CAYMAN ISLANDS Law and Practice Contributed by: Jason Ta, Gemma Walters, Paul Walters and Ben Magahy, Travers Thorp Alberga
gain expertise and access to technology rather than building the technology internally; • experimentation in blockchain outside of their regulated activities as a profile-raising initiative – for example, exploring the issue of tokens or other blockchain initiatives which are not connected to their traditional financial services provision; • adopting blockchain technology and use of arti - ficial intelligence to reduce operating costs and overheads; and • the opportunity to get investment and funding from a new class of investors interested in transacting with tokens or digital assets as opposed to shares and other traditional finance assets and in some cases, benefiting from cheaper funding by doing so. 10.2 Local Regulators’ Approach to Blockchain The Cayman Islands was an early adopter of the FATF requirements for a virtual asset service provider regime. 10.3 Classification of Blockchain Assets Not all blockchain assets in the Cayman Islands will be regulated financial instruments. The key classifications of blockchain assets cover: • securities – if a blockchain asset meets the defini - tion of a security under SIBA, a relevant person engaging in “securities investment business” will need to be registered or licensed by CIMA (or qual - ify for a specific exclusion) – however, most forms of blockchain assets are unlikely to be a security under Cayman Islands law; • virtual assets – the VASP Act defines a “virtual asset” 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. Most forms of fungible blockchain assets will fall within this definition of a “virtual asset”; and • virtual service tokens – the VASP Act defines a “virtual service token” as a digital representation of value which is not transferable 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. Virtual service tokens are not regulated under the VASP Act. The complexity and challenges in classification include (by way of example): • blockchain technology and assets are constantly evolving, which means the regulatory framework is constantly evolving and cannot remain static; • the same products may be classified differently in different jurisdictions. The definition of “security” in the Cayman Islands is narrow and would not cap - ture many forms of blockchain assets, which would instead be regulated under the VASP Act regime; • differentiating between tokens designed for utility within a specific ecosystem and those intended primarily for investment purposes poses chal - lenges; and • decentralisation versus centralised control – the level of centralisation surrounding the issuance and management of the asset could also influence its classification. Issuances by investment funds will generally be sub - ject to regulation pursuant to the Mutual Funds Act or the Private Funds Act. A tokenised fund may also be regulated by the VASP Act. Legal advice should be taken as to the precise legal nature of the tokenisation to determine whether authorisation under the VASP Act is also required. CIMA may also impose additional conditions on a tokenised fund. Further amendments to the legislation and regulatory regime in this area are expected within the next 12 months. 10.4 Regulation of “Issuers” of Blockchain Assets The Cayman Islands, while considered progressive in this space, has a nuanced regulatory framework for “blockchain assets” and their issuance/sale. The key legislation is: • the VASP Act – this core legislation regulates busi - nesses providing services related to virtual assets, including issuance and sale; and
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