Cryptocurrency, Web 3.0, Blockchain & Fintech Lawyers in the Cayman Islands

The Cayman Islands government has not yet passed any specific regulations in relation to cryptocurrency and Token Offerings, however, there are a number of regulations and laws in the Cayman Islands that are relevant to Token Offerings, cryptocurrency funds and other digital products.

The most relevant laws for Token Offerings, cryptocurrency funds and other digital products in the Caymans Islands are:

• The Securities Investment Business Act (SIBA)
• The Mutual Funds Act (MFA)
• The Money Services Act (MSA)
• The Anti-Money Laundering Regulations (AML Regulations)
• The Proceeds of Crime Act (PCA)

How these laws will apply to your Token Offering, cryptocurrency fund or other digital product will depend on the circumstances. The effect of these laws on a Token Offering can vary significantly depending on issues such as:

• The nature of the tokens you are offering
• The rights attached to them

It is therefore essential to take specific legal advice before opening a cryptocurrency fund or launching a Token Offering in the Cayman Islands.

The Securities Investment Business Act (SIBA) is the Cayman Islands primary legislation relating to the regulation of investment securities and associated businesses. Under SIBA, no person is allowed to carry on business in securities investment unless they hold the appropriate licence.

The legislation defines securities investment business as that which involves:

• Dealing in securities
• Managing securities
• Advising on securities

Various types of securities are covered by SIBA, including:

• Shares
• Stocks
• Partnership interests
• Instruments acknowledging indebtedness
• Options
• Futures

The legislation does not specifically refer to cryptocurrencies and tokens, so it is generally accepted that Token Offerings fall outside this law. However, this will entirely depend on the individual circumstances of the Token Offering, so you should never rely on the idea that your Token Offering will not be covered by SIBA.

Again, please do seek specific legal guidance before conducting any financial business in the Cayman Islands.

The Money Services Act (MSA) regulates all money services business in the Cayman Islands, including businesses that provide currency exchange and money transmission.

Under MSA, anyone wishing to carry out a money services business in the Cayman Islands must be appropriately licenced by the Cayman Islands Monetary Authority (CIMA).

It is our view that the Money Services Act does not generally apply to Token Offerings, but again, this will depend entirely on the specific circumstances involved in your Token Offering, including the particular rights attached to the tokens.

Of course whether a cryptocurrency exchange is considered to be conducting money services business will need to be determined on a case-by-case basis depending on the services being offered on the exchange.  However generally cryptocurrencies are not legal tender in any country, and therefore a cryptocurrency exchange is not likely to be considered a currency exchange, and therefore would not require a licence.

A cryptocurrency exchange that only permits crypto-to-crypto exchange is not likely to be considered as offering, as a principal business, a money transmission service.

Our Digital, Blockchain and Fintech Team is highly experienced with CIMA licences, so can help facilitate the necessary licence application and advise you on the steps you need to take to comply with the conditions of a CIMA licence.

If a Token Offering is related to an investment fund (for example, because it is tokenised) or connected to some other form of investment vehicle, the Mutual Funds Act (MFA) may be applicable.

As the name implies, the MFA regulates Mutual Funds in the Cayman Islands. Under this law, a mutual fund is generally defined as:

“A company, unit trust or partnership that issues equity interests, the purpose or effect of which is the pooling of investor funds with the aim of spreading investment risk and enabling investors in the mutual fund to receive profits or gains from the acquisition, holding, management or disposal of investments.”

The MFA, therefore, will not typically be a concern for Initial Coin Offerings as they do not meet this definition. Where a Token Offering relates to an investment fund or investment fund activity, the way the MFA currently defines equity interests is critical.

The MFA currently defines an equity interest as:

“A share, trust unit or partnership interest that carries an entitlement to participate in the profits or gain of a company, unit trust or partnership and is redeemable or repurchasable at the option of the investor.”

Based on this definition, we therefore take the view that tokens issued by investment funds would not fall within the current definition of equity interests as they are not a share, trust unit or partnership interest.

However, Token Offerings that are structured as tokenised funds should take specific advice in connection with their structure and the rights attached to the tokens, as future changes to the definition of equity interests may be extended to cover cryptographic tokens

If changes to the MFA do bring cryptographic tokens within the definition of equity interests, tokenised funds that offer token holders the right to redeem would likely require registration with the Cayman Islands Monetary Authority under the Mutual Funds Act. Those funds would then need to comply with the requirements of that registration.

Requirements of CIMA registration under MFA include:

• Minimum investment by prospective investors of at least £100,000
• Filing an offering document with the Monetary Authority
• Appointing a local auditor

We can offer a number of options to future-proof your fund against any potential registration issues at a later date that may be caused by a change in the Mutual Funds Act.

The Cayman Islands has a robust and comprehensive anti-money laundering regime, made up of the following laws and regulations:

• The Proceeds of Crime Act 2017 Revision (PCA)
• The Anti-Money Laundering Regulations 2017 (AML Regulations)
• The Guidance Notes on the Prevention and Detection of Money Laundering and Terrorist Financing in the Cayman Islands (‘The Guidance Notes’)

The Proceeds of Crime Act applies to all Cayman Island entities and requires them to take certain specific steps to ensure the prevention and detection of money laundering and terrorist financing. This law imposes serious penalties for non-compliance.

The Anti-Money Laundering Regulations are perhaps of greater practical significance to a Token Offering due to their wide application and compliance requirements.

The AML regulations cover those who carry out “relevant financial business”, which is defined by a list of activities, the most obviously relevant to Token Offerings being:

• Acceptance of funds and other repayable funds from the public
• Issuing and managing means of payment
• Money brokering
• Money or value transfer services

If a Token Offering issuer’s activities fall within this definition, it will need to:

• Establish written AML procedures and policies
• Carry out identification verification checks
• Carry out source of funds verification checks
• Appoint specific officers, including:
  • A money laundering reporting officer
  • A deputy money laundering reporting officer
  • An anti-money laundering compliance officer

Due to the potentially serious penalties for failing to comply with Cayman Islands anti-money laundering laws, it is imperative to seek legal advice on whether your Token Offering constitutes a relevant financial business and, if so, what you will need to do to achieve compliance with the AML regulations. This includes how to carry out appropriate identification and source of funds verification checks when dealing with cryptocurrencies which are, by their very nature, encrypted.

We can assist in making introductions to service providers who can offer solutions to these challenges which are robust and compliant with Cayman Islands law, as well as user friendly.