With the coming into effect of the Virtual Asset (Service Providers) Act, 2020 (the “VASP Act”), the Cayman Islands Monetary Authority (“CIMA”) announced that the regulatory framework for the VASP Act would be implemented in two phases. Phase one focuses on anti-money laundering (“AML”) and countering the financing of terrorism (“CFT”) compliance, supervision and enforcement, and other key areas of risk. CIMA announced that under phase one, entities engaged in or wishing to engage in virtual asset services must be registered with CIMA under the VASP Act. Entities engaged in or wishing to engage in virtual asset services, already subject to CIMA’s supervision under another regulatory law, must notify (in the case of CIMA licensees) or register with CIMA (in the case of entities registered with CIMA e.g. under the Securities Investment Business Act) under the VASP Act. Phase two will include a licensing and virtual asset issuance approval process that will begin when the appropriate clauses and aspects of the VASP Act come into effect.

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See the following links for further details of the regulatory regime in the Cayman Islands for token issuers, providers of custody services for digital assets, crypto exchanges, and other providers of virtual asset services.
Game changer- Introduction of the regulation of Virtual Assets in the Cayman Islands (Part I)
Game changer-Licensing requirements for Virtual Assets in the Cayman Islands (Part II)

On 25 May 2020 the Cayman Islands government passed The Virtual Asset (Service Providers) Law, 2020 (“VASP Law”), which provides a legislative framework for the conduct of virtual assets business in the Cayman Islands and for the registration and licensing of persons providing virtual asset services. The VASP Law is intended to place the Cayman Islands with a cutting edge, robust framework which is in alignment with global regulatory standards, protect consumers and meet the requirements of the Financial Action Task Force recommendations in respect of virtual assets. In this two part series (this being Part 2) we look at the new VASP Law and its requirements with respect to licensing. Part 1 looked at the requirements with respect to registration.

1.   WHAT IS A VIRTUAL ASSET?

The VASP Law 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 Law makes a distinction between a “virtual asset” as defined above which will be regulated 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 Law.¹

2.   WHAT ARE VIRTUAL ASSET SERVICES?

The VASP Law states that “Virtual asset service” means 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.

3.   WHO IS A VIRTUAL ASSET SERVICE PROVIDER?

A person is a “virtual asset service provider” (“VASP”) under the VASP Law, 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) provides 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 Law or is an existing licensee that is granted a waiver under the VASP Law.
A natural person cannot carry on or purport to carry on a virtual asset service as a business or in the course of business in or from within the Cayman Islands.

The VASP Law requires a VASP to either register with Cayman Islands Monetary Authority (“CIMA”) or be licensed by 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, 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, registration with CIMA is required.

4.   CIMA CONSIDERATIONS: LICENCE OR REGISTER

In determining whether to grant a virtual asset licence, a sandbox licence, register an applicant as a “registered person” or to waive a requirement to licence or register under the VASP Law, CIMA will take into account the following:

1. size, scope and complexity of the virtual asset service, underlying technology, method of delivery of the service and virtual asset utilised;
2. knowledge, expertise and experience of the applicant;
3. the AML procedures that the applicant has in place;
4. internal safeguards and data protection systems being utilised by the applicant;
5. the similarity of the virtual asset service to securities investment business or any other regulated activity under any of the other Cayman Islands regulatory laws;
6. the risks involved;
7. whether the virtual asset service business involves the offering of virtual asset custodial services or the operation of a virtual asset trading platform;
8. the net worth, capital reserves and financial stability of the applicant;
9. the likelihood that the service will promote innovation, competition and benefits to consumers; and
10. the applicant’s senior officers, trustees and beneficial owners are fit and proper persons.

5.   VIRTUAL ASSET SERVICE LICENCE

A person who wishes to (i) provide virtual asset custody services (i.e. the business of safekeeping or administration of virtual assets) or (ii) to operate a virtual asset trading platforms (“VATP”) or is at the commencement of the VASP Law already doing so, should apply for a virtual asset service licence. For the purposes of the VASP Law, a VATP does not include a platform that only provides a forum where buyers and sellers post bids and offers and a forum where the parties trade in a separate platform or in a peer-to-peer manner.

