Structuring Cayman Digital Asset Funds

The Cayman Islands continues to be a leading domicile for open-ended investment funds, with mutual funds regulated by the Cayman Islands Monetary Authority (“CIMA”) exceeding 13,000 in both Q1 and Q2 of 2026. Digital asset strategies now represent a material segment of that market, with approximately 19% of Cayman open-ended funds launched in the quarter expressly permitting investment in digital or crypto assets.

Investor demand is increasingly evident, with global hedge fund surveys pointing to growing institutional engagement with digital assets. Cayman fund sponsors must, however, address distinct structuring, liquidity and operational issues when combining volatile, potentially illiquid and hard-to-value digital assets with the redemption expectations of an open-ended mutual fund.

In particular, a robust Cayman structure should address three core issues:

1. Balancing Investor Liquidity with Asset Volatility

Open-ended funds commonly offer periodic redemption rights, often monthly or quarterly. Those terms are most effective where the underlying portfolio can be valued and liquidated in an orderly manner. Digital asset portfolios may, however, be exposed to sharp market movements, exchange or custody disruption, protocol events and periods of materially reduced liquidity.

To manage this potential liquidity mismatch, sponsors are increasingly using structural liquidity tools rather than offering unrestricted redemption rights. Data indicates that almost 80% of new Cayman open-ended fund launches incorporated at least one of the following: redemption gates, side-pocket powers or lock-up periods.

Redemption Gates: used by approximately half of all new funds launched to limit the amount of capital that may be redeemed on a dealing day or during a redemption period, thereby reducing the risk of forced asset sales and potential prejudice to remaining investors.

Lock-Up Periods: common in new launches, often as “soft lock-ups” under which investors may redeem before the end of the lock-up period on payment of a redemption fee. This can provide greater capital stability while preserving a defined route to liquidity for investors.

2. Valuation and the Use of Side-Pockets

Determining a reliable net asset value (NAV) can be particularly challenging for restricted tokens, early-stage Web3 investments, assets affected by protocol exploits, thinly traded tokens and instruments held through disrupted trading or custody channels.

Sponsors are therefore increasingly including side-pocket powers in constitutional and offering documents. Data indicates that more than a third of new Cayman open-ended funds included side-pocket mechanisms, allowing illiquid, distressed or hard-to-value assets to be segregated from the liquid portfolio. This can permit subscriptions and redemptions to continue by reference to the more readily valued portion of the fund, subject to the fund’s governing terms.

3. Navigating Cayman’s Evolving Regulatory Framework

An open-ended Cayman digital asset fund falling within the Mutual Funds Act must be registered, licensed or otherwise regulated in accordance with that Act and applicable CIMA requirements. The framework has been modernised to address tokenisation and operational risk more directly:

Tokenised mutual funds: The Mutual Funds (Amendment) Act, 2026 defines a “digital equity token” as a digital representation of the whole of an equity interest held by an investor in a mutual fund, and a “tokenised mutual fund” as a mutual fund that has any of its equity interests represented by digital equity tokens. The amendments introduce specific requirements, including record-keeping for the issuance, creation, sale, transfer and ownership of tokenised equity interests; operator approval for transfers in accordance with the offering document; disclosure and mitigation of risks specific to digital equity tokens, including cybersecurity and transferability; compliance with any CIMA reporting requirements or restrictions on token characteristics; and CIMA supervisory powers in relation to the underlying technology and digital equity token transactions.

Governance, controls and cybersecurity: CIMA’s rules and guidance for regulated entities emphasise governance structure, allocation of oversight and management responsibilities, independent judgement, risk management, internal controls and conflicts of interest. For crypto-exposed funds, institutional investors will also expect credible and demonstrable oversight of valuation, custody, liquidity management and conflicts of interest. A majority-independent board may be appropriate for many institutional products as a matter of governance practice and investor expectation, although it is not a universal statutory requirement. Where tokenisation or digital asset custody is involved, the governing body should also ensure that cybersecurity risk management, incident-response procedures and service-provider oversight are appropriately documented, proportionate to the fund’s risk profile and kept under regular review.

Integrating digital assets into a Cayman open-ended fund is no longer a niche proposition, but it does require careful and strategy-specific fund design. Generic fund documentation is unlikely to be sufficient. Accordingly, sponsors should calibrate redemption gates, lock-up terms, side-pocket powers, valuation procedures, tokenisation mechanics, governance arrangements and cybersecurity controls to the fund’s strategy, investor base and service-provider model. Properly calibrated, documented and implemented, these tools can enable Cayman funds to accommodate digital asset exposure while maintaining the investor protection, operational resilience and regulatory credibility expected of the jurisdiction.

For further advice on structuring Cayman Islands digital asset funds, including liquidity, valuation, tokenisation, governance and related regulatory considerations, please contact our Head of Investment Funds, Chris Humphries, at chris.humphries@stuartslaw.com.