CAYMAN ISLANDS Law and Practice Contributed by: Peter Colegate, Marsha Williamson and Dean Bennett, Appleby
which resolves the fundamental problem that faces unincorporated DAOs. The foundation company structure can be adapted to implement DAO governance mechanisms with a reasonable degree of fidelity. Token holder voting can be mapped to the foundation’s supervisory function (the analogue of a member in a conventional com- pany structure), directors can be required to imple- ment governance decisions within specified param- eters, and the foundation’s constitutional documents can hardcode the protocol’s fundamental rules in a manner that gives legal effect to the DAO’s govern- ance architecture. The Foundation Companies Act is flexible enough to accommodate most governance designs. Unincorporated DAOs Where a DAO operates without any incorporated enti- ty – whether because it is genuinely immutable and no entity is required, or by deliberate design choice – Cayman law would likely characterise the DAO as an unincorporated association. The consequences are significant: assets are legally held by the members jointly, contracts are binding on the members person- ally, and there is no legal shield between the DAO and its participants. The cases concerning unincorporated DAOs in the United States have highlighted the per- sonal liability exposure can create. 5.3 Liability There is no Cayman case law or regulation that specif- ically addresses accountability or liability in the event that DeFi causes harm in the Cayman Islands – wheth- er to consumer, other businesses or more broadly. CIMA will likely look to the approach of developing legislation and regulatory guidance in other jurisdic- tions. Any English law decisions will also be relevant Where a smart contract executes as coded but caus- es loss to a user, the contractual analysis depends on what agreement (if any) was formed between the parties, what the terms of that agreement were, and whether the code faithfully implemented those terms. Where the code was the entire agreement, the deploy- er’s liability for losses caused by the code’s operation to the Cayman courts. Smart Contract Liability
will generally turn on whether any misrepresentation, warranty, or other obligation was given in connection with deployment.
6. Payments and Stablecoins 6.1 Payments
The Cayman Islands does not have dedicated pay- ments services or e-money legislation, unlike certain other jurisdictions. The VASP Act and other regulatory laws (for example, the Banking and Trust Companies Act) do not restrict the use of digital assets for pay- ment for services in the Cayman Islands. For exam- ple, many corporate and financial services providers now accept payments in a range of digital assets, and some M&A transactions and investments are settled in stablecoins or other digital assets. There is also a growing trend in the Cayman Islands for real estate to be purchased using bitcoin (BTC) and other digital assets. However, where a business facilitates pay- ments (ie, transfer) of digital assets between parties, such activity is likely to be a virtual asset service under the VASP Act requiring registration. 6.2 Stablecoins 6.2.1 Fiat Currency and Algorithmic Stablecoins A Meaningful Distinction The distinction between fiat-backed (or asset-backed) stablecoins and algorithmic stablecoins is legally and commercially significant. A fiat-backed stablecoin – where each outstanding token is redeemable for a defined quantity of fiat currency or other real-world asset held in reserve – has a fundamentally different risk profile and a much clearer analogy to conventional financial instruments. The stabilisation mechanism is exogenous: the peg is maintained by reference to assets held outside the blockchain. An algorithmic stablecoin, by contrast, maintains its peg (or attempts to) through on-chain mechanisms – typically through the supply of a related token and algorithmic expan- sion or contraction of token supply in response to price deviations. The stabilisation mechanism is endogenous and, as the TerraUSD/LUNA collapse of May 2022 demonstrated, can fail catastrophically and suddenly.
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