CAYMAN ISLANDS Law and Practice Contributed by: Peter Colegate, Marsha Williamson and Dean Bennett, Appleby
2.6 Non-Compliance Regulatory Sanctions
Where the virtual asset being issued also constitutes a security for SIBA purposes, SIBA requirements apply in addition to or instead of the VASP Act. The interac- tion between the two regimes requires careful analysis on a transaction-by-transaction basis. 2.5 Market Abuse No Bespoke Market Abuse Regime The Cayman Islands does not have a standalone mar- ket abuse or market manipulation prohibition. There is no statutory prohibition in the VASP Act or elsewhere on wash trading, spoofing, front-running, or pump- and-dump schemes in virtual asset markets as such. The available legal tools are general rather than sec- tor-specific. The Misrepresentation Act and the gener- al law of fraud will apply where manipulative conduct involves false representations. Criminal liability under the Proceeds of Crime Act (as revised) may arise where market manipulation generates criminal pro- ceeds or involves money laundering. Where a virtual asset also constitutes a security for SIBA purposes, CIMA has supervisory authority over conduct of busi- ness, and the general standard of conduct applicable to securities investment businesses would capture CIMA’s Market Conduct Rule and Statement of Guid- ance represents the most significant step toward a substantive conduct framework for Cayman VASPs to date. While the Rule does not replicate the full appa- ratus of a market abuse regime, it establishes stand- ards for fair dealing, transparency, conflict of interest management, and the handling of client orders that address several of the conduct risks associated with market manipulation. The Gate.io enforcement notice published by CIMA on 11 April 2025 – which con- cerned a firm providing virtual asset exchange ser- vices to Cayman users without registration – demon- strates CIMA’s willingness to take public enforcement action and signals a more active supervisory posture on conduct. manipulative trading practices. The CIMA Market Conduct Rule We expect the market conduct framework to develop further as CIMA’s supervisory experience with the phase 2 licensee population accumulates.
CIMA’s enforcement toolkit that has been progres- sively strengthened. For VASPs, the consequences of non-compliance range from administrative condi- tions, reprimands, and directions to comply, through to financial penalties, suspension, and the cancella- tion of a registration or licence. CIMA’s rules governing the cancellation of registrations and licences, effective 10 September 2025, brought greater procedural clar- ity to the most serious sanction available, setting out grounds for cancellation and the process by which CIMA will exercise that power. The rules are an impor- tant reference point for any firm that has received an indication from CIMA that its registration or licence is at risk. Criminal Liability Operating as a VASP without registration or, where required, a licence, is a criminal offence under the VASP Act. The criminal liability attaches not only to the corporate entity but potentially to the individuals responsible for its management. AML/CFT breaches can give rise to additional criminal liability under the Proceeds of Crime Act. Civil Liability Non-compliance with the VASP Act does not of itself give rise to a private right of action by a client or coun- terparty against the non-compliant firm. However, the existence of a regulatory breach may be relevant to civil claims in negligence, breach of fiduciary duty, or breach of contract in appropriate circumstances. In our experience, the practical consequences of a public enforcement action – loss of banking rela- tionships, reputational damage, investor redemption rights triggered by regulatory events – are often more immediately damaging to a business than the formal legal consequences, and the two should be assessed together rather than in isolation. Is the Regulatory Attitude Likely to Change? The trajectory of CIMA’s supervisory stance is clearly toward increasing sophistication and oversight. The progression from a registration-only regime in 2020, through phase 2 licensing in 2025, to the Market Conduct Rule and updated obligations rules in early 2026 shows an expanding supervisory framework. We
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