In advising our STO clients, we have found that there are several practical matters which consistently appear to be either unexpected or not yet planned for. The below is a summary of the top 5 things that should be considered when launching an STO out of the Cayman Islands.
- Utility vs Security Tokens
Our clients are often concerned with receiving our confirmation as to whether the tokens they are proposing to issue would be considered as utility tokens or security tokens.
The Cayman Islands has passed the Virtual Asset (Service Providers) Act (Revised) (“VASP Act”) which regulates ‘virtual asset service providers’ in the Cayman Islands. Virtual Asset means a digital representation of value that can be digitally traded or transferred and can be used for payment or investment purposes but does not include a digital representation of fiat currencies. Virtual Asset Service means the issuance of virtual assets or the business of providing one or more of the following services or operations for or on behalf of a natural or legal person or legal arrangement: 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.
Note that non-transferrable virtual assets are excluded from definition of ‘virtual asset’ under the VASP Act. Under the VASP Act, virtual service tokens are not virtual assets and a person or legal arrangement that provides services that involve virtual service tokens only are not required to have a licence or registration under this VASP Act.
The treatment of the tokens can, and most likely will, vary from jurisdiction to jurisdiction and so advice should be taken in each jurisdiction in which the Tokens are being offered.
- Getting a Bank Account
Getting a bank account in the Cayman Islands for your token issuing entity is, as with pretty much every other jurisdiction, difficult. Banks are of course nervous to be involved in this fast-moving and newly popular sector.
We have a small network of banks that may be willing to provide accounts to token issuing entities, subject of course to their own criteria being satisfied. We can facilitate introductions to these banks for our clients, but we would suggest this process is started as early as possible to avoid delays with the project later on.
- How to Store Your Crypto
If your STO is successful, you will likely be receiving large amounts of Bitcoin and other cryptocurrencies which will need to be safely stored and, more importantly, require due diligence as to their source.
We always advise our clients to seek the services of a custodian to hold these crypto assets in cold storage. We have contacts who can provide such custody services and, in doing so, may also provide an AML review of the crypto assets being contributed from token purchasers. These services can take care of some of the major headaches our crypto clients experience and we can facilitate introductions to these providers for our clients.
- AML Compliance
We advise all of our clients that they are required to comply with the provisions of the Proceeds of Crime Act and the Anti-Money Laundering Regulations. To do so includes adopting written policies and procedures (including as to KYC or due diligence, training of staff, record keeping etc) but, also, the appointment of certain officers such as a Money Laundering Reporting Officer, Deputy Money Laundering Reporting Officer and a Compliance Officer.
Some thought should be given at the outset as to which of the AML procedures will be delegated to service providers and which persons will occupy the required offices.
More frequently, we are seeing our STO clients wish to separate their token issuing entity from the entity which runs the platform.
That way, there can be a segregation of the liabilities associated with the offering from the operation of the platform and the value being built up in it. The funds raised by the entity are then contributed to the operating entity following completion of the STO.
For more information on structuring, read our article Cayman Structures for Web 3.0 Entities.
This publication is for general guidance and is not intended to be a substitute for specific legal advice. Advice should be sought about specific circumstances.