With a favourable tax regime, a robust financial services sector and an established reputation as a trusted financial centre, the Cayman Islands are well positioned to support the growth of the global cryptocurrency industry, and the Cayman Islands regulators have worked hard to keep up with the changing landscape in digital assets.
In recent years, the Cayman Islands Monetary Authority (CIMA) has worked to establish a regulatory framework for virtual asset service providers (VASPs). This has included the development of guidelines for VASPs and service providers to make sure they meet their obligations under Virtual Asset Service Providers Law, 2020 (the VASP Act), anti-money laundering regulations (AMLR) and countering the financing of terrorism (CFT) laws.
Registration and Licensing
Firstly, CIMA requires VASPs to be registered and/or to be licensed depending on the services provided. Registration is required when VASP’s intend is to issue virtual assets to the public and a VASP license will be granted for companies that intend to provide virtual asset custody services or which wish to operate a trading platform.
Regulatory Framework
Secondly, these regulations require VASPs to implement a robust AML/CFT compliance program and to report suspicious activity to the appropriate authorities. The regulator also requires VASPs to implement customer due diligence (CDD) procedures, which include identifying and verifying their customers and the source of their funds. The Cryptocurrency entities operating in the Cayman Islands are expected to conduct regular assessments of their AML/CFT compliance program to ensure it is effective and up-to-date. This may include reviewing and updating policies and procedures, conducting regular staff training, and conducting internal audits to identify areas for improvement. In case of any breach of laws or regulations, CIMA has the right to take enforcement action against VASPs, primarily fines and suspend license or revoke them all together, and other penalties.
To ensure that the Cayman Islands continues to be a trusted financial centre, CIMA is working to ensure that VASPs operating in the jurisdiction are subject to robust regulatory oversight. This includes regular inspections of VASPs to make sure they are meeting their obligations under AMLR and other relevant regulations. VASPs are also required to appoint compliance officers who are responsible for overseeing their AML/CFT compliance program and ensuring that it is effective and up-to-date. The compliance officers are expected to have an in-depth understanding of the relevant regulations and be familiar with the latest trends and developments in the cryptocurrency industry on the islands.
Sandbox Licence
Thirdly, in addition to the regulatory framework for VASPs, the Cayman Islands also offers sandbox licenses for fintech companies. This allows companies to test their products and services in a controlled environment with the support and guidance of regulators but also with an additional degree of oversight. A sandbox license is required by CIMA mostly when the cryptocurrencies services offered don’t fall under the VASP definitions that encompass issuers of virtual assets, virtual asset custodians, virtual asset trading platforms and virtual asset dealers. This sandbox license is granted for up to one year and it allows CIMA to have a better oversight, propose guidance but also impose limitation onto the fintech company.
Ongoing Obligations
The companies registered and licensed under the VASP Act are required:
- to be registered through the REEFs platform,
- to have a registered office on the Cayman islands,
- as mentioned above, to be compliant with the AMLR and other AML/CFT laws among other:
- by implementing internal AML policies,
- by performing yearly staff training,
- by appointing AML officers (AMLCO, MLRO and DMLRO),
- by performing a risk rating of their senior stakeholders, investors, senior officers, jurisdiction of operations
- to make the accounts available for inspection by CIMA,
- to notify CIMA if the VASP has any license, office, penalties in other jurisdictions,
- to notify CIMA of any AML and CFT breaches,
- in case of holding a VASP license – to be audited annually by a CIMA approved auditor.
Conclusions
In summary, the Cayman Islands is taking a proactive approach to regulating VASPs to guarantee that its financial services sector remains competitive and able to support the growth of the cryptocurrency industry. By implementing robust regulatory oversight and making sure VASPs conduct regular assessments of their AML/CFT compliance programs, CIMA is working to protect the integrity of the Cayman Islands' financial system and prevent the jurisdiction from being used for illegal activities.
If you wish to read more about the VASP framework, CIMA has provided a very helpful VASP FAQ on their website: https://www.cima.ky/vasp-faq
How We Can Assist
Trident Trust is a leading provider of services to cryptocurrency clients, including fund accounting, investor services, corporate services, AML/CFT compliance, and other regulatory compliance services. Our team of highly qualified and experienced account managers and compliance professionals are well versed in the latest developments in the cryptocurrency industry. We work closely with our clients to ensure that their funds are compliant with all relevant regulations and that they meet their AML/CFT obligations.
For more information about our Cayman services, please contact David Mungall, Head of Fund Administration in our Cayman office.