The Virtual Assets (Service Providers) (VASP) Law - Cayman Islands
On 20 May 2020 the Cayman Islands introduced a new framework for regulating virtual asset businesses. The VASP Law derives from recommendations made by the Financial Action Task Force and provides for the regulation of virtual asset businesses and the registration and licensing of persons which provide virtual asset services.
In addition to the VASP Law, the government has amended a number of existing laws to extend to virtual assets, including the Mutual Funds Law (Revised) and the Securities Investment Business (SIB) Law (Revised). These amendments are expected to come into force at the same time as the VASP Law.
What are virtual assets? 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".
This wide definition will likely capture all cryptocurrencies, security tokens, utility tokens and other digital assets that are tradeable or transferable, with the exception of digital fiat currencies. While the term 'digital expression of fiat currencies' is not defined, this is likely to apply only to government-issued virtual currencies as opposed to, for example, Tether and Gemini dollars.
What are virtual asset services? The VASP Law applies to any person which provides 'virtual asset services' – 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 relating to a virtual asset issuance or the sale of a virtual asset.
The VASP Law will affect only persons that carry out virtual asset services as a business or in the course of a business for or on behalf of other persons. It does not appear to affect persons that carry out those functions only for themselves. With regard to virtual asset issuances, this distinction does not apply. This means that most issuers of virtual assets for their own benefit will be subject to the VASP Law.
The VASP Law also addresses persons that promote themselves as carrying on virtual asset services, even though they may not technically be performing a virtual asset service (as defined under the VASP Law).
Registration or licensing? Businesses which provide custodial services of virtual assets and businesses that operate or intend to operate a 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 (eg, the Mutual Funds Law, the SIB Law or the Companies Management Law (Revised)) must notify CIMA if they wish to carry on virtual asset services and may request a waiver from registration or licensing under the VASP Law. CIMA will apply the same considerations to a waiver as to the grant of registration or a licence under the VASP Law.
CIMA considerations CIMA will consider, among other matters:
the size, scope and complexity of the virtual asset service, underlying technology, method of service delivery and virtual asset utilised;
the applicant's knowledge, expertise and experience;
the AML procedures and data protection safeguards in place for the applicant;
the similarity of the virtual asset service to activities under the SIB Law or any other regulatory laws;
the risks that the virtual asset service may pose to existing clients, future clients, other licensees or the Cayman financial system;
the applicant's net worth, capital reserves and financial stability;
the applicant's ability to comply with the VASP Law and the relevant requirements of the AML Regulations; and
whether the applicant's senior officers and ultimate beneficial owners are fit and proper persons.
Additional considerations will also apply to virtual asset issuances.
Sandbox licence The VASP Law also introduces the concept of a sandbox licence that provides CIMA with the flexibility to regulate relevant businesses that utilise innovative technologies and activities by imposing additional requirements to, or allowing certain exemptions from, the standard requirements within the VASP Law. A sandbox licence is meant to operate for a limited timeframe so that CIMA can assess how best to regulate a sandbox licence applicant and whether legislative changes may be required to further promote the development of the particular innovative technologies or activity that is subject to the sandbox licence.
Mutual Funds (Amendment) (No 2) Law 2020
The definition of 'equity interest' under the Mutual Funds Law has been amended to include "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 Mutual Funds Law and must be registered or licensed thereunder.
Securities Investment Business (Amendment) Law 2020
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 and:
represent or can be converted into any of the securities listed in Schedule 1 of the SIB Law; or
represent a derivative of any of the securities listed in Schedule 1 of the SIB Law.
The securities listed in Schedule 1 of the SIB Law are traditional securities including equity interests, debt instruments, options and futures.
Therefore, persons dealing in, arranging deals in, managing or advising on virtual assets that are securities will have to register or be licensed under the SIB Law. To avoid regulatory overlap, CIMA may exempt an applicant from registration or licensing under the SIB Law or the VASP Law. However, an applicant must first apply under either law before having this exemption granted.
For further information on VASP, Cayman digital asset structures, investment fund formation or bolstering the governance framework for your existing digital asset fund, then please feel free to contact us: firstname.lastname@example.org
CV5 Capital is a leading professional services firm focused on hedge fund services with a particular focus on digital asset fund structures, crypto, blockchain developments. We routinely advise on the formation of digital asset funds on a stand-alone basis and also provide emerging fund managers with CV5 Digital, the leading institutional fund platform for fund managers to launch and manage digital asset funds with best-in-class service providers.