The Virtual Asset (Service Providers) Law, 2020

The Cayman Islands Government passed the Virtual Asset (Service Providers) Law, 2020 (the “Law”) on 25 May 2020. This was accompanied with updates to a number of other laws including the Monetary Authority (Amendment) (No.2) Law, 2020, the Securities Investment Business (Amendment) Law, 2020 (the “SIBL”), the Mutual Funds (Amendment) (No. 2) Law, 2020 (the “Mutual Funds Law”) and the Stock Exchange Company (Amendment) Law, 2020 (the “Stock Exchange Law”).

Although passed, the Law is not yet in force and provisions relating to different matters contained in the Law may be brought into effect at different times.

These laws form part of a regulatory framework to promote the development and use of innovative financial services (the “Framework”). The Cayman Islands Ministry of Financial services has stated that the Framework seeks to provide regulatory certainty and a solid foundation for legitimate financial services innovators who are operating in or from within the Cayman Islands, whilst also complying with emerging global standards surrounding virtual assets.

Relevant definitions used in the new Law are:

“virtual asset” means 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.

“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:

Who should register under the Law?

The Law applies to any persons involved in providing one or more of the ‘virtual asset services’ listed above. Note that non-transferrable virtual assets are excluded from definition of ‘virtual asset’ under the Law.

Any organisation offering these virtual asset services (including an existing STO), which does not require a licence (exchanges and custodians), will be required to register with the Cayman Islands Monetary Authority (the “Authority”) and pay the required assessment and application fee.

It should be noted that the assessment and application fee has not yet been determined by the Authority. The regulations and guidance to accompany the Law have also not yet been published.

Who is considered a virtual asset service provider under the Law?

Under the Law, a person is a virtual asset service provider if the person is:

and provides 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 this Law or is an existing licensee that is granted a waiver by the Authority.

Under the 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.

A registered person under the Law:

The Threshold is yet to be determined by the Authority.

Factors the Authority will consider when reviewing a registration application

The Authority, in making a decision to register an applicant (or grant a licence, if applicable) under the Law will consider the following factors:

Securities Investment Business Law

Under the Framework, the SIBL has been amended by including under the definition of “security” virtual assets that represent, are derivatives of, or can be converted into, securities listed in Schedule 1.  This change is to ensure that virtual assets which should be considered securities are defined as such, by applying the well-established definition of SIBL to virtual assets.  This seeks to minimise regulatory uncertainty.

Mutual Funds Law

To ensure that funds are able to benefit from innovative technologies while complying with existing regulation, the definition of “equity interest” in The Mutual Funds Law has been revised to include any other representation of an interest that carries an entitlement to participate in the profits of gains of the company.  This broad addition to the definition ensures that a fund may use traditional shares, partnership interests, virtual assets, or any other innovative form of conveying equity interest.

Licensing for virtual asset exchanges

Under the Law and through updates to the Stock Exchange Law, a virtual asset trading platform can now obtain a licence and operate from within the Cayman Islands providing it only lists virtual assets.

Licensing for custodians

The Law has also introduced a specific licence for custodians of virtual assets. The Law includes disclosure requirements from the custodian as well as the ability of the authority to impose certain requirements around segregation of assets, insurance requirements and cyber security measures to ensure the protection of users of these services.