In recent years, there have been a number of legal and regulatory changes in the Cayman Islands FinTech and virtual assets ecosystem. These have been very positive and help explain why the Cayman Islands is one of the leading jurisdictions for FinTech and virtual assets.
In recent years, there have been a number of legal and regulatory changes in the Cayman Islands FinTech and virtual assets ecosystem. These have been very positive and help explain why the Cayman Islands is one of the leading jurisdictions for FinTech and virtual assets.
Since around 2017, the virtual assets and blockchain sectors in the Cayman Islands have grown materially and become increasingly sophisticated. The jurisdiction has continually been at the forefront of innovation in this area, with many of the world’s biggest names in the Web3 space choosing the Cayman Islands for their projects. In addition, around 49 per cent of all the world’s digital assets funds are domiciled in the Cayman Islands[1] and many virtual assets service providers such as custodians, trading platforms, brokers and lenders have chosen it as their home jurisdiction in which to become regulated. This success is partly due to all the usual factors that have long made the jurisdiction so popular with the more traditional financial sector. In addition, however, the following legal and regulatory changes have been key.
First, the Virtual Asset (Service Providers) Act (VASP Act) introduced in 2020 provides legal certainty and a clear regulatory perimeter, something which most other jurisdictions have not achieved.
Second, since the Foundation Companies Act was introduced in 2017, foundation companies have become highly popular as legal wrappers for decentralised autonomous organisations (DAOs), generally in conjunction with token issuances.
Third, in 2023 the financial regulator updated its guidance to confirm that it is possible for any business required to comply with the Anti-Money Laundering Regulations to rely on virtual means of verification, including e-KYC technology and digital identification.
A summary of these changes is below, but it is also worth bearing in mind the Cayman Islands backdrop of sophisticated specialist FinTech and virtual asset service providers along with substantive government encouragement. For example, the government has provided grants to promote the sector and also provided a sizeable budget to the financial regulator to establish a VASP unit which has hired private practice professionals alongside experienced regulators.
The Virtual Asset (Service Providers) Act
The VASP Act provides a short, accessible, technology neutral and adaptable framework for the regulation of the provision of virtual asset services.
A ‘virtual asset service’ means the issuance of virtual assets to the public for consideration or the business of providing one or more of the following services or operations for or on behalf of another person: (a) exchange between virtual assets and fiat currencies; (b) exchange between one or more other forms of convertible virtual assets; (c) transfer of virtual assets; (d) virtual asset custody service; or (e) participation in, and provision of, financial services related to a virtual asset issuance or the sale of a virtual asset. Proprietary transactions and non-public issuances are outside the scope of the VASP Act. Indeed, many projects will undertake an issuance without conducting a public issuance of virtual assets. Where a public issuance for consideration is intended, the structure will often include a BVI issuer.
The VASP Act provides a registration and licensing regime for any person carrying on a ‘virtual asset service’ in the course of a business using a Cayman Islands entity or otherwise from within the Cayman Islands.
To date, around twenty VASPs have been approved by the regulator to carry on a range of business including broker-dealers, lenders, custodians, trading platforms, and others. While turnaround times were slower back in 2020 when the VASP Act was new, we now see efficient processing of applications by the regulator, with approval achieved in as little as eight weeks.
In July 2024, the FATF issued its Fifth Update on jurisdictions’ compliance with its requirement that countries ensure virtual asset service providers are regulated and subject to supervision, finding that global implementation is still lagging and that many countries need to prioritise implementing the FATF’s standards in full as a matter of urgency[2]. Based on 130 member state reports, 75 per cent of jurisdictions are only partially or not compliant with the FATF’s requirements, and showed negligible improvement as at 2023.
The Cayman Islands is one of the only jurisdictions to be already largely compliant and not awaiting new legislation. As such, the Cayman Islands provides not only a clear regulatory perimeter but also future stability for FinTech and virtual assets.
e-KYC And Digital Identification
The financial regulator made a very welcome update to its Guidance Notes on the Prevention and Detection of Money Laundering, Terrorist Financing and Proliferation Financing in 2023, confirming that it is possible to rely on virtual means of verification, including e-KYC technology and digital identification, subject to conducting formal risk assessments and having robust policies and procedures in place.
