The Virtual Asset (Service Providers) Act, 2020 (VASP Act) as amended, provides a legislative framework for the conduct of virtual assets busi¬ness in the Cayman Islands, and the registration and licensing of persons providing virtual asset services. Since the introduction of the VASP Act, the Cayman Islands Monetary Authority (CIMA) has seen a large number of registration applications and, where applicable, licence applications relating to crypto exchanges, crypto custody and brokerage, crypto marketplaces, initial coin offerings, security token offerings, and other businesses operating in, and services being provided in, the digital assets space utilising Cayman Islands entities.

According to information from the CIMA, 55% of the VASPs registered in Cayman are trading platforms with a daily transaction volume of USD5.1 billion (2 to 3% of total global volumes).

The VASP Act defines a “virtual asset” 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 Act makes a distinction between a virtual asset, as defined above, which will be regu¬lated, and a “virtual service token”, which is defined as “a digital representation of value, which is not transferrable or exchangeable with a third party at any time, and includes digital tokens whose sole function is to provide access to an application or service or, to provide a service or function directly to its owner”.

The distinction is meant to deal with the usual question as to whether or not a digital token or coin is a security or a utility token. Virtual service tokens will be treated as utility tokens and, therefore, will fall outside the registration regime and the licensing regime under the VASP Act. Section 3(2) of the VASP Act makes this clear by stating: “For the purposes of this law, virtual service tokens are not virtual assets and a person or legal arrangement that provides services that involve virtual service tokens only are not required to have a licence or registration under this law.”

The VASP Act states that virtual asset service means: (1) the issuance of virtual assets; or (2) 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:

(i) Exchange between virtual assets and fiat currencies;

(ii) Exchange between one or more other forms of convertible virtual assets;

(iii) Transfer of virtual assets;

(iv) Virtual asset custody services; or

(v) Participation in and provision of financial services related to a virtual asset issuance or the sale of a virtual asset.

A person is a virtual asset service provider (VASP) under the VASP Act if it is: (1) a company, or a general partnership, or a limited partnership, or a limited liability company, or a foreign company registered in the Cayman Islands; and (2) providing a virtual asset service as a business, or in the course of business in or from within the Cayman Islands, and is registered or licensed in accordance with the VASP Act, or is an existing licensee that is granted a waiver under the VASP Act.

The trading activity of a Cayman entity to acquire and dispose of cryptocurrencies for its own benefit would not be regulated under the VASP Act, as it is not providing a virtual asset service as a business, or in the course of business. Outside the activity of issuing virtual assets, the VASP Act will only affect persons that undertake virtual asset ser¬vices as a business, or in the course of a business for or on behalf of other persons. A natural person cannot carry on or purport to carry on a virtual asset service as a business, or in the course of busi¬ness in or from within the Cayman Islands.

The VASP Act requires a VASP to either register with the CIMA or be licensed by the CIMA. Whether the VASP will have to register or be licensed will be dependent on the activity carried out by the VASP. However, broadly speaking, in the case of the provision of virtual asset custodial services, or the operation of a virtual asset trading platform (e.g. crypto exchanges, trading platforms), the VASP is required to have a virtual asset service licence. It appears that in most cases where the VASP is carrying on business as a VASP, but is not providing virtual asset custodial services or the operation of a virtual asset trading platform, only registration with the CIMA is required.

Cayman entities operating in breach of the VASP Act without the CIMA registration or a licence with the CIMA (as appropriate) will, among other things, subject VASPs and their operators to substantial administrative fines from the CIMA.

This publication is not intended to be a substitute for specific legal advice or a legal opinion on the laws governing virtual assets in the Cayman Islands. For specific advice on the regulatory requirements for please contact your usual Loeb Smith attorney or any of:

E: gary.smith@loebsmith.com

Cayman Islands
The duties of a director of a Cayman company are found in the common law and include (i) the duty to act bona fide in the best interests of the company, (ii) a duty to exercise his or her powers for proper purposes (and not to exercise them for purposes for which they were not conferred), and (iii) a duty not to make secret profits.

