristin contact or one of the contacts listed.