June 19, 2020

New Cayman Regulatory Regime for Virtual Assets

by Bradley Kruger, Michael Robinson

A new framework for regulating virtual asset businesses in the Cayman Islands will add a welcome degree of certainty and help maintain the jurisdiction’s position as an attractive domicile for legitimate virtual asset businesses.

Introduced by the Cayman Islands Government on May 20, 2020, the new Virtual Assets (Service Providers) Law ("VASP Law"), which will come into force upon issue of a commencement order, derives from recommendations made by the Financial Action Task Force to provide for the regulation of virtual asset businesses and for the registration and licensing of persons who are providing "virtual asset services."

As part of this framework, amendments have also been made to other pieces of legislation which will provide coherent regulation for businesses intending to issue virtual assets and businesses carrying on or intending to carry on virtual asset services.

According to definitions outlined in the VASP Law, it will likely capture all cryptocurrencies, security tokens, utility tokens, or other digital assets that are tradeable or transferable, with the exception of digital fiat currencies. It applies to any person, service provider or intermediary providing virtual asset services, such as virtual assets issuance, virtual asset trading platforms, and custody services.

Under the new law, those wishing to undertake virtual asset services from the Cayman Islands must register and/or receive an appropriate license from the Cayman Islands Monetary Authority ("CIMA"), and they will be subject to ongoing requirements, such as providing regular audited accounts and undertaking AML audits.

The VASP Law also introduces the concept of a sandbox license that provides CIMA with the flexibility to regulate relevant businesses that utilize innovative technologies and activities by imposing additional requirements to, or allowing certain exemptions from, the standard requirements within the VASP Law.

A sandbox license is meant to operate for a limited timeframe so that CIMA can assess how best to regulate a sandbox license applicant and whether legislative changes may be required to further promote the development of the innovative technologies or activities subject to the licence.

Meanwhile, the Government has also amended a number of existing laws to extend to virtual assets. These include amendments to the Mutual Funds Law ("MF Law") and the Securities Investment Business Law ("SIB Law"), which are expected to come into force at the same time as the VASP Law.

The definition of "equity interest" under the MF Law has been amended to include "any other representation of an interest." This amendment is broad enough to capture digital tokens or other virtual assets. The result is that open-ended funds issuing redeemable tokens instead of shares or other equity interests are now covered by the MF Law and will need to be registered or licensed under that law.

The SIB Law has also been amended to extend to virtual assets. In particular, the definition of "securities" now includes virtual assets which can be sold, traded or exchanged immediately or at any time in the future that could potentially be covered by Schedule 1 of the SIB Law. The securities listed in Schedule 1 of the SIB Law are traditional securities including equity interests, debt instruments, options, and futures.

This will mean that registration or licensing under the SIB Law will be a requirement to deal in, arrange deals in, manage, or advise on virtual assets that are securities.

One significant exclusion applies for private issuers of virtual assets that are securities under the SIB Law. Where a private issuer issues, redeems, or repurchases its own virtual assets that represent shares, limited partnership interests, units in a unit trust, debt, or warrants of the private issuer, the activity is excluded. This means that private issuers issuing certain types of security tokens will not be required to register or be licensed under the SIB Law (although they may still need to be registered under the VASP Law).

Importantly, the Cayman Government's intention has been to provide for appropriate regulation without stifling innovation. As such, it should help to maintain Cayman's position as an attractive domicile for legitimate virtual asset businesses.

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Bradley Kruger

Partner, Ogier

Bradley Kruger is the lead partner of Ogier’s Corporate team in the Cayman Islands. He advises on IPOs, SPACs and M&A transactions, start-up businesses and fund formations. He is a member of the firm’s Digital, Blockchain and Fintech group, working with blockchain companies, token issuers, technology companies and cryptocurrency fund managers on a regular basis.

Michael specializes in Cayman corporate matters and, in particular, mergers and acquisitions, restructurings, reorganisations, public listings and migrations. He also advises technology companies, ICO issuers and cryptocurrency funds and is a member of Ogier’s Digital, Blockchain and Fintech group.