For those FinTech and virtual assets businesses that are required to perform customer due diligence subject to these guidance notes (which will depend on what type of business they are doing), is it possible to use digital identity proofing, enrolment and authentication, and also processes whereby a customer’s identity is verified via electronic means, such as video-conferencing and certification of documents through ‘selfie’ documents, photographs or videos. Customer due diligence documents in electronic form, including government issued identification received in e-format, are also acceptable provided that the FSP takes a risked-based approach and has suitable documented policies and procedures in place. The guidance notes were also updated in 2021 to provide very helpful sector specific guidance for virtual asset service providers, again showing that the regulator has the FinTech and virtual assets sector and global standards at the forefront of its thinking.
Foundation Companies
Since the commencement of the Foundation Companies Act in 2017, we have seen foundation companies increasingly used in respect of blockchain projects. One of the most important uses of foundation companies to date has been to serve as a legal wrapper for DAOs and, typically, holder of governance tokens. DAOs, by their very nature, are decentralised organisations that are governed by a community. There is no centralised ownership or governance. This is in contrast to traditional legal structures, such as companies, where ownership, governance rights and obligations are conferred (or otherwise imposed) on shareholders and directors.
This is where foundation companies step in. They offer legal personality but can be structured to be ownerless. They have no shareholders and instead have a supervisor. A supervisor has no ownership or economic interests in the foundation company. Depending on the powers conferred on the supervisor, they may have a passive role by merely having the standing to take the directors of the foundation company to court for breach of fiduciary duties, and the ability to pass certain resolutions statutorily mandated by Cayman Islands law. The foundation company will adopt bylaws which set out the governance mechanics of the governance tokens. Token holders submit proposals via the relevant community channel and if approved via voting, this is a decision of the DAO which is then implemented by the foundation company to the extent that the decision is an off-chain real-world transaction.
The FinTech And Virtual Assets Landscape
DAOs, foundation companies, and regulated virtual asset service providers are just some examples of the FinTech and virtual assets sector in the Cayman Islands. Also thriving are: corporate transactions such as M&A and joint ventures of FinTech companies;
Tokenisation as a way forward is a very exciting area for the Cayman Islands, which vies with the USA as the largest alternative investment fund jurisdiction in the world, with around a third each. Actually, traditional investment funds, rather than digital assets funds, have demonstrated a greater degree of curiosity in tokenised assets and securities[3]. Tokenisation of funds is attractive for creating increased efficiency, reducing friction by enabling faster settlement times, and minimising operating costs, with around one-in-three traditional hedge funds surveyed noting tokenisation as the biggest growth opportunity in the crypto-asset space in the coming year.
Legal and regulatory certainty and clarity are key to solidifying business confidence and investor engagement. The changes discussed in this article provide a welcome addition to the Cayman Islands existing body of law and regulation, and serves to further reinforce confidence and certainty in the jurisdiction’s FinTech and virtual assets regulatory environment.
[1] PwC and AIMA 4th Annual Global Crypto Hedge Fund Report (2022)
[2] Virtual Assets: Targeted Update on Implementation of the FATF Standards on VAs and VASPs
[3] PwC and AIMA 5th Annual Global Crypto Hedge Fund Report (2023)
Lucy Frew
Lucy heads up Walkers' Global Regulatory & Risk Advisory Group. She joined in 2016 and has more than 20 years’ experience as a specialist financial regulatory and risk management lawyer.
Lucy helps clients with all aspects of financial regulation and risk management, including contentious, as well as advisory, matters. These include:
inspections, investigations and regulatory audits
remediation
compliance training
minimising regulatory and litigation risk
public relations issues
anti-money laundering
sanctions and asset freezes
tax transparency
data protection (including breaches)
corporate governance
cross-border structuring and business marketing.
Lucy is an expert at helping clients put regulatory policies, procedures and compliance monitoring programmes in place. She also advises on the regulatory aspects of transactional documentations and service provider agreements. She has a long track record of helping with contentious financial regulatory matters and investigations, and handling relationships with regulators. She has also advised on fintech and virtual assets since 2013.