Cayman Islands: virtual assets regulatory overview

Stable political and tax neutral system, judicial and legislative ties to the UK, a balanced regulatory regime that embarks on the financial services industry make Cayman islands an attractive destination for incorporating companies.

This jurisdiction has long remained as a major domicile for investment funds, financial institutions and especially virtual asset service providers (hereinafter:- “VASP”) and decentralized financing projects.

Current policies

The following list of laws form a general regulatory framework for virtual assets sector within the Cayman Islands:

As of 2020, the government introduced a novel regulatory framework for businesses in the virtual assets industry, called the Virtual Assets (Service Providers) Act (hereinafter:- “VASPA”). The act implements Financial Action Task Force (FATF) recommendations on universal standards of countering against money laundering and terrorist financing and profileration on VASPs (viz., issuers, trading platforms, dealers). Moreover VASPA broadly defines virtual assets:

‘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’.

Moreover, in accordance with VASPA, Virtual asset services are 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 physical or legal entity:

  • 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;
  • participation in, and provision of, financial services related to a virtual asset issuance or the sale of a virtual asset.

The VASPA stipulated registration requirements, which must be complied by all digital assets service providers by applying for a registration with the Cayman Islands Monetary Authority (CIMA) before commencing their operations. If a Cayman incorporated entity issues or trades virtual assets that are deemed to be securities, then it must be registered or licensed under the VASPA.

VASPA also introduced a regulatory sandbox license, which can be applied to promotion of innovative technologies which can be tested before universally applied across the country. The sandbox is mainly targeted to be used by fintech companies and VASPs and has an initial fixed term license valid for up to a year, which might be reviewed by CIMA if necessary. License holders must adhere to honesty, integrity, fair treatment and customer protection principles. However, at the time of writing, there has not been any official announcement with regards to the specifications of the sandbox license, such as eligibility, official fees and conditions.

Categories of tokens

CIMA has not yet determined the legal status of the cryptocurrency and the order of its circulation, as well as specific status of the DeFi segment. Despite the lack of a clear position on regulation, tokens issued in the Cayman Islands can be divided into three categories: payment, security and utility tokens.

Payment tokens can be used to pay for goods and services and are usually issued on their own company`s blockchain. Most of these tokens are used by companies engaged in the provision of monetary services. In this case, the issuing companies must adhere to the provisions of Money Services Act and Electronic Transactions Law.

The Securities Investment Business Act (hereinafter:- “SIBA”) defines which virtual assets constitute securities. Hereby, tokens are recognized as securities tokens if they fall under the definition of “securities” set forth in the SIBA, accordingly, securities are assets, rights or interests in the form of:

  • shares and instruments that create or confirm debt obligations (bonds);
  • futures;
  • options;
  • instruments granting rights to securities;
  • certificates for certain securities;
  • contracts for differences (CFD).

Utility tokens, in turn, include tokens that do not fall under the definition of securities, thus, the utility tokens are not considered as payment instruments or securities by CIMA and companies issuing utility tokens are not subjected to licensing, thus such entities can just incorporate their company as an exempted company. In case the status of issued utility tokens changes or CIMA considers the use of tokens as means of payment, (payment or securities tokens) this may be regulated by the Monetary Services Act (MSA). The provisions of this legislative act stipulate that in order to carry out financial transactions, legal entities must obtain a license from CIMA. The procedure requires the following info to be submitted for Securities Licensing (license application form).

Within the meaning of this act, securities investment business refers to dealing in securities, security deals arrangements, securities management and advising on securities. Correspondingly, digital assets which can be traded, sold or exchanged at any time that represent or can be converted into any of the instruments listed in the SIBA or represent a derivative of any such instruments are themselves securities. If an entity based in Caymans is assumed to be issuers of securities, it might get exemption from any form of licensing under the SIBA if the character of the security was an equity interest, debt interest, or a warrant or similar for equity or debt interests.

Advantages of doing business in Caymans

  • Taxes

Companies incorporated in the jurisdiction are exempt from paying taxes and can apply for renewable “Tax Exemption Undertaking” to maintain their tax-free status for up to 20 years, with a possibility of extension to 30 years.

Moreover, Cayman Islands is a party to the Convention on Mutual Administrative Assistance in Tax Matters (1988) as amended by the 2010 Protocol and CRS Multilateral Agreement on the Automatic Exchange of Financial Account Information (MCAA). Besides, Cayman Islands has signed 27 active bilateral tax information exchange agreements (TIEAs,) including US, and EU countries. The Caymans has a double tax agreement with the UK and an agreement with the United States to implement the FATCA (Foreign Account Tax Compliance Act) which came into force as of June 1, 2014. Since February 2018, Cayman’s automatic exchange commitments have been activated with 57 countries, including Russia.

  • Currency control

Due to absence of currency control in Cayman islands, storage there is a simplified transfer of money into any convertible currency and free movement of funds.

  • Company incorporation

There is a possibility of accelerating the company registration procedure within 24 hours filing the documents for an express fee of KYD 400 (EUR 431). Companies are entitled to carry out any business activity not expressly prohibited by legislation.

  • Corporate requirements

Annual reporting requirements have been set to a minimum, and companies are not obliged to submit accounts with the registrar, and there is no local residency requirement for directors and shareholders, and the register of shareholders does not have to be kept at the registered office and is not open to public inspection. The companies are not subject to hold yearly meetings with shareholders and there is no there is no minimum or maximum share capital requirement. Nevertheless, the size of the authorized share capital determines the initial registration and annual government fee. Fees range from KYD 300 (EUR 323) (for an ordinary company with authorized capital of KYD 42,000 (EUR 45,256) or less), to KYD 2,568 (EUR 2,767), for an exempted company with capital of more than USD 2 million (EUR 1,794,060).

  • Exempt companies

There is a possibility to incorporate an exempted company within the jurisdiction, but formed to do business outside the Islands. These types of companies are (with limited exceptions) not subject to statutory or regulatory constraints on investment policies and strategies or other commercial matters. Exempted companies must file the following corporate data (including any changes) with the Registrar: the memorandum and articles of association, details of the authorized share capital, the location of the registered office, details of directors and officers. Details of the shareholders of exempted companies do not need to be filed with the Registrar.

While, an exempted company must file an annual return stating that:

  • the company has conducted most of its operations outside the Cayman Islands and has complied with the Companies Act (2020 Revision);
  • all bearer shares (if any) are maintained by an authorized custodian.

Potential risks and opportunities

Being a tax haven for offshore companies, there is still uncertainty as to how the government of Cayman islands will change course of regulation concerning cryptocurrencies. There might be compliance risks, as virtual assets business is not deemed to be financial business, in case of potential regulatory updates, ICOs and VASPs might be obliged to implement certain AML procedures. The registration aspects of the VASPA is not clear yet at the time of writing, as well as policy guidance is expected from CIMA as to licensing process, fees and requirements for VASPs. Whereas Cayman Islands is still endeavoring to diversify the financial services industry and recognize the growing interest in decentralized financial technologies. Hence the progressive regulatory approach is still expected from the government to pave the way in the sector of DeFi and virtual assets to preserve the status of competitive business jurisdiction.

The content of this article is intended to provide a general guide to the subject matter, not to be considered as a legal consultation.

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