1. CIMA criteria – In order to determine whether to approve an application for a licence, CIMA will consider the matters set out in section 4 above, whether approval of the application is against the public interest and if the applicant has (i) personnel with the necessary skills, knowledge and experience (ii) facilities, books, records and accounting systems, and (iii) adequate capital and cybersecurity measures, as CIMA considers appropriate having regard to the size, scope and complexity of the business. When CIMA has granted a licence, it will publish notification in the Cayman Islands Gazette.
2. CIMA regulatory requirements – CIMA may impose such regulatory requirements on a virtual asset service licensee as it considers necessary, including further restriction or prohibitions on the use of technology or practices which CIMA deems may disrupt or prejudice the functions of CIMA, the interests of the public and the financial services in the Cayman Islands.
3. Event-driven notifications – In addition to an annual renewal fee which is due by 15th January each year, a licensee is required to notify CIMA within 15 days of any changes made to the information in the application form submitted to CIMA.
4. Annual Audit obligations for Licensees – A licensee is required to have its accounts audited annually and submit such accounts to CIMA within 6 months of financial year end. CIMA may grant an exemption to this requirement if CIMA determines the requirement to be unnecessary or prohibitive given the size, scope and complexity of the economic activity and the availability of auditing services to the virtual asset service.

6.   REQUIREMENTS: VIRTUAL ASSET CUSTODY SERVICES

A licensee that provides virtual asset custody services must:

1. maintain best technology practices relating to virtual assets held in custody;
2. not encumber or cause any virtual asset to be encumbered, unless specifically agreed to by the beneficial owners of the virtual assets;
3. ensure that all proceeds relating to virtual assets held in custody shall accrue for the benefit of the owner, unless otherwise agreed in writing;
4. take such steps as may be necessary to safeguard the virtual assets held;
5. have adequate safeguards against theft and loss; and
6. enter into a custodial arrangement with the owner of a virtual asset, which includes the prescribed details set out in the VASP Law (i.e. in relation to the manner in which the virtual assets are to be held, the transactions the custodian is permitted to engage in, disclosures relating to the risks and fees etc.).

CIMA may also impose requirements on a licensee that provides virtual asset custody services, including (i) net worth requirements, (ii) reporting requirements, (iii) disclosures to clients concerning the transparency of operations, (iv) requirements for the safekeeping of client assets (including the segregated of assets, insurance requirements and cybersecurity measures), and (v) any other requirement CIMA determines is in the best interest of the beneficial owners of the assets held by the licensee.

7.   REQUIREMENTS: VIRTUAL ASSET TRADING PLATFORMS

1. CIMA requirements – CIMA may impose requirements on a licensee that operates a VATP where CIMA deems it necessary, including: (i) the type of client it may market its services to, (ii) the types of virtual assets that may and may not be traded on the VATP, (iii) the clearing and settlement process for transactions between buyers and sellers of virtual assets, and (iv) net worth and reporting requirements.
2. Due diligence requirement – A licensee operating a VATP is required to carry out reasonable due diligence procedures on virtual assets and their issuers listed on the VATP.
3. Securities investment business – A licensee who is operating a VATP must apply to CIMA, in the prescribed form, for approval prior to engaging in securities investment business² (as defined under the Cayman Islands Securities Investment Business Law (“SIBL”)) which relates to virtual assets. In determining an application by a VATP, CIMA will take into account whether the VATP lists or facilitates the issuance of securities which are virtual assets in accordance with SIBL and whether any additional supervision is required under SIBL.
4. Prohibitions on a licensee – A licensee that operates a VATP shall not:

• • provide financing to clients for the purchase of virtual assets, unless disclosures are made to client regarding the terms and risk of the financing;
  • engage in trading or market making behavior for its own account which could be detrimental to the interests of its clients, unless these activities are necessary for the operation of the VATP and these activities have been disclosed to clients of the VATP;
  • allow a virtual asset to be traded on the VATP unless it has assured itself that the virtual asset is not presented in a deceiving manner or in a manner that is meant to defraud;
  • allow a client to purchase or trade in virtual assets unless the licensee has assured itself the client is aware of the risks of purchasing, holding or trading the virtual asset and has provided disclosures in a form that the client can understand; and
  • provide fiat currency to fiat currency exchange services to users of the VATP.

8.   SANDBOX LICENCE

A “sandbox licence” is a temporary licence granted for a period of up to 1 year for a person providing a virtual asset service that represents an (i) innovative use of technology or (ii) uses an innovative method of delivery that requires supervision and oversight not offered by an existing licence or registration.

