Virtual Asset (Service Providers) Law, 2020, of the Cayman Islands

• Overview:

In late May 2020, Cayman Islands Government officially passed five new and amended legislative acts that establishes a new regulatory framework regulating its cryptocurrency sector. This new regulatory framework brings it in alignment with global anti-money laundering (the AML) and counter-terrorism funding (the CFT) endeavors such as the Travel Rule made by Financial Action Task Force (the FATF), aiming to maintain Cayman's position as an attractive domicile for legitimate virtual asset businesses.

In particular, the Cayman Islands Government enacted the Virtual Assets (Service Providers) Law, 2020 (the VASP Law), which will come into force upon the issue of a commencement order. The VASP Law has been enacted to comply with the recommendations made by the FATF and provide regulation on virtual asset businesses that includes registration guidelines and requirements for firms offering crypto-related services.

In addition to the VASP Law, the Government has amended a number of existing laws to extend to virtual assets. These include, without limitation, the Mutual Funds Law (Revised) (the MF Law) and the Securities Investment Business Law (Revised) (the SIB Law) These amendments are expected to come into force at the same time as the VASP Law.

The VASP Law defines virtual assets as "a digital representation of value that can be digitally traded or transferred and can be used for payment or investment purposes but does not include a digital representation of fiat currencies.”

The VASP Law applies to any person providing "virtual asset services". Virtual asset services are 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:

1. exchange between virtual assets and fiat currencies;

2. exchange between one or more other forms of convertible virtual assets;

3. transfer of virtual assets;

4. virtual asset custody service; or

5. participation in, and provision of, financial services related to a virtual asset issuance or the sale of a virtual asset.”

Under the VASP Law, VASPs would need to register with, or be licensed by, the Cayman Islands Monetary Authority (the CIMA). A separate licence from CIMA would be needed for virtual asset custodial services and exchange or trading platforms.

• Key Points:

Licensing or Registration Requirement:

The new regulatory framework requires that entities that provide or wish to offer virtual asset services to Cayman-based or overseas customers be officially recognized as VASPs. Such VASPs need to apply for a Virtual Asset Service License or register and on or before 15th January in each year, pay the prescribed renewal fee, or acquire a waiver before they can offer their services.

Businesses providing custodial services of virtual assets and businesses that operate or intend to operate a virtual assets trading platform (the VATP) will require a licence. All other persons carrying on or intending to carry on virtual asset services will require registration. Depending on the extent of the activities, CIMA may require an applicant for registration to apply for a licence instead.

Existing licence holders under other regulatory laws, such as the MF Law or the SIB Law, must notify CIMA if they wish to carry on virtual asset services and outline the type of crypto service they want to offer. CIMA may either waive the new registration and Virtual Asset Service License requirement or subject such companies and individuals to the new VASP Law.

Sandbox License for Emerging Technologies

The VASP Law also introduces the concept of a sandbox licence that mitigates the risks surrounding new crypto companies without stifling their innovation. It requires that cryptocurrency and blockchain entities dealing with emerging technologies are issued a 1-year sandbox license to continue testing and improving their operations in accordance with global standards and best practices for combating money laundering, terrorist financing and proliferation financing on a limited basis.

CIMA also has the flexibility to impose additional requirements to, or allow certain exemptions from, the standard requirements within the VASP Law, applicants applying for the sandbox licence.

Corresponding Amendments under the MF Law and the SIB Law The VASP Law is accompanied by four other bills that furthermore propose an amendment of the Caribbean territory’s current regulatory framework.

The definition of "equity interest" under the MF Law has been amended to include "any other representation of an interest", which 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 MF Law and will need to be registered or licensed under that law.

The SIB Law has also been amended to extend to virtual assets. In particular, the definition of "securities" now 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 Schedule 1 of the SIB Law; or (b) represent a derivative of any of the securities listed in Schedule 1 of the SIB Law.

Therefore, persons dealing in, arranging deals in, managing or advising on virtual assets that are securities will also be required to register or be licensed under the SIB Law. To avoid regulatory overlap, CIMA may exempt an applicant from registration or licensing under either the SIB Law or the VASP Law. However, an applicant must first apply under either law before having this exemption granted.