Cayman Islands

The Cayman Islands recently announced a regulatory framework for “virtual asset service providers” (VASPs) designed to attract cryptocurrency businesses.  The Virtual Asset (Service Providers) Law, 2020 (“the VASP Law”) went into effect as of October 31, 2020.  In conjunction with the VASP Law, the Cayman Islands Monetary Authority announced the opening of registration or notification for entities wishing to provide virtual asset services.

The VASP Law applies to all entities that intend to or currently provide virtual asset services in or from within the Cayman Islands.

Virtual asset services are defined as follows under the VASP Law:

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 — (a) exchange between virtual assets and fiat currencies; (b) exchange between one or more other forms of convertible virtual assets; (c) transfer of virtual assets; (d) virtual asset custody service; or (e) participation in, and provision of, financial services related to a virtual asset issuance or the sale of a virtual asset.

The VASP definition includes issuers of virtual assets, virtual asset custodians, virtual asset trading platforms as well as entities providing financial services related to the sale of a virtual asset such as virtual asset dealers.

Under Cayman law, a virtual asset is defined as a digital representation of value that can be electronically traded and used for investment purposes–cryptocurrencies are perhaps the most common.  

The Cayman Islands’ VASP regulatory framework is being implemented in two phases.  

Phase one began on October 31, 2020 with a focus on anti-money laundering (AML) and countering the financing of terrorism (CFT).  Under phase one, entities engaged in or wishing to engage in virtual asset services must be registered with the Authority under the VASP Law. Entities engaged in or wishing to engage in virtual asset services, already subject to CIMA’s supervision under another regulatory law, are required to notify (in the case of licensees) or register with (in the case of registrants) the government under the VASP Law.

Cayman’s AML/CFT regime, along with its efforts to counter proliferation financing (CPF), are being assessed by the Caribbean Financial Action Task Force (CFATF) and the Financial Action Task Force (FATF). The FATF sets the global AML/CFT/CPF standards. The CFATF is the regional body that monitors compliance with the FATF standard. Cayman’s VASPs framework incorporates the FATF’s recommendations for AML/CFT/CPF, which the FATF adopted in 2019.  The AML/CFT focus in phase one provides VASPs with the opportunity to demonstrate their compliance with global standards for AML/CFT/CPF.

Phase two, which is expected to come into force in June of 2021, provides for license requirements.  Indeed, Phase two will include a licensing and virtual asset issuance approval process that will begin when the appropriate clauses and aspects of the VASP Law come into effect.

Links to several relevant Cayman legal sources governing crypto-assets are set forth below:

In addition, the Virtual Asset (Service Providers) (Amendment) Bill, 2020 was recently introduced and will be presented to the Legislative Assembly.  

In late 2020, the Cayman Islands Monetary Authority issued a Supervisory Information Circular regarding the VASP Law.  Certain key takeaways from that Circular are summarized below: 

Phase One (registration or notification) targets three groups:

  1. Entities wishing to perform virtual asset services for the first time (“New Market Entrants”);
  2. Entities providing virtual asset services prior to the commencement of the VASP Law (“Pre-Existing Service Providers”); and
  3. Existing Authority licensees that provide or propose to provide virtual asset services (“Other Authorized Entities”).

All New Market Entrants and Pre-Existing Service Providers seeking to provide virtual asset services are required to register in phase one. This includes entities engaged in virtual asset custodial services or in the operation of virtual asset trading platforms. In the second phase, the licensing regime will commence, and these entities will be required to apply for a license. However, the initial registration process will not immediately result in additional requirements for virtual asset custodians or virtual asset trading platforms but rather will apply VASP Law and regulation requirements in a phased manner. The additional licensing requirements will begin in phase two.

In phase one, registration is not required for Other Authorized Entities; however, they will be required to provide notification of their current or proposed virtual asset services by completing the VASP Application Form via the REEFS platform. The form to be completed is the same as that applicable to registration applicants; however, information already provided to the Authority through their existing authorization will not be required to be resubmitted. Other Authorized Entities will also be required to complete an AML/CFT form which will be available on the Authority’s REEFS platform.

