Further to the Cayman Islands Governments' recent changes to the Anti Money Laundering (AML)/Combatting the Financing of Terrorism (CFT) regime to include virtual asset services as "relevant financial business" the jurisdiction is now set to implement a registration and licensing regime for virtual asset service providers.
Virtual Asset (Service Providers) Bill (the "Bill"/the "Law")
The Bill is currently in a consultation phase during which time comments can be provided to the Cayman Islands Government up until 8 April 2020 (date extension provided on March 21 due to covid-19), but should the Bill be passed into Law in its current form we can expect the following:
Virtual Asset Services
The Bill defines virtual asset services as providing one or more of the following services or operations for or on behalf of a natural or legal 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) safekeeping or administration of virtual assets or instruments enabling control over virtual assets; or
(e) participation in, and provision of, financial services related to a virtual asset issuance or the sale of a virtual asset.
Virtual Assets are defined as "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".
It is important to note that under the Bill, Virtual Utility Tokens are not deemed to be virtual assets and a person or legal arrangement that provides services that involve these tokens only do not require registration or licensing under the Bill.
Under the Bill a person (being a Cayman Islands company, a Cayman Islands general partnership, a Cayman Islands limited partnership, a Cayman Islands exempted limited partnership, a foreign company registered in the Cayman Islands, a Cayman Islands Limited Liability Company (LLC) or a Cayman Islands Limited Liability Partnership (LLP)) shall not carry on or propose to carry on any virtual asset services unless they are registered with the Cayman Islands Monetary Authority ("CIMA") as a registered person, hold a virtual asset service licence, a sandbox licence or is otherwise already licensed by CIMA and has been granted a waiver from further licensing or registration.
It will be an offence to carry on business without a licence, registration or waiver and those found guilty will be liable on summary conviction to a fine of CI$25,000 and imprisonment for one year, and in the case of a continuing offense, to a fine of CI$10,000 for each day during which the offence continues.
Any persons wishing to provide a virtual asset service which is not the provision of virtual asset custody services or the operation of a virtual asset trading platform will need to register with CIMA as a 'registered person'.
Registered persons will need to apply with CIMA and be bound by the Anti-Money Laundering Regulations (as Revised) and the senior officers and trustees of the applicant will need to be 'fit and proper persons'.
Once the application is approved the applicant will need to pay an application fee and annual renewal fees, which will be due on or before 15 January.
In considering the application to be a registered person CIMA will also consider whether a full licence or a sandbox licence should instead be applied for.
Virtual Asset Service Licence
Those applying for a virtual asset service licence (to provide virtual asset custody services or to operate a virtual asset trading platform) will also apply to CIMA who will consider whether:
(a) the applicant will be able to comply with the Law;
(b) the applicant will be able to comply with the relevant requirements of the Anti-Money Laundering Regulations (as Revised);
(c) an approval of the application is not against the public interest;
(d) the applicant has —
(i) personnel with the necessary skills, knowledge and experience;
(ii) facilities, books, records and accounting systems;
(iii) adequate capital and cybersecurity measures, as the Authority considers appropriate having regard to the size, scope and complexity of the business;
(e) the applicant's senior officers and trustees are fit and proper persons to hold the respective positions;
(f) the applicant's beneficial owners are fit and proper persons to have such control or ownership; and
(g) the applicant has complied with such other requirements under this Law which the Authority requests that the applicant complies with.
The application will need to be accompanied with an assessment fee.
CIMA may refuse or grant the licence or direct the applicant to apply for a sandbox licence or another licence under one of the regulatory laws where the virtual asset service is similar in nature to a service for which registration or a licence is required.
CIMA may also impose further regulatory requirements which it considers necessary based on its assessment of the virtual asset services to be provided by the applicant, the nature of supervisions required for the virtual asset service etc.
Where CIMA deems it necessary a licensee shall have its accounts audited at such times as CIMA may require.
A sandbox licence is a temporary licence which can be granted for a period of up to one year and is subject to CIMA review as such times as CIMA deems appropriate.
CIMA will likely direct a registered person applicant or licence applicant to apply for a sandbox licence where:
- the virtual asset represents an innovative use of technology or uses an innovative method of delivery that requires supervision and oversight that is not offered by a licence or registration under this Law or any other law;
- it is in the best interest of the public, existing licensee or the financial markets for the virtual asset service to be temporarily restricted or for specific requirements to be placed temporarily on the provision of the virtual asset service;
- the virtual asset service uses or promotes technology or method of delivery that may create systemic risk to the financial markets or otherwise to the jurisdiction; or
- the virtual asset service poses an anti-money laundering, terrorism financing or proliferation financing risk that is not properly mitigated by the Anti-Money Laundering Regulations (as Revised) or the Law.
Amendments to the Securities Investment Business Law ("SIBL")
In line with the proposed Virtual Asset (Service Providers) Bill the SIBL is being amended to include virtual assets in the definition of securities. In particular virtual assets which can be sold, traded or exchanged immediately or at any time in the future that (a) represent or can be converted into any other securities listed on schedule 1 of the SIBL or (b) represent a derivate of any of the securities listed in Schedule 1 of the SIBL.
With the above in mind, SIBL licences and or registration will likely become necessary in the near future for those dealing with Virtual Assets.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.