British Virgin Islands
The law governing the “duties of directors and conflicts” is set out in Division 3 of Part VI of the BVI Business Companies Act, 2004 (as amended) (the “Act”). These largely mirror the position at common law and include, for example, (i) the duty to “act honestly and in good faith and in what the director believes to be in the best interests of the company”(section 120); (ii) the duty to exercise powers “for a proper purpose” and a requirement that a director “shall not act, or agree to the company acting, in a manner which contravenes this Act or the memorandum or articles of the company” (section 121); and (iii) a requirement that “a director of a company shall forthwith after becoming aware of the fact that he or she is interested in a transaction entered into or to be entered into by the company, disclose the interest to the board of the company” (section 124). It is interesting to note that the Act also provides that a director of a company that is a wholly-owned subsidiary, subsidiary or joint venture company may, subject to certain requirements, act in the best interests of the relevant parent, or in the case of the joint venture company, the relevant shareholders even though such act may not be in the best interests of the company of which he or she is a director.

Cayman Islands
The common law applies to the Cayman Islands such that a director is under a duty to act with reasonable care, skill and diligence in the performance of his or her duties. In the English caselaw authority of Re City Equitable Fire Insurance Co [1925] Ch. 407 it was held that a director need not exhibit in the performance of his or her duties a greater degree of skill than may reasonably be expected from a person of his or her knowledge and experience. This highly subjective test, however, has been met with increasing criticism in more recent years and there is further English caselaw authority to suggest that directors are nevertheless subject to an objective duty to “take such care as an ordinary man might be expected to take on his own behalf” (Dorchester Finance Co v Stebbing [1989] BCLC 498 (decided in 1977)). As such, a distinction appears to be drawn between the duty of skill on the one hand and the duty to take care on the other. However, in Re City Equitable Fire Insurance Co it was further held that “in respect of all duties that, having regard to the exigencies of business, and the articles of association, may be properly left to some other official, a director is, in the absence of grounds for suspicion, justified in trusting to that official to perform such duties honestly.”

British Virgin Islands
In the BVI, the Act provides that “A director of a company, when exercising powers or performing duties as a director shall exercise the care, diligence and skill that a reasonable director would exercise in the same circumstances taking into account, but without limitation:

1. the nature of the company;
2. the nature of the decision; and
3. the position of the director and the nature of the responsibilities undertaken by him or her.”

This duty is qualified by section 123 of the Act to the extent that the director of a company is entitled to rely upon the register of members and upon books, records, financial statements and other information prepared or supplied, and on professional or expert advice given, by:

1. an employee of the company whom the director believes on reasonable grounds to be reliable and competent in relation to the matters concerned;
2. a professional adviser or expert in relation to matters which the director believes on reasonable grounds to be within the person’s professional or expert competence; and
3. any other director, or committee of directors upon which the director did not serve, in relation to matters within the director’s or committee’s designated authority.

However, the relevant director’s reliance on the matters set above is subject to the proviso that in doing so he or she acts in good faith, undertakes a proper inquiry where this is warranted, and has no knowledge that his or her reliance on the register of members or the books, records, financial statements and other information or expert advice is not warranted.

Cayman Islands
The following remedies are available to a shareholder of a Cayman company:

1. A personal action against the company (where the company has breached a duty which is owed to the shareholder personally);
2. A representative action (this is similar to a personal action and would lie for breach of a duty owed to a group of shareholders);
3. A derivative, or multiple derivative claim (this is the most common type of action. See below); or
4. A petition to wind up the company on just and equitable grounds. (This remedy risks placing the company into liquidation although the Cayman Companies Act (2023 Revision) (the “Cayman Companies Act”) provides the Court with the option of making an alternative order. See below).

British Virgin Islands
The shareholders of a BVI company may pursue the following remedies:

1. A personal action under the Act (on the same grounds as at common law in the Cayman Islands);
2. A representative action under the Act. Where a member of a company brings proceedings against the company and there are other members that have the same or substantially the same interest in relation to the proceedings, the Court may appoint that member to represent all or some of the members having the same interest and may, for that purpose, make such order as it thinks fit, including an order:
   1. as to the control and conduct of the proceedings;
   2. as to the costs of the proceedings; and
   3. directing the distribution of any amount ordered to be paid by a defendant in the proceedings among the members represented.
3. A derivative claim under the Act; or
4. An unfair prejudice claim under the Act.

