On April 28, 2020, proposed legislation was published in the Cayman Islands Gazette, namely the:
- Virtual Asset (Service Providers) Bill, 2020
- Monetary Authority (Amendment) (No.2) Bill, 2020
- Securities Investment Business (Amendment) Bill, 2020
- Mutual Funds (Amendment) (No. 2) Bill, 2020
- Stock Exchange Company (Amendment) Bill, 2020
These bills form part of a regulatory framework to promote the development and use of innovative financial services. The framework seeks to provide regulatory certainty and a solid foundation for legitimate financial services innovators who are operating in or from within our shores, while also complying with emerging global standards. The framework implements a flexible regime for the supervision of innovative financial services which scales to the size and nature of a company and also includes a regulatory sandbox which aims to speed up the adoption of new innovative services, technologies and methods of delivery in the jurisdiction.
The attached document seeks to answer commonly asked questions about the proposed framework. Comments on the proposed framework should be submitted to firstname.lastname@example.org.
Question 1: How will this framework benefit the Cayman Islands?
The proposed framework implements certain measures (such as a regulatory sandbox) which will facilitate the adoption of new technologies in or from within the Cayman Islands. The framework will also add certain measures which will help protect consumers of innovative financial services, while also complying with emerging global standards for new financial technologies.
As a global leader in financial services, the framework will help ensure that the Cayman Islands remains at the forefront of financial innovation and continues to attract legitimate business to our shores.
Question 2: What is a virtual asset, what is a virtual asset service, and what is a virtual asset service provider?
A virtual asset means a digital representation of value that can be electronically traded or transferred and can be used for payment or investment purposes. However, a virtual asset does not include digital fiat currencies, such as the electronic representation of US dollars or any other currency. Examples of virtual assets include Bitcoin, Ethereum and others that are commonly called “crypto assets”, “digital assets” or “cryptocurrencies”.
A virtual asset service means the business of providing one or more of the five activities outlined in clause two of the Virtual Asset (Service Providers) Bill, 2020 for or on behalf of a third party. The activities include the exchange, transfer, issuance and safekeeping of virtual assets.
A virtual asset service provider is a person who is registered, licensed or the holder of a waiver under the Virtual Asset (Service Providers) Bill, 2020 in order to provide virtual asset services as a business or in the course of business, to clients within or outside of the jurisdiction.
The definitions used in the proposed legislation are based on the Financial Action Task Force’s (FATF’s) newly adopted changes relating to virtual assets. The FATF is the global standard setter for Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) practices, and it passed requirements relating to virtual assets in 2019.
As a member state of the Caribbean Financial Action Task Force, the regional body under the FATF, the Cayman Islands is committed to abiding by the FATF standards. The legislation being proposed is in line with this commitment.
Question 3: What will the proposed legislation do?
The proposed legislation introduces a number of measures relating to the supervision and regulation of virtual asset services taking place within the Cayman Islands and originating from the Islands. Among other measures, the Virtual Asset (Service Provider) Bill, 2020 introduces a registration requirement, a Virtual Asset Service Licence, and a Sandbox Licence for virtual asset service providers.
Question 4: Who does this legislation apply to?
Any person providing virtual asset services as a business or in the course of business for Cayman-based customers or for overseas clients would need to be officially recognised as a virtual asset service provider. This means that persons are required to apply for a virtual asset licence, or seek registration, or obtain a waiver before they can provide any virtual asset services.
Question 5: Do I need to register or apply for a licence in order to use virtual assets personally or as a consumer?
The requirement for licensing or registration only applies to persons who offer virtual asset services as a business, or in the course of business for or on behalf of someone else. Individuals or persons are therefore not required to register or apply for a licence if they are using virtual assets strictly for their own personal use. Virtual asset service consumers and clients are not required to register or apply for a licence, as long as they are not also providing virtual asset services to someone else as a business or in the course of business.
Question 6: Will a person already licensed by the Cayman Islands Monetary Authority need to apply for a licence or registration in order to provide virtual asset services?
A person who has been previously granted a licence by the Cayman Islands Monetary Authority (CIMA) under another regulatory law is required to provide a notice to the authority. The notice outlines basic information on the virtual asset service they wish to provide. CIMA may, on review of the information, waive the requirement for registration or a Virtual Asset Service Licence, or require licensing under the proposed virtual asset service providers (VASPs) law.
Question 7: Would funds that use digital tokens as representation of equity interest have to register or apply for a licence under the proposed VASPs law?
A virtual asset is a digital representation of value that can be digitally transferred or exchanged between two parties. Digital tokens issued by a fund would not be considered virtual assets if they cannot be transferred or exchanged in this manner. There is no requirement for registration or licensing under the proposed VASPs law if a fund does not issue virtual assets or provide virtual asset services.
Question 8: What is required for registration and who must register?
Registration is required for anyone who wishes to provide virtual asset services for which a licence is not needed. Registration entails certain AML/CFT requirements such as those outlined in the Anti-Money Laundering Regulations. Registrants are also required to abide by certain requirements when selling or offering newly created virtual assets for sale to the public.
Question 9: Who needs to operate with a Virtual Asset Service Licence?
Persons who wish to provide virtual asset custodial services (such as wallet services) and persons who wish to operate a virtual asset trading platform (e.g. a “crypto exchange”) are required to apply for a Virtual Asset Service Licence under the proposed VASPs law. Virtual asset service licensees would be required to abide by the same AML requirements as
registered persons, and comply with certain other requirements which are meant to protect the public and the users of their services.
Question 10: What is a Sandbox Licence and who does it apply to?
The Sandbox Licence (SL) allows the regulatory authority to tailor restrictions, monitor covenants, and/or place limit on the offering of the service or specific obligations in order to allow it to adequately supervise an innovative activity, technology or service delivery. The sandbox is meant to be for a limited timeframe and would allow the authority to assess how best to regulate the innovative activity and whether legislative changes are required to existing laws in order to further promote the development of the innovative activity taking place within the sandbox.
The regulatory authority may require a registered person or a Virtual Asset Service licensee which uses innovative technology or offers advanced services to undergo bespoke supervision under the SL. A person who does not offer virtual asset services, but who offers an innovative service or technology which affects a regulated activity may also apply for a SL on a voluntary basis.
Question 11: What is required if I want to raise funds using virtual assets, via an Initial Coin Offering?
A person must be registered or licenced under the proposed VASPs law in order to issue newly created virtual assets directly to the public, in or from within the islands. Additionally, registered persons may only issue virtual assets to the public under a certain threshold. Registered persons who wish to issue virtual assets over this threshold will have to engage licensed or supervised virtual asset trading platforms and issue the virtual assets via these trading platforms.
Question 12: How will this framework protect consumers of virtual asset services?
Though persons offering virtual asset services may abide by certain standards, there are no requirements, and no supervision currently in place to protect the users of these services. The Cayman Islands Government has identified two primary activities which represent the largest potential risk to consumers – namely the custody of virtual assets and the operation of a virtual asset trading platform. The proposed legislation will impose certain requirements on these service providers such as minimum disclosure, net worth, insurance or operational requirements. These measures will provide greater transparency and certainty for users.
Question 13: How much will registration or licensing cost?
Applicants for registration or a licence will be required to provide an assessment fee with their application. On approval of the submission, an application fee will be determined, which will be payable before registration or licensing. The application fee range will be outlined in the regulations for the proposed VASPs law and will be consistent with existing regulatory fees.