CAYMAN ISLANDS Law and Practice Contributed by: Peter Colegate, Marsha Williamson and Dean Bennett, Appleby
6.2.3 Backing Assets No Mandatory Reserve Regime
In terms of Cayman law classification, both fiat- backed and algorithmic stablecoins will generally con- stitute virtual assets under the VASP Act, provided they are used for payment or investment purposes and are not merely digital representations of a single fiat currency (which would fall within the CBDC/fiat exclusion). The issuer of either type of stablecoin to the public requires VASP registration as an issuer of virtual assets. The reserve arrangements behind a fiat-backed sta- blecoin introduce additional regulatory considerations. Where the reserve is substantial and held in traditional financial instruments, the entity managing the reserve may itself constitute a regulated mutual fund or invest- ment business. The particular structure of the reserve management arrangement requires analysis under both the Mutual Funds Act and SIBA. No equivalent reserve analysis arises for a pure algorithmic stable- coin, though the mechanisms for governance of the stabilisation protocol may raise their own regulatory questions. 6.2.2 Stablecoin Regulation The VASP Act Framework Applied to Stablecoins The Cayman Islands does not have a standalone sta- blecoin regulatory framework of the kind contemplat- ed by the EU’s Markets in Crypto-Assets Regulation (MiCA). Cayman regulates stablecoins through the VASP Act as virtual asset services, without product- specific categorisation. A stablecoin issuer that makes a public sale of the stablecoin is an issuer of virtual assets and requires VASP registration. A person that provides custody of stablecoin balances on behalf of clients requires a virtual asset service licence. A person that operates a stablecoin trading platform requires a licence at the relevant threshold. CIMA has not issued stablecoin-specific guidance. The regulatory requirements that apply are there- fore those of general application under the VASP Act: AML/CFT systems and controls, fit and proper management, and the relevant conduct of business requirements.
The Cayman Islands does not impose mandatory reserve or backing asset requirements on stable- coin issuers as a condition of VASP Act registration. The Cayman VASP Act contains no product-specific reserve obligation, and CIMA has not issued guidance establishing reserve standards for stablecoin issuers. The practical consequence is that the reserve design for a Cayman-based stablecoin issuance is, as a mat- ter of Cayman law, a commercial rather than regula- tory decision – to be made by reference to the issuer’s redemption obligations, the creditworthiness expecta- tions of its institutional counterparties and users, and any requirements imposed by listing venues, liquidity providers, or banking partners. In practice, the market has converged on reserve designs that include cash, short-term government securities, and money market instruments as the standard components, because institutional and banking counterparties demand this standard regardless of whether it is legally mandated. One area where regulation does become relevant to reserves is where the reserve management function constitutes investment business. An entity managing a substantial pool of reserve assets in traditional secu- rities or money market instruments may be conduct- ing securities investment business for SIBA purposes or managing a regulated fund under the Mutual Funds Act. AML/CFT compliance is a foundational obligation for all Cayman VASP registrants and licensees, and stablecoin operators are not treated differently from other virtual asset service providers in this respect. The AML Regulations and CIMA’s AML/CFT guid- ance apply in full, covering customer due diligence, enhanced due diligence for higher-risk customers, sanctions screening, suspicious activity reporting to the FIU, and record-keeping obligations. The Travel Rule (FATF Recommendation 16 as implemented in Cayman) requires stablecoin transfer providers to col- lect and transmit originator and beneficiary informa- tion for transfers above the threshold – a requirement that, in the context of stablecoins designed for high- 6.2.4 Special Considerations AML/CFT and the Travel Rule
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