With its stable political environment, strong regulatory framework, and strategic positioning as a leading global financial centre, the Cayman Islands has become the destination of choice for businesses looking to establish fintech-related structures.
Here, Chris Duncan and Richard Munden, partners at Carey Olsen, a leading offshore law firm with expertise in digital assets, cryptocurrency and fintech matters, delve into the Cayman Islands’ appeal as a leading jurisdiction for businesses providing virtual asset services.
The Cayman Islands is a leading global financial centre with a reputation as one of the world’s most innovative and business-friendly places to operate. The jurisdiction offers a stable society and political system, judicial and legislative links to the UK, tax neutrality, sophisticated service providers, and a proportionate regulatory regime that focuses closely on the financial services industry, and in particular those catering to sophisticated and institutional investors based elsewhere.
It is this reputation and these attributes that have helped the jurisdiction become an obvious choice for many of those proposing to establish fintech-related structures, whether it be a fund vehicle investing into digital assets or the launch of a decentralised finance protocol or network using a Cayman Islands foundation company.
In particular, the Cayman Islands is now regarded as a leading jurisdiction for businesses wishing to provide virtual asset services in a regulated manner, with 23 businesses having obtained registration under the Cayman Islands VASP regime (with more pending) as at the time of writing.
This note briefly considers the process and highlights why so many businesses have chosen the Cayman Islands for their registration as a VASP.
The VASP Act – a modern and robust regime
Each of the Cayman Islands Government, the Cayman Islands Monetary Authority (CIMA), and industry bodies such as Cayman Finance and the Cayman Islands Blockchain Foundation, acknowledge the importance of continuing to attract fintech and digital assets business to the jurisdiction and ensuring the further growth of the sector whilst maintaining the Cayman Islands’ commitment to the highest standards of financial probity and transparency and the specific considerations that can accompany digital assets.
Consequently, in May 2020, recognising the newly adopted international standards set by the Financial Action Task Force, a new framework for the supervision and regulation of virtual asset services businesses was introduced in the form of the Virtual Asset (Service Providers) Act, 2020 (the VASP Act).
The features of the VASP Act are described further below however, it is important to note that at the time of writing, this new legislation is only partially in force; the VASP Act is being introduced in two phases, with the first primarily dealing with anti-money laundering (AML) regulations and requiring virtual asset service providers (VASPs) to be registered, and the second phase dealing with licensing and other matters. A specific date for implementation of phase two of the VASP Act has not yet been announced.
Overall, the modern, robust and clear framework makes the Cayman Islands an attractive jurisdiction for virtual asset services businesses while furthering Cayman’s commitment to international standards.
The VASP Act regulates businesses providing virtual asset services in or from the Cayman Islands. Virtual assets themselves and parties dealing with virtual assets for their own purposes are generally not subject to specific regulation in the Cayman Islands.
A ‘virtual asset service’ for this purpose means the issuance of virtual assets or the business of providing exchange, custody and transfer services or financial services in relation to a sale or issuance for or on behalf of another person or entity.
Under the VASP Act, a virtual asset is defined as a digital representation of value that can be digitally traded or transferred and can be used for payment or investment purposes. An issuance means the sale of newly created virtual assets to the public in exchange for fiat currency, other virtual assets or other consideration. ‘Public’ is not defined in the VASP Act; however, the Virtual Assets (Service Providers) Regulations distinguish a ‘private sale’, defined as a sale that is not advertised and is sold to a limited number of persons by private agreement from a sale to the public (meaning that registration under the VASP Act may not be required for compliant private sales). Transfers without consideration (e.g. ‘airdrops’) should also be excluded.
It is worth noting that cryptocurrency and other digital asset businesses that do not fall within the definition of virtual asset service may still be subject to regulation in the Cayman Islands, such as under the Securities Investment Business Act or the Money Services Act.
In contrast with some other jurisdictions, being registered as a VASP does not itself require any physical presence in the Cayman Islands.
Sensible registration process and costs
Businesses wishing to provide virtual asset services are required to be licensed or registered with CIMA, obtain a waiver or hold a sandbox licence. As above, the licensing framework is not yet in place and therefore all businesses wanting to provide virtual asset services in or from within the Cayman Islands must at the time of writing apply for registration.
The registration process, whilst rigorous can be relatively straightforward provided that the people behind the business can satisfy CIMA that they are ‘fit and proper’, have a comprehensive business plan and adequate policies and procedures such as AML/KYC and risk management policies.
Prospective applicants must submit a completed application form together with the requisite policies and procedures and detailed information on the directors, owners and money laundering reporting officers. Once submitted, an applicant can expect a dialogue with CIMA before the application process is concluded.
The time involved will depend on the complexity of the business model and the quality of the application, but most applications will be processed well within a year in our experience and sometimes much less. Having advisors familiar with the process will of course make a big difference in terms of the overall speed, cost and quality of an application.
In terms of costs, the fees associated with a Cayman VASP application compare very favourably with the costs found in other jurisdictions.
Forward thinking regulator
The existence of the VASP Act alone would not have led to the Cayman Islands becoming a leading jurisdiction for regulated virtual assets businesses. To earn that reputation, an open minded and forward-thinking regulator is also a key part of the equation.
CIMA has shown that it can review and process even the most complex of applications including the recent approval of Mauve Limited in its application to become the world’s regulated non-custodial virtual assets exchange. This approval demonstrates CIMA’s knowledge and sophistication and shows it is willing to consider novel applications on their merits.
Whilst not directly relevant to the Cayman VASP regime, the foundation company structure and Special Economic Zone also make the Cayman Islands a jurisdiction of choice for businesses in the digital assets space.
- There are now a very large number of digital assets focused businesses and projects have decided to use a Cayman Islands foundation company as a legal entity to support the project. Its ease of formation, flexible management and ability to be ownerless has made the Cayman foundation company one of the most popular legal entities in the space globally, utilised by some of the largest and most significant projects.
- The Special Economic Zone (the SEZ) offers businesses focused on the fintech industry the opportunity to establish physical operations within the Cayman Islands in a more streamlined manner. It provides several benefits, including a rapid and cost-effective work permit process, with the ability to be operational within four to six weeks and allocated office space. When coupled with the other benefits of the jurisdiction the SEZ has proven highly popular with the fintech industry, with the number of blockchain-focused companies established within it continuing to grow.
As more and more jurisdictions introduce regulations focused on digital assets, we anticipate that the Cayman Islands will become a home for many new VASPs wishing to do business in a stable and well-regulated jurisdiction