Overview Of The Regulatory Regime For Virtual Assets In The Cayman Islands

• Published date: 10 February 2023
• Subject Matter: Finance and Banking, Government, Public Sector, Technology, Financial Services, Money Laundering, Fin Tech
• Law Firm: Ogier
• Author: Mr Bradley Kruger

The Virtual Asset (Service Providers) Act (Revised) (the VASP Act) of the Cayman Islands derives from recommendations made by the Financial Action Task Force and provides for the regulation of virtual asset businesses and for the registration and licensing of persons who are providing "virtual asset services".

The VASP Act is being implemented in phases. Phase one, which focuses on anti-money laundering (AML) and countering the financing of terrorism (CFT) compliance, supervision and enforcement, came into effect on 31 October 2020.

Under phase one, persons engaged in or wishing to engage in virtual asset services must be registered with the Cayman Islands Monetary Authority (CIMA) pursuant to the VASP Act. However, where such persons are already subject to CIMA's supervision under another regulatory law, they must notify (in the case of licensees) or register with (in the case of registrants) CIMA pursuant to the VASP Act.

Provisions of the VASP Act which relate to enforcement, penalties or offences commenced on 31 January 2021. Persons engaging in virtual asset services on or after 1 February 2021, that have not registered or notified CIMA (as applicable), will be subject to penalties and other enforcement measures from CIMA pursuant to the VASP Act, including potential orders to cease and desist providing virtual asset services.

Phase two will bring into force the licencing and virtual asset issuance approval process. It is now expected that phase two will commence in 2023.

Businesses wishing to carry on any virtual asset service (including virtual asset custody services, operating a virtual asset trading platform or selling virtual assets to the public) must first register with or notify CIMA (as applicable) but they need not apply for a licence or for permission to issue tokens (as applicable) until such time as the relevant provisions in the VASP Act are commenced under phase two.

In addition to the VASP Act, the Government has amended a number of existing laws to extend them to virtual assets. These include the Mutual Funds Act (Revised) (the MF Act), the Securities Investment Business Act (Revised) (the SIB Act), the Proceeds of Crime Act (Revised) (the PC Act) and the Anti-Money Laundering Regulations (Revised) (the AML Regulations). These amendments are already in effect.

This briefing provides a high level summary of the VASP Act and the amended legislation above.

Virtual Assets (Service Providers) Act (Revised)

What are virtual assets?

The VASP Act 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".

This wide definition will likely capture all cryptocurrencies, security tokens, utility tokens or other digital assets that are tradeable or transferable, with the exception of digital fiat currencies. Whilst the term "digital expression of fiat currencies" is not defined, we are of the view this is likely to apply only to government-issued virtual currencies as opposed to Tether, GUSD and the like.

What are virtual asset services?

The VASP Act 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:

(a) exchange between virtual assets and fiat currencies;

(b) exchange between one or more other forms of...