Importantly, entities engaging in virtual asset services on or after 1 February 2021, that are not registered or have not notified the Cayman government, will be in breach of the VASP Law. Such entities may be subject to penalties and other enforcement measures from the Authority, including to cease and desist providing virtual asset services.

Entities currently providing virtual asset services can continue to provide such services if they complete the VASP Application Form and are registered or have notified the government by January 31, 2021. However, they must cease providing virtual asset services if they are not registered by that time or they have not notified the proper authority.

In addition to the VASP Law, all entities providing virtual asset services are required to comply with AML/CFT/CPF and Sanctions obligations including requirements under the Anti-Money Laundering Regulations (2020 Revision) and the Authority’s Guidance Notes (Amendment) (No. 5): Virtual Asset Service Providers, February 2020.

Common Questions Regarding Cayman Islands

  1. What are VASPs?

Virtual asset service providers (VASPs) are persons and entities whose businesses, on behalf of another person or entity, provide certain services that use or rely on virtual assets.

  1. What is a virtual asset?

In the Cayman Islands, a virtual asset is defined as a digital representation of value that can be electronically traded and used for investment purposes. A common type of virtual asset is cryptocurrency.

  1. How does regulating VASPs protect consumers?

The Cayman Islands has expressed its commitment to satisfying international standards with regard to anti-money laundering and countering the financing of terrorism (AML/CFT) measures. As a result, Cayman has adopted legislation to regulate virtual assets, identified in 2019 as needing new requirements by the FATF, the global standard-setter for AML/CFT practices.

  1. Who needs to comply with the VASPs regime?

Anyone who is now offering virtual asset services in the Cayman Islands to local residents or overseas clients (such as those engaged in initial coin offerings), and persons and entities who want to offer virtual asset services.

  1. How is the Cayman Government regulating VASPs?

The Cayman Islands regulates VASPs through the laws listed below, which together form its comprehensive regulatory framework:

The following were published on 28 October 2020 to bring into force certain provisions of the VASP regulatory framework:

The Virtual Asset (Service Providers) (Amendment) Bill, 2020, which will better facilitate the phased commencement approach, is expected to be presented at the first sitting of the Cayman Islands House of Parliament.

  1. What are the important dates for commencement?

By commencing in two phases, the regime will first bring into effect global regulatory standards, and then give persons and entities time to become compliant with the standards.

  • Phase one, 31 October 2020: Persons and entities who are offering or wish to offer virtual asset services, must notify and register with CIMA. More information, including deadlines, is here.

VASPs who have not registered or notified CIMA, but who are engaging in virtual asset services on and after January 31, 2021, are subject to penalties and other enforcement measures.

Phase one is intended to satisfy FATF standards on anti-money laundering (AML) and countering the financing of terrorism (CFT) compliance, supervision and enforcement.

  • Phase two, June 2021: This phase will focus on licensing requirements for specific persons and entities (including those who provide for the safekeeping of virtual assets on behalf of others and entities who have an electronic platform to facilitate the trading of virtual assets)

More details on operational matters, like fees, can be found in the Cayman Islands Monetary Authority’s supervisory circular.

7.  What is the “travel rule” and is it currently in force?

The “travel rule” is a set of requirements adopted by the FATF which imposes certain obligations on VASPs when transferring virtual assets on behalf of another person or entity. The travel rule is outlined in Regulation 49C and 49F of the Anti-Money Laundering Regulations (2020 Revision) (which were amended by the Anti-Money Laundering Amendment (No. 2) Regulations, 2020).

The travel rule is currently not in force during phase one of commencement, as Regulations 49C and 49F are not yet commenced. VASPs will only be required to comply with the travel rule when these regulations come into effect.

8. What is the sandbox and when is it coming into effect?

The VASP regulatory framework includes provisions for a regulatory sandbox by which new technologies can be observed before being used more widely in the country. The sandbox is currently expected to come into effect during phase two.

9. Do I need to register or apply for a licence in order to use virtual assets personally or as a consumer?

No, persons using virtual assets for their own purposes only are not required to register or apply for a license.