What are not virtual assets?
The VASP Law excludes “virtual service tokens”, which are “a digital representation of value which is not transferrable or exchangeable with a third party at any time and includes digital tokens whose sole function is to provide access to an application or service or to provide a service or function directly to its owner”.
The second part of the definition may seem to describe conventional utility tokens, but they are only virtual service tokens if they are also “not transferrable or exchange with a third party at any time”.
What is a VASP?
The VASP Law defines a VASP as:
- a Cayman entity,
- which provides a virtual asset services,
- as a business or within the course of a business in or from within the Cayman Islands,
- and is registered or licensed in accordance with the VASP Law or is an existing licensee that is granted a waiver.
A virtual asset service is any of the following businesses provided for or on behalf of another party:
- virtual asset exchange (whether to or from fiat or other virtual assets),
- transfers of virtual assets,
- custody services, and
- participation in, and provision of, financial services related to a virtual asset issuance or the sale of a virtual asset.
The VASP Law licenses and regulates those engaged in relevant financial business involving virtual assets for or on behalf of a third party. Virtual assets themselves, and those using virtual assets or VASPs for their own private purposes or as principals, are not affected.
Registration and licensing requirements
Unfortunately, we are yet to see full details of CIMA’s regulatory regime, licensing and registration requirements and any rules.
VASPs other than custodians and trading platforms
All VASPs – including businesses acting as VASPs on an occasional or limited basis – must be registered with CIMA. VASPs must already comply with Cayman’s anti-money laundering, proliferation financing and countering the financing of terrorism regulations under changes that were made to the Proceeds of Crime Law during 2019.
VASPs already licensed under any other regulatory laws may not need to be registered. However, they will need to notify CIMA of the details of their VASP activities and the need for separate licensing or registration may be waived by CIMA on a discretionary basis.
Investment funds wishing to accept subscriptions in virtual assets or make redemptions-in-kind must take structuring advice to determine whether they or their service providers may fall within the framework.
All VASPs will be subject to ongoing requirements, including regulatory audits by CIMA, preparing audited financial statements, appointing and maintaining compliance officers, and obtaining CIMA’s written approval before issuing or transferring equity interests representing 10 per cent or more of its total equity interests. Further requirements may also apply but are not yet available.
Custodians and trading platforms
VASPs providing custodial services and trading platforms must be licensed by CIMA.
Custodial services must demonstrate that they meet capital, disclosure and safekeeping standards.
Trading platforms must do the same for disclosure, onboarding, trading supervision, operational and clearance and settlement standards.
Detailed standards are not yet available.
Issuing virtual assets
The framework doesn’t seek to create a licencing regime around issuances of virtual assets (previously through unregulated initial coin offerings or ICOs). However, issuers will be subject to basic registration requirements. These include registration with and notification of an issuance to CIMA, content and accuracy requirements for issuance documentation, fit and proper persons to be in control of the issuer, and CIMA approval prior to issuance. Details of these requirements are not yet available.
Licensed trading platforms may facilitate the issuance of virtual assets to the public.
Virtual assets may be issued directly to the public below a threshold which has not yet been published. Any issuance above the threshold must be through a suitably licensed trading platform.
Registration and licensing fees will be assessed by CIMA within a prescribed range and determined by factors such as the nature, size, scope and complexity of the VASP. Details are not yet available.
A time-limited regulatory sandbox licence will be available to both VASPs and FinTechs. Cayman is following the approach taken by regulators such as the Financial Conduct Authority in the UK.
The flexible sandbox licence will permit CIMA to tailor restrictions, monitoring covenants, limits on the offering of the service or specific obligations. This helps CIMA adequately supervise the innovative activity and decide on further regulatory action or recommend changes in regulatory laws as needed.
The sandbox licence is intended for VASPs whose virtual asset activity is not properly supervised by an existing regulatory law, or may pose substantial market, systemic or AML/CFT risks. For FinTechs, the sandbox licence can help accelerate adoption of the innovative technology or delivery channel they have developed.
Changes to other laws and regulations
Several other Cayman laws and regulations (as revised and amended from time to time) have been updated to reflect the new framework:
- Anti-Money Laundering Regulations (2020 Revision) – VASPs must carry out due diligence for all one-off transactions, regardless of value, and provide transaction information for every virtual asset transfer as if it were a wire transfer of funds.
- Mutual Funds Law (2020 Revision) – funds can convey equity interests using virtual assets or any other innovative form. This permits rapid fund formation and investor subscriptions, general fund administration and transfer of fund interests through new technology platforms and tokenised interests if or when these become available. Service providers may themselves need to be licensed and funds must take structuring advice if they wish to avoid being registered or licensed as VASPs.
- Securities Investment Business Law (2020 Revision) (SIBL) – virtual assets that represent, are derivatives of, or can be converted into, securities set out in Schedule 1 of SIBL will themselves be deemed to be securities. This approach provides regulatory certainty (unlike the Howey test used in the USA), clearly distinguishing between virtual assets that are securities and those that are not (such as virtual service tokens, virtual utility tokens, and stablecoins).
- Stock Exchange Company Law (2014 Revision), as amended – the Cayman Islands Stock Exchange will not have the sole and exclusive right in the Cayman Islands to list virtual assets which are securities. This important amendment allows virtual assets securities exchanges to be licensed and operate under the framework.
What is the impact on VASPs?
All Cayman-based VASPs will need to register with or be licensed by CIMA depending on their activities. As noted above, VASPs must already be operating in compliance with the Cayman AML/CFT regime, including appointing AML officers and performing customer due diligence.
All potential and existing Cayman-based VASPs should begin preparing internally so that they are ready to apply for licensing or registration.
We are closely monitoring the development of the framework and will publish a detailed client guide once regulatory standards and requirements are available.