The most common type of remedies sought by minority shareholders are under (iii) and (iv) above. (see below).

Cayman Islands
A derivative action is a claim commenced by one or more minority shareholders on behalf of a company of which they are a member in respect of loss or damage which that company has suffered. Such a claim can only be brought in certain circumstances and amounts to an exception to the rule that a company, as a separate legal person, should sue and be sued in its own name (often referred to as the rule in the English caselaw authority of Foss v Harbottle (1843) 2 Hare 461; 67 E.R 189). In the Cayman Islands the law governing derivative actions is drawn from the common law rather than statute.

British Virgin Islands
While the English common law applies in the British Virgin Islands “members remedies” have been given a statutory footing in Part XA of the Act (see below).

Cayman Islands
As with the majority of actions commenced in the Cayman Islands, derivative claims are normally begun by serving a writ and statement of claim on the relevant defendant or defendants. Grand Court Rules O.15, r. 12A provides that where the defendant gives notice of an intention to defend the claim then the plaintiff must apply to the Court for leave to continue the action. Such an application should be supported by affidavit evidence verifying the facts on which the claim and entitlement to sue on behalf of the company are based. Pursuant to Grand Court Rules O.15 r.12A(8) on the hearing of the application, the Court may grant leave to continue the action for such period and upon such terms as it thinks fit, dismiss the action, or adjourn the application and give such direction as to joinder of parties, the filing of further evidence, discovery, cross-examination of deponents and otherwise as it considers expedient. In Renova Resources Private Equity Limited v Gilbertson and Others [2009] CILR 268, Foster., J affirmed the application in the Cayman Islands of the test to be applied in determining whether to grant leave to continue the action put forward by the English Court of Appeal in the case of Prudential Assurance Co Ltd v Newman Industries Ltd (No.2) [1981] Ch 257. Foster, J., held that: “(…) there are two elements to this: first the plaintiff [is] required to show prima facie that there [is] a viable cause of action vested in the company and, secondly, that the alleged wrongdoers [have] control of the company (or could block any resolution of the company or the board) and thereby prevent the company bringing an action against themselves.”

British Virgin Islands
The Act provides that subject to certain exceptions “the Court may, on the application of a member of a company, grant leave to that member to (a) bring proceedings in the name and on behalf of that company; or (b) intervene in the proceedings to which the company is a party for the purpose of continuing, defending or discontinuing the proceedings on behalf of the company.” Section 184C(2) provides that “without limiting subsection (1), in determining whether to grant leave under that subsection, the Court must take the following matters into account: (a) whether the member is acting in good faith; (b) whether the derivative action is in the interests of the company taking account of the views of the company’s director’s on commercial matters; (c) whether the proceedings are likely to succeed; (d) the costs of the proceedings in relation to the relief likely to be obtained; and (e) whether an alternative remedy to the derivative claim is available.”

Leave to bring or intervene in proceedings may be granted by the Court only if the Court is satisfied that:

1. the company does not intend to bring, diligently continue or defend, or discontinue the proceedings, as the case may be; or
2. it is in the interests of the company that the conduct of the proceedings should not be left to the directors or to the determination of the shareholders or members as a whole.

Such an application for leave should be made to the Court supported by affidavit evidence.

Cayman Islands
In the Renova case the Grand Court held that in appropriate circumstances MDCs would be permitted. In that case, the plaintiff had brought an action in respect of loss incurred by a wholly-owned subsidiary of the company in which it was a shareholder and therefore loss to the subsidiary caused indirect loss to its parent company and shareholders. However, the rule against the recovery of reflexive loss applied such that a shareholder or parent company would not be permitted to claim for indirect losses which mirrored those losses suffered directly by the relevant subsidiary or indeed sub-subsidiary on who behalf action was being brought.