1. CIMA supervision – CIMA shall assess, monitor, supervise the innovative service, technology or method of delivery of a sandbox licensee with a view to ensuring that the service, technology or delivery (i) complies with the core principles of a sandbox licence, as set out in the VASP Law, (ii) improves the provision of financial services within the Cayman Islands, (iii) complies with global standards and best AML practices, (iv) facilitates the adoption of new financial services practices and technologies within the Cayman Islands, and (v) best practices and guidance are developed for the virtual asset service sector.
2. Direction by CIMA – CIMA has the discretion to require a person applying to be a registered person or a virtual asset service licensee to apply instead for a sandbox licence.
3. CIMA powers – CIMA may take any action necessary where it is of the opinion that the action is necessary for the protection of clients or potential clients and is in the interest of the public, may extend the duration of the sandbox licence, amend any restrictions or revoke it.
4. Fintech service provider – A fintech service provider may, but is not required to, apply for a sandbox licence. For the purposes of the VASP Law, a “fintech service provider” is a person who is carrying on a service that uses innovative technology to improve, change or enhance financial services, but is not a virtual asset service.
5. Compliance requirements – Where CIMA grants a sandbox licence, CIMA may impose any of the requirements that are applicable to a virtual asset service licensee and any restrictions that it considers necessary (e.g. impose a limit of the value or amount of virtual asset service or fintech service offered to clients).

9. CIMA’S ENFORCEMENT POWERS

CIMA has broad discretionary supervisory powers in respect of a registered person or licensee under the VASP Law. These powers are set out in Part 1 of this two part series.

CIMA may revoke a virtual asset service licence, sandbox licence or cancel the registration if the licensee or registered person has ceased or wishes to cease carrying on virtual asset service or has not commenced business within 1 year of the date of grant of the licence or the registration. 

1.  Section 3(2) of the VASP Law 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.”
2.  Securities investment business (as defined under the Cayman Islands Securities Investment Business Law mainly relates to managing securities, dealing in securities, advising in respect of securities, or arranging deals in securities)

This publication is not intended to be a substitute for specific legal advice or a legal opinion. For specific advice, please contact any of:

E: gary.smith@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: santiago.carvajal@loebsmith.com

Job Description

Loeb Smith Attorneys is a dynamic, fast growing Cayman Islands law firm with an enviable international client base and a proven record of providing creative and insightful legal advice and solutions to, among other, investment funds, listed companies, blockchain technology companies. We work with our clients, other law firms and advisers and with each other to efficiently maximize our clients’ commercial advantage whilst minimizing their legal risk.

We are seeking a bright, hardworking Corporate Attorney to join our Corporate Group.

The successful applicant will be working principally on:

1. the formation and launch of investment funds including hedge funds, PE funds, tokenised funds, and cryptocurrency funds; and
2. advising on the acquisition and disposal of fintech and blockchain technology companies.

Basic Requirements

The successful applicant will receive in-depth training and support to acquire the necessary technical know-how and skills to provide the high quality advice and service delivery that our clients expect from our lawyers and legal professionals and must:

1. have a minimum of 5 years’ PQE working in a corporate team undertaking high quality corporate work particularly focused on cross border M&A, private equity transactions, or IPOs;
2. have strong academic record, be fluent in English, and qualified to practice law in a British commonwealth jurisdiction;
3. be a good team player with strong interpersonal skills, strong work ethic, excellent attention to detail, time management and very good organizational skills.

Salary and Benefits

The successful candidate will receive a very competitive salary and benefits package including a performance related bonus scheme, health insurance, and pension.

On 25 May 2020 the Cayman Islands government passed The Virtual Asset (Service Providers) Law, 2020 (“VASP Law”), which provides a legislative framework for the conduct of virtual assets business in the Cayman Islands and for the registration and licensing of persons providing virtual asset services. The VASP Law is intended to place the Cayman Islands with a cutting edge, robust framework which is in alignment with global regulatory standards, protect consumers and meet the requirements of the Financial Action Task Force recommendations in respect of virtual assets. In this two part series (this being Part 1) we look at the new VASP Law and its requirements with respect to registration. Part 2 will look at the requirements with respect to licensing.

