Updated: Nov 21
Why Cayman Islands?
The Cayman Islands has developed a legal framework for digital assets in the blockchain space that strikes the right balance between risk-based regulation and a culture of innovation. While many jurisdictions eye opportunities in cryptocurrency and have established rules for companies dealing with virtual assets, the Cayman Islands’ experience is unique, drawing on an extensive track record of compliance with international standards and long-standing leadership in banking, asset management and the investment funds sector.
There is no taxation imposed on Cayman entities. However, parties interested in virtual asset businesses in the Cayman Islands will need to obtain tax advice in their own jurisdictions. Cayman entities will need to consider their reporting obligations (if any) under FATCA and the CRS.
What are virtual assets?
The Virtual Asset (Service Providers) Act, 2020 (the VASP Act) implements the FATF definition of a virtual asset: “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”.
This definition is broad and focuses on transferability and exchangeability. According to the FATF, the definitions of virtual asset and VASP are intended “to capture specific financial activities and functions (ie, transfer, exchange, safekeeping and administration, issuance, etc) and assets that are fungible—whether virtual-to-virtual or virtual-to-fiat”.
Any token technically capable of transfer or exchange is a virtual asset under the VASP Act, regardless of programmed properties or intended use. No distinction is made between what are commonly known as utility tokens, security tokens and stablecoins.
The term ”digital representations of fiat currencies”, subject to any further guidance from the Cayman Islands Monetary Authority (CIMA), is likely only intended cover central bank digital currencies.
What are not virtual assets?
The VASP Act excludes “virtual service tokens”, which are “a digital representation of value which is not transferrable or exchangeable with a third party at any time and includes digital tokens whose sole function is to provide access to an application or service or to provide a service or function directly to its owner”.
The second part of the definition may seem to describe conventional utility tokens, but they are only virtual service tokens if they are also “not transferrable or exchange with a third party at any time”.
The FATF offers more guidance on what is intended: this definition captures digital assets which are “closed-loop items that are non-transferable, non-exchangeable, and non-fungible. Such items might include airline miles, credit card awards, or similar loyalty program rewards or points, which an individual cannot sell onward in a secondary market”.
What is a VASP?
The VASP Act defines a VASP as:
a Cayman entity
which provides a virtual asset services as a business or within the course of a business in or from within the Cayman Islands.
And is registered or licensed in accordance with the VASP Act or is an existing licensee that is granted a waiver.
A virtual asset service is any of the following businesses provided for or on behalf of another party:
virtual asset exchange (whether to or from fiat or other virtual assets).
transfers of virtual assets.
participation in, and provision of, financial services related to a virtual asset issuance or the sale of a virtual asset.
The VASP Act licenses and regulates those engaged in relevant financial business involving virtual assets for or on behalf of a third party. Virtual assets themselves, and those using virtual assets or VASPs for their own private purposes or as principals, are not affected.
What documents/fees are required to register a VASP pursuant to section 6 (1) of the VASP Act?
REEFS Application form (APP-101-84 and AIR-157-84).
List of the applicant’s Blockchain addresses (separated by coin).
Details of all shareholders with more than 10% shareholding together with a completed CIMA personal questionnaire.
Information on Chief Information Officer/Chief Information Security Officer, including CV.
Copies of cybersecurity policies (follow CIMA’s Guidance on Cybersecurity).
Copies of AML/CFT policies (in line with Anti-Money Laundering Regulations and Guidance Notes).
Comprehensive business plan.
Transaction flow charts.
Applicable Fee of CI$1,000 (US$1,219.50) + Assessment fee to be determine at approval.
Applicable Fee of CI$1,000 (US$1,219.50) + Assessment fee to be determine at approval
What elements should be included in the business plan?
A comprehensive business plan should clearly outline the following, at a minimum:
A description of the business conducted.
Products and services being offered or to be offered in the future and details on the process of how those services are being offered.
Standalone financial statements covering two years and financial projections.
Physical location of operations.
Customer base (e.g. number of customers, geography/jurisdiction).
Delivery channels and marketing plan/strategy.
Corporate governance e.g. composition of board of directors, senior management and any committees.
Staff complement and organisational chart showing reporting lines.
Information about contracts with affiliates and outsourcing arrangements, where applicable and details on whether they are regulated in any jurisdictions.
When is a VASP registration/license application viewed as complete and ready for
processing by the Authority?
All documentation and payment must be submitted to the Authority before the processing of the application will commence. The documentation required for the registration/licensing of a VASP is outlined on the applicable REEFS forms together with a comprehensive business plan and transaction flow charts.
What information must be supplied, upon application for a registration/license on
major shareholders (10% or above), directors and officers for VASP?
Certified copies of academic and professional qualification certificates.
Police Clearance certificate or affidavit of no criminal convictions.
A fully completed Personal Questionnaire.
Two character references.
One financial reference.
An updated and comprehensive CV.
A notarised or similarly certified colour copy of Government issued photo ID.
Completed Declaration of Source of Funds/ Source of Wealth form with supporting evidence for major shareholders.
To ensure that there are no undue delays in the due diligence process, VASPs must ensure that they follow the Regulatory Procedure – Assessing Fitness and Propriety.
What must be submitted to evidence the organization structure of a VASPs?
A comprehensive full group companies structure chart, including the ultimate beneficial owners.
Details of regulated status of entities within the group the relevant regulated services and jurisdictions.
Details of services provided by any related entity to the VASP Travel Rule Compliance
What is the Travel Rule and how is it applicable to VASPs?
Financial Action Task Force (“FATF”) Recommendation 16 prescribes that originating VASPs must obtain and hold required and accurate originator information and required beneficiary information on virtual asset transfers. These requirements apply to VASPs whenever their transactions (in fiat currency or virtual assets) involve:
(a) a traditional wire transfer,
(b) a virtual asset transfer between a VASP and another obliged entity or
(c) a virtual asset transfer between a VASP and a non-obliged entity.
The application of the FATF’s wire transfer requirements in the virtual asset context is known as the “Travel Rule”.
Part XA of the Anti-Money Laundering Regulations contains definitions and provisions pertaining to the identification, verification, production, record-keeping and other relevant obligations relating to virtual assets including the Travel Rule requirements for VASPs. See Anti-Money Laundering (Amendment) (No. 2) Regulations, 2020.
When will Part XA of the AMLRs commence?
Part XA of the Anti-Money Laundering Regulations will be effective from 1 July 2022.
How can Bell Rock assist with VASP Registration?
As a licensed and regulated professional services firm based in the Cayman Islands we routinely work with blockchain organizations (centralized and decentralized organizations (DAOs) with the provision of a wide range of services such as follows:
initial advice on VASP registration or exemption
Cayman entity incorporation
Registration with CIMA as a VASP
Attending promptly to CIMA questions and responses
Assisting with business plan
Ongoing support services such as governance (provision of CIMA approved directors with VASP expertise)
Compliance officers with specific VASP expertise
On-Chain compliance analytics
physical presence, securities investment business registration, crypto fund formation and registration, physical office support, registered office, professional and experienced CIMA registered directors, AML compliance services and other support services from our offices in the Cayman Islands.