Digital Assets, Blockchain, Fintech, Crypto, Tokenisation and Web3 in the Cayman Islands

Token Offerings in the Cayman Islands are primarily regulated by the Virtual Asset Service Providers Act (as Revised) (the “VASP Act”).

The VASP Act applies to any persons or entities involved in providing one more of “virtual asset services. Under the VASP Act, “virtual asset services” is defined as 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.

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 potentially extend to cryptocurrencies and Token Offerings as SIBA specifically states that a “Security” includes virtual assets which can be sold, traded or exchanged immediately or at any time in the future that (a) represent or can be converted into any of the securities listed in paragraphs 1 to 13 of Schedule 1 to SIBA; or (b) represent a derivative of any of the securities listed in paragraphs 1 to 13 of Schedule 1 to SIBA.

Whether SIBA applies, 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 definition of "equity interest" under the MFA includes "any other representation of an interest". This amendment is broad enough to capture digital tokens or other virtual assets. Therefore, open-ended funds issuing redeemable tokens instead of shares or other equity interests are now covered by the MFA and will need to be registered or licensed under that law.

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 "providing virtual asset 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.