1. WHAT IS A VIRTUAL ASSET?

The VASP Law 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 Law makes a distinction between a “virtual asset” as defined above which will be regulated 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 Law.¹

2. WHAT ARE VIRTUAL ASSET SERVICES?

The VASP Law states that “Virtual asset service” means 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.

3. WHO IS A VIRTUAL ASSET SERVICE PROVIDER?

A person is a “virtual asset service provider” (“VASP”) under the VASP Law, 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) provides 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 Law or is an existing licensee that is granted a waiver under the VASP Law. 

A natural person cannot carry on or purport to carry on a virtual asset service as a business or in the course of business in or from within the Cayman Islands.  
The VASP Law requires a VASP to either register with Cayman Islands Monetary Authority (“CIMA”) or be licensed by 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, 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, registration with CIMA is required.

4. REGISTRATION OF VASPS

Any person who is already carrying on business as a VASP at the date of commencement of the VASP Law or wishes to carry on a virtual asset service (for which a licence is not required under the VASP Law), will be required to apply to CIMA in order to become a “registered person” under the VASP Law.

5. CIMA CONSIDERATIONS: LICENCE OR REGISTER

In determining whether to grant a virtual asset licence, a sandbox licence, register an applicant as a “registered person” or to waive a requirement to licence or register under the VASP Law, CIMA will take into account the following:

1. size, scope and complexity of the virtual asset service, underlying technology, method of delivery of the service and virtual asset utilised;
2. knowledge, expertise and experience of the applicant;
3. the AML procedures that the applicant has in place;
4. internal safeguards and data protection systems being utilised by the applicant;
5. the similarity of the virtual asset service to securities investment business or any other regulated activity under any of the other Cayman Islands regulatory laws;
6. the risks involved;
7. whether the virtual asset service business involves the offering of virtual asset custodial services or the operation of a virtual asset trading platform;
8. the net worth, capital reserves and financial stability of the applicant;
9. the likelihood that the service will promote innovation, competition and benefits to consumers; and
10. the applicant’s senior officers, trustees and beneficial owners are fit and proper persons.

6. GENERAL REQUIREMENTS APPLICABLE TO A VASP AFTER REGISTRATION

The VASP Law sets out the continuing obligations which apply to a VASP after registration, including the following:

1. prepare accounts annually which are made available for inspection (including unaudited reports) to CIMA upon request (note: the VASP Law does not specify that the accounts need be audited);
2. ensure its senior officers and trustees are fit and proper persons to hold the respective positions;
3. ensure beneficial owners are fit and proper persons to have such control or ownership;
4. take such steps as are necessary to protect and secure the personal data and virtual assets of its clients;
5. ensure all communications relating to the virtual asset service are accurate;
6. comply with the Cayman Islands’ Anti-Money Laundering Regulations (2020 Revision), as amended (“AML Regulations”) i.e. including the appointment of AML officers and putting in place AML systems and procedures;
7. where performing a transfer of virtual assets, a VASP is required to collect and maintain information on the beneficiary and originator of the transfer in accordance with the AML Regulations, which are to be made available within 48 hours of receipt of a request by CIMA;
8. to notify CIMA within 15 days of any changes made to the information in the application form submitted to CIMA;
9. pay an annual renewal fee by the 15th January of each year; and
10. subject to certain exceptions, the prior approval of CIMA is required for the issue, voluntary transfer or disposal of 10% or more of the total shares or interest in a VASP – the incoming shareholder or partner also needs to be a “fit and proper” person. 

In addition, a VASP is not permitted to engage in securities investment business (as defined under the Securities Investment Business Law (2020 Revision) as amended (“SIBL”)) (this is likely where, e.g. a VASP is an investment manager or adviser or is providing brokerage services), unless the person is a licensee or registered person under SIBL and cannot appoint a senior officer or trustee of AMLCO without the prior approval of CIMA. 

Given the “four eyes” principle applied by CIMA in respect of other registered persons and licensees, it is likely that a VASP will be required to have a minimum of two directors, members or partners, as applicable.