British Virgin Islands
In Microsoft Corporation v Vandem Ltd BVIHCVAP2013/0007 the Eastern Caribbean Court of Appeal held that BVI law which has been codified in this area “does not permit double derivative actions.” However, while the Act does not contemplate multiple derivative actions, there have been other case law authority that have confirmed that multiple derivative actions are available at common law in the BVI. English caselaw authority (which is persuasive authority in the BVI) such as Universal Project Management Services Ltd v Fort Gilkicker Ltd [2013] 3 WLR concerning the interpretation of s.260 the English Companies Act, 2006 may open up arguments that such actions are nevertheless available in the BVI at common law.

Cayman Islands
Pursuant to the Cayman Companies Act the Court may wind up a company if it is of the opinion that it would be just and equitable for it to do so. The Cayman Companies Act also provides that where such a petition “is presented by members of the company as contributories on the ground that it is just and equitable that the company should be wound up, the Court shall have jurisdiction to make the following orders, as an alternative to a winding-up order, namely –

1. an order regulating the conduct of the company’s affairs in the future;
   an order requiring the company to refrain from doing or continuing an act complained of by the petitioner or to do an act which the petitioner has complained it has omitted to do;
   an order authorising civil proceedings to be brought in the name and on behalf of the company by the petitioner on such terms as the Court may direct; or
2. an order providing for the purchase of the shares of any members of the company by other members or by the company itself and, in the case of a purchase by the company itself, a reduction of the company’s capital accordingly.”

British Virgin Islands 
The Act provides that “A member of a company who considers that the affairs of the company have been, are being or are likely to be, conducted in a manner that is, or any act or acts of the company have been, or are, likely to be oppressive, unfairly discriminatory, or unfairly prejudicial to him or her in that capacity, may apply to the Court for an order under this section.”

The Act also provides that “If on an application under this section, the Court considers it just and equitable to do so, it may make such order as it thinks fit, including, without limiting the generality of this subsection, one or more of the following orders –

1. in the case of a shareholder, requiring the company or any other person to acquire the shareholder’s shares;
2. requiring the company or any other person to pay compensation to the member;
3. regulating the future conduct of the company’s affairs;
4. amending the memorandum and articles of the company;
5. appointing a receiver of the company;
6. appointing a liquidator of the company under the Insolvency Act on the grounds specified in section 162(1)(b) of the Insolvency Act;
7. directing the rectification of the records of the company;
8. setting aside any decision made or action taken by the company or its directors in breach of the Act or the memorandum or articles of the company.”

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Gary is a Partner in the Corporate Group of Loeb Smith Attorneys whose practice focuses principally on Corporate, Investment Funds, M&A, and Corporate Restructurings.

Profile: Gary Smith
E: gary.smith@loebsmith.com

For those persons who have been carrying on a virtual asset service prior to the coming into force of the VASP Act on 1 February 2023, the VASP Act allows a transitioning period of 6 months (ending therefore on 31 July 2023) within which they can either (1) submit an application to the BVI FSC to be registered as VASPs or (2) cease their VASP- related operations altogether.

Who is a Virtual Asset Service Provider?

By way of recap, the VASP Act defines a VASP as a virtual asset service provider who provides, as a business, a virtual assets service and is registered under the VASP Act to conduct one or more of the following activities or operations for or on behalf of another person:

1. exchange between virtual assets and fiat currencies;
2. exchange between one or more forms of virtual assets;
3. transfer of virtual assets, where the transfer relates to conducting a transaction on behalf of another person that moves a virtual asset from one virtual asset address or account to another;
4. safekeeping or administration of virtual assets or instruments enabling control over virtual assets;
5. participation in, and provision of, financial services related to an issuer’s offer or sale of a virtual asset; or
6. perform such other activity or operation as may be specified in the VASP Act or as may be prescribed by regulations made by the BVI FSC in connection with the VASP Act.

A virtual asset is a digital representation of value that can be digitally traded or transferred, and can be used for payment or investment purposes, but specifically does not include the following:

1. digital representations of fiat currencies and other assets or matters specified in the guidelines which have been, and may in the future be, published in conjunction with the VASP Act; or
2. a digital record of a credit against a financial institution of fiat currency, securities or other financial assets that can be transferred digitally.

