Current policiesThe following list of laws form a general regulatory framework for virtual assets sector within the Cayman Islands:
- Virtual Asset (Service Providers) Act: being the main law for VASPs, as it provides the legal basis for virtual asset business in the jurisdiction;
- Monetary Authority (Amendment) (No.2) Law: allows Cayman Islands Monetary Authority to have regulatory oversight over local VASP activity;
- Securities Investment Business (Amendment) Act: provides parameters for the treatment of virtual assets as securities;
- Mutual Funds (Amendment) (No.2) Law: The amendment to this law allows for the use of virtual assets in the funds space;
- Anti-Money Laundering Amendment (No. 2) Regulations, 2020: The amendment outlines key AML/CFT requirements for VASPs”;
- Private Funds Act.
‘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.
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 tokensCIMA 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);
- instruments granting rights to securities;
- certificates for certain securities;
- contracts for differences (CFD).
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
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
- Company incorporation
- Corporate requirements
- Exempt companies
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 opportunitiesBeing 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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