7. ISSUE OF VIRTUAL ASSETS

1. Direct issue by VASP – In order to issue newly created virtual assets directly to the public in or from within the Cayman Islands in excess of a “prescribed threshold”, a registered person (i.e. a VASP which has already registered with CIMA) must first submit an “issuance request” to and obtain approval from CIMA. The VASP Law is silent on the value of “prescribed threshold” – this is essentially an amount in fiat currency or equivalent which can be raised by public issue by an issuer within a given timeframe, which will likely be confirmed by further amending regulation. 
2. Issue by a VATP on behalf of a VASP – However, a registered person may engage on one or more virtual asset trading platforms (“VATP”) in order to issue virtual assets over the prescribed threshold on the VATP. This is provided that the VATP is either (i) licensed under the VASP Law or (ii) licensed or registered and supervised for virtual assets by a government regulatory body in another non high-risk jurisdiction. Prior to engaging a VATP for the issuance of newly created virtual assets, a registered person is required to submit a virtual asset issuance request to and obtain approval from CIMA. 
3. Direct issue by a VATP – A licensee who operates a VATP may issue virtual assets directly on its own behalf to the public over the prescribed threshold by submitting an issuance request to CIMA for approval, where permitted by the terms of its licence. 
4. Issue by a VATP on behalf of a VASP – A VATP that is licensed under the VASP Law may issue virtual assets on behalf of a VASP directly to the public over the prescribed threshold where it is permitted under the terms of its licence and the VASP which is creating the virtual assets has obtained CIMA approval for the issuance. 
5. Obligations on issuer under the prescribed threshold – If a virtual asset issuance is within the prescribed threshold or involves the transfer or exchange of other virtual assets or fiat currency, a registered person is required to maintain records containing all the information required by CIMA for every transaction of the issuance and to make such records available to CIMA when requested. 
6. CIMA conditions – On approval of an issuance which is over the prescribed threshold, CIMA may impose requirements in relation to (i) the method by which the issuer may solicit members of the public to participate in the issuance (ii) the information provided to the public
   i.e. disclosure of risks (iii) the information that the licensee is required to collect from members of the public who participate in the issuance and (iv) the reporting requirements to CIMA. 
7. Reporting duty of licensee – If a licensee operating a VATP which is facilitating the issuance of newly created virtual assets on behalf of a VASP knows or has reasonably grounds to believe that the virtual asset issuance does not comply with an applicable requirements, the licensee shall immediately give CIMA written notice of its knowledge or belief, with reasons. 
8. CIMA response time – CIMA shall notify the licensee/ virtual asset issuer who submitted the issuance request whether it has been approved within 21 days of receipt of the issuance request.

8. CIMA CONSIDERATIONS: APPROVAL OF AN ISSUE OF VIRTUAL ASSETS

The VASP Law sets out a number of factors that CIMA will take into account in determining whether to approve an issuance request by a VATP or a registered person. This includes the following:

1. the nature of the virtual asset, including whether the virtual asset is a “security”, as defined in SIBL;
2. the functions and purpose of the virtual asset and the nature of the underlying asset which the virtual asset may represent (if applicable);
3. the accuracy and completeness of the disclosures made to the public regarding the issuance of virtual assets;
4. whether the VASP wishes to solicit the public directly for the purchase of the virtual assets;
5. the total number of virtual assets that will be available for purchase and the amount to be raised;
6. the period of time during which the issuance will take place;
7. the platform from which the virtual assets will be issued; and
8. the AML processes of the virtual asset issuer.

9. CIMA’S ENFORCEMENT POWERS

As a general note, CIMA has broad discretionary supervisory powers in respect of a registered person or licensee under the VASP Law, including but not limited to, the following: 

1. Examine the affairs – Whenever CIMA considers it necessary, examine the affairs of business of any VASP i.e. by way of regular returns, on-site inspections, auditor’s reports or in any such other manner as CIMA determines in compliance with the VASP Law.
2. Cease and desist – Where CIMA is of the opinion that a VASP is carrying out, pursuing or about to carry or pursue out an act that is unsafe or an unsound practice in conducting the business of VASP, CIMA may direct the VASP to cease and desist from carrying out the act or conduct.
3. CIMA direction – If at any time it appears to CIMA that a VASP has failed to comply with any of the requirements under the VASP Law, CIMA may by written notice direct the VASP to comply with the requirement within such period of time and on such conditions as specified in the notice.
4. Enforcement powers – If CIMA knows or has reasonable grounds to believe that a VASP:

• • is unable or appears likely to become unable to meet its obligations as they fall due;
  • is carrying on business fraudulently or otherwise in a manner detrimental to the public interest, to the interest of its clients or to the interest of its creditors;
  • has contravened any provision of the AML Regulations;
  • has failed to comply with a condition of its licence/ registration;
  • has not conducted the direction and management of its business in a fit and proper manner or has senior officers, managers or persons who have acquired ownership or control who are not “fit and proper persons”;
  • is a “corporate services provider” and has contravened the applicable law; or
  • has failed to comply with any lawful direction from CIMA.