Services Expressly Caught by the VASP Act

The following services have been included in a non-exhaustive list of virtual assets services and are, as such, regulated by the VASP Act when carried out on behalf of another person:

1. hosting wallets or maintaining custody or control over another person’s virtual asset, wallet or private key;
2. providing financial services relating to the issuance, offer or sale of a virtual asset;
3. providing kiosks (such as automatic teller machines, bitcoin teller machines or vending machines) for the purpose of facilitating virtual assets activities through electronic terminals to enable the owner or operator of the kiosk to actively facilitate the exchange of virtual assets for fiat currency or other virtual assets; or
4. engaging in any other activity that, under issued guidelines, constitutes the carrying on of the business of providing virtual asset service or issuing virtual assets or being involved in virtual asset activity.

Services Specifically Excluded from the Application of the VASP Act

Rather helpfully, the VASP Act also sets out a non-exhaustive list of some of the services which are specifically excluded from its remit and these are as follows:

1. providing ancillary infrastructure to allow another person to offer a service, such as cloud data storage provider or integrity service provider responsible for verifying the accuracy of signatures;
2. providing service as a software developer or provider of un-hosted wallets whose function is only to develop or sell software or hardware;
3. solely creating or selling a software application or virtual asset platform;
4. providing ancillary services or products to a virtual asset network, including the provision of services like hardware wallet manufacturer or provider of un-hosted wallets, to the extent that such services do not extend to engaging in or actively facilitating as a business any of those services for or on behalf of another person;
5. solely engaging in the operation of a virtual asset network without engaging or facilitating any of the activities or operations of a VASP on behalf of customers;
6. providing closed-loop items that are non-transferable, non-exchangeable and which cannot be used for payment or investment purposes; and
7. accepting virtual assets as payment for good or services (such as the acceptance of virtual assets by a merchant when effecting the purchase of goods).

Globalization is defined as the process of interaction and integration among people, companies, and governments worldwide. It is primarily an economic process of interaction and integration causing a growth in international trade and the exchange of ideas, beliefs, and culture.

Economically, globalization involves the international exchange of goods, services, data, technology, and the economic resources of capital which along with advances in telecommunication have developed and expanded global markets to facilitate the economic activities of the exchange of goods, services and capital.

This article seeks to briefly assess where the British Virgin Islands (BVI) stands in the current period of globalization (Globalization 3.0) and also to explore the future of the BVI under the next phase of Globalization 3.0.

The American political commentator, Thomas L. Friedman in his book, “The World Is Flat: A Brief History of the Twenty-first Century” divides the history of globalization into three periods: Globalization 1.0 (1492–1800), Globalization 2.0 (1800–2000) and Globalization 3.0 (2000–present). The Globalization 1.0 period, according to Friedman, involved the globalization of countries, “the main agent of globalization was the nation-state globalizing for Empire, or for resources, or for power.” Globalization 2.0 involved the globalization of companies. During this period, Friedman argues, globalization “was spearheaded by companies globalizing for markets, for labor, and for resources.” The activities related to this phase further broke down the barriers of international borders, trade, and cross-cultural connections.

The third and current phase of globalization, what is referred to as Globalization 3.0, involves the globalization of individuals. This began around the year 2000. Friedman noted that “what’s really new, really exciting, and really terrifying about this era of globalization is that it is built around individuals. What is really new about this era is that we now have individuals that can compete, connect, and collaborate globally as individuals.”

Features of Globalization 3.0 include the development of the personal computer, which “allowed individuals, for the first time in history, to author their own content” in digital form, the “dot com bubble,” which funded the necessary infrastructure for global internet access, the development of optical fibre and cable connectivity arrangements, leading to a revolution in global connectivity. The development of the internet from the “static web”, made of read-only webpages that, by and large, lacked much in the way of interactive features, to web 2.0, which is what we have now, and marks the internet’s evolution into an era of dynamic content. Users can interact with web pages, communicate with each other and create content – for example on social media networks like Weibo, Twitter, WeChat, Facebook, and Instagram.