CIMA may take certain actions, including, but not limited to the following:

1. 1. revoke the virtual asset licence or sandbox licence or cancel the registration;
   2. impose conditions upon the licence or amend or revoke such conditions;
   3. apply to the court for any order which is necessary to protect the interests of clients or creditors of the licensee or registered person;
   4. at the expense of the VASP, require that a licensee or registered person obtain auditor’s report to be submitted to CIMA on its anti-money laundering systems and procedures for compliance with the AML Regulations;
   5. require the substitution of any senior officer or trustee of the VASP appointed, or the divestment of ownership or control;
   6. appoint a person to advise the licensee on the proper conduct of its affairs and report the same to CIMA;
   7. requiring such action to be taken by the VASP as CIMA reasonably believes necessary.

CIMA may revoke a virtual asset service licence, sandbox licence or cancel the registration if the licensee of registered person has ceased or wishes to cease carrying on virtual asset service or has not commenced business within 1 year of the date of grant of the licence of the registration.

1.   Section 3(2) of the VASP Law 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.”

 This publication is not intended to be a substitute for specific legal advice or a legal opinion.
For specific advice, please contact either:

E: gary.smith@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: santiago.carvajal@loebsmith.com

Game Changer! Introduction of the regulation of Virtual Assets in the Cayman Islands 

On 25 May 2020 the Cayman Islands government passed The Virtual Asset (Service Providers) Law, 2020 (“VASP Law”), which provides a legislative framework for the conduct of virtual assets business in and from the Cayman Islands through requiring either (i) the registration or (ii) the licensing, of persons providing virtual asset services. The Cayman Islands already has the benefits of a being friendly jurisdiction for token issuers, cryptocurrency funds, and developers of other forms of digital assets. The Cayman Islands Government intends for the VASP Law to place the Cayman Islands with a cutting edge, robust framework which is in alignment with global regulatory standards, protect consumers, and meet the requirements of the Financial Action Task Force recommendations in respect of virtual assets. The new legal framework also makes the Cayman Islands an attractive destination for virtual asset service providers (“VASPs”), as it provides legal and regulatory certainty and supports innovation. For more information on the VASP Law, please see Part 1 of our previous Legal Update.

VASP Regime to commence in Phases

The Cayman Islands Government recently announced that the VASPs regulatory framework is being commenced in two phases. According to the Government, Phase one, which began 31 October 2020, will focus on anti-money laundering (AML) and countering the financing of terrorism (CFT) compliance, supervision and enforcement. Persons engaged in or wishing to engage in virtual asset services must be registered with the Cayman Islands Monetary Authority (“CIMA”) under the VASP Law. Persons engaged in or wishing to engage in virtual asset services currently holding a licence granted by CIMA under another regulatory law must notify CIMA under the VASP Law.

Provisions of the VASP Law which relate to enforcement, penalties or offences will be commenced on 31 January 2021. Persons who have not registered or notified CIMA by CIMA’s application deadline, but who are engaging in virtual asset services on and after 31 January 2021 will be subject to penalties and other enforcement measures. Registration/notification is via the VASP Application Form on CIMA’s REEFS online platform. CIMA will publish a date by which applications have to be received in order to be considered prior to 31 January 2021.

Phase two, which is expected to begin in June 2021, will bring into force the remaining provisions of the VASP Law, including the licensing requirement for virtual asset custodians and trading platform operators, the sandbox licensing regime and other elements of the VASP Law.
The Virtual Asset (Service Providers) (Amendment) Bill, 2020, which will introduce provisions to better facilitate the phased commencement approach, was published on 29 October 2020 and will be presented at the next sitting of the Legislative Assembly.

For specific advice on the application of the VASP Law to your Cayman company or limited partnership, please contact any of:

E: gary.smith@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: santiago.carvajal@loebsmith.com

The economic substance test (“ES Test”) under the International Tax Co-operation (Economic Substance) Law (2020 Revision) as amended (the “ES Law”) requires that a “relevant entity” (i.e. a Cayman company including, an exempted company, SPC, or LLC) conducting a relevant activity:

i. conducts core income generating activities (“CIGA”) in relation to that relevant activity;

ii. is directed and managed in an appropriate manner in the Cayman Islands in relation to that relevant activity; and

iii. having regard to the level of relevant income derived from the relevant activity carried out in the Cayman Island

a. has an adequate amount of operating expenditure incurred in the Cayman Islands;

b. has an adequate physical presence (including maintaining a place of business or plant, property and equipment) in the Cayman Islands; and

c. has an adequate number of full-time employees or other personnel with appropriate qualifications in the Cayman Islands.

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A relevant entity is subject to the ES Test from the date on which the relevant entity commences a relevant activity unless the relevant entity was in existence prior to 1 January 2019 (i.e. the date when the ES Law came into force), in which case it must have started compliance with the ES Law by 1 July 2019. However, Cayman companies which are carrying on business as investment funds (or entities through which investment funds directly or indirectly invest or operate) and Cayman exempted limited partnerships and trusts are excluded from the scope of the ES Law. Cayman companies which are tax domiciled outside the Cayman Islands do not have to pass the ES Test but are nonetheless required to make a filing to show that they are tax domiciled overseas.

CIGA means activities that are of central importance to a relevant entity in terms of generating relevant income and must be carried on in the Cayman Islands. A relevant entity conducting a relevant activity may satisfy the ES Test by outsourcing the conduct of its CIGA to another person in the Cayman Islands. A relevant entity that outsources its CIGA must be able to monitor and control the carrying out of the CIGA.

The Cayman Islands has been removed from the European Union’s list of non-cooperative jurisdictions for tax purposes.

The Cayman Islands Government and other stakeholders in the jurisdiction’s financial services industry welcomed the news announced on 6th October 2020. The EU’s decision is recognition of the Cayman Islands’ sustained efforts to meet EU regulatory requirements on tax transparency, and continuing its focus on expanding the regulatory framework for investment funds, and extending the scope of anti-money laundering regulation.

Since 2018 the Cayman Islands has introduced a large number of legislative measures (including amendments to the Mutual Funds Law and a new Private Funds Law to implement new rules for the registration and regulation of investment funds) to meet EU demands on tax matters.

The Cayman Islands was placed on the list of non-cooperative jurisdictions for tax purposes in February 2020. The removal comes as part of the first review of the list since February 2020.

The Private Funds Law, 2020 (the “Law“) came into force on 7th February 2020 and introduces, among other things, a requirement for the registration of closed-ended funds (typically, investment funds which do not grant investors with a right or entitlement to withdraw or redeem their shares or interests from the fund upon notice) with the Cayman Islands Monetary Authority (“CIMA“). The Law refers to these closed-ended funds as “Private Funds”. Mutual funds (e.g. open-ended funds) are not caught by the Law and continue to be regulated by the Mutual Funds Law (2020 Revision) as amended. Accordingly, there is now a regulatory regime in the Cayman Islands for all mutual funds and a separate regulatory regime for “private funds” covered by the Law.

Cayman Islands’ mutual funds which are currently exempted from registration with the Cayman Islands Monetary Authority (“CIMA”) under Section 4(4) of the Mutual Funds Law (2020 Revision) on the basis that (i) the shares or interests are held by not more than fifteen investors, (ii) a majority of whom are capable of appointing or removing the operator of the fund (“Section 4(4) Funds“) will be required, once the Mutual Funds (Amendment) Bill, 2020 (the “Bill”) becomes law, to register with CIMA and fall within CIMA’s regulatory purview.

The Bill does not propose a prescribed minimum initial investment amount and Section 4(4) Funds will not be required to file an offering document (or any amendments) with CIMA. Certain regulatory powers of CIMA which already apply to existing CIMA regulated mutual funds will also apply to Section 4(4) Funds once the Bill becomes law.
In connection with their registration with CIMA, each Section 4(4) Fund will be required to do the following.

1. Pay an annual fee to CIMA.
2. File a certified copy of an extract of its constitutional documents with CIMA showing that a majority in number of its investors are capable of appointing or removing the operator of the Fund.
3. File with CIMA such other information as may be required in the prescribed form.