Developers of Web 3.0 infrastructure (with its different sectors, such as (i) Decentralised Finance or DeFi, (ii) NFTs, and (iii) Decentralized autonomous organizations (DAOs)) are increasingly using BVI entities to own and manage their creations as BVI companies are relatively cheap to establish, take 1-2 days to be formed and their annual maintenance costs compare well against other offshore jurisdictions like the Cayman Islands and Bermuda, and mid-shore jurisdictions like Luxembourg, Hong Kong and Singapore.

Web3.0 is predicted to include the next evolutionary stage of the internet which involves decentralization, token-based economies and blockchain technology. Decentralization means internet users can transact business peer-to-peer, cutting out intermediaries and removing power from controlling entities. With Web 3.0, there is a greater focus on user privacy, transparency and ownership. The BVI has a common law legal system that facilitates commercial transactions and maximizes flexibility and additionally has been introducing legislation such as the Data Protection Act, 2021 (“DPA”) to enhance the protection of rights related to privacy, transparency and ownership. Under the DPA, any BVI entity that handles an individual’s personal information will have obligations with respect to how that data is handled. For example, the individual to whom the information relates must be informed of what their personal information is being used for, and by whom. The processing and control of such data must also abide by certain specific principles.

The increasing use of Blockchain and other distributed ledger technology (DLT), big data and artificial intelligence (AI) as well as cloud computing is likely to cause significant transformation of the financial sector as the use of DeFi, NFTs and other DLT features expand. For example, investment Fund managers are already being significantly affected by improved availability of data, by algorithms, the digitization of assets, and by new processes in custody, settlement and reporting. As a fast-growing jurisdiction for offshore investment funds investing in sectors such as web3.0 and AI, the BVI has been developing its laws to ensure that it encourages the use of BVI structures within the framework of international standards. The BVI is committed to ensuring that its financial services industry is aligned with international best prac¬tices and compliant with the standards imposed by the Financial Action Task Force in order to actively participate in the various aspects of this next exciting phase of Globalization 3.0. The BVI has enacted the Virtual Asset Service Providers Act, 2022 (“VASP Act”) to implement the Financial Action Task Force’s standards on virtual assets and virtual asset service providers (“VASPs”). The VASP Act creates the legal framework for the registration and supervision of Virtual Assets Service Providers (VASPs) operating in and from within the BVI.

On 1 December 2022, the BVI implemented measures to ensure a VASP which is carrying on or providing “virtual asset services” when a transaction involves virtual assets valued at US$1,000 or more is required to be compliant with the BVI’s Anti-Money Laundering Regulations (“AMLRs”) and related Anti-Money Laundering and Terrorist Financing Code of Practice (“Code”).

With the advantage of having a sophisticated legal framework that includes the VASP Act, the AMLRs, the Code, and the DPA, the BVI is setting itself as a key jurisdiction for individuals around the global to set up corporate structures to actively participate in the next phase of Globalization 3.0, namely the development and growth of (i) artificial intelligence (AI) and (ii) Web 3.0 infrastructure (e.g. DeFi, NFTs, etc.).

Other advantages of the BVI such as (i) aligning with international best prac¬tices and compliant with the standards imposed by the Financial Action Task Force, (ii) the absence of currency exchange controls, (iii) tax neutrality (i.e. utilizing BVI entities or trusts does not add to the tax burden or complexity of a corporate group structure as there are no income tax, capital gains tax, corporation tax, wealth tax or other taxes applicable to the BVI entities or trusts), (iv) political stability, and (v) a common law legal system that facilitates commercial transactions and maximizes flexibility, will make the BVI increasingly competitive in the next phase of Globalization 3.0.

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This publication is not intended to be a substitute for specific legal advice or a legal opinion. For specific advice on the formation, structuring and regulation of crypto/digital assets offerings in the BVI, please contact your usual Loeb Smith attorney or any of the following:

E: gary.smith@loebsmith.com
E: robert.farrell@loebsmith.com
E: cesare.bandini@loebsmith.com
E: peter.vas@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: wendy.au@loebsmith.com
E: vivian.huang@loebsmith.com
E: faye.huang@loebsmith.com
E: yun.sheng@loebsmith.com