On May 2020, 5, the Cayman Islands government passed the Virtual Assets (Service Providers) Law (hereinafter referred to as the Virtual Assets Law), bringing the digital asset industry under the jurisdiction of the Cayman Islands Monetary Authority. The first legal framework for the registration, licensing and supervision of virtual asset service providers operating in the country was officially introduced.
The Virtual Assets Law also gives the Cayman Islands the most advanced and powerful framework, aligned with global regulatory standards, making it an ideal country for registration of virtual asset service providers.
Regulatory scope of the Virtual Assets Law
Virtual Asset
According to the Virtual Asset Service Providers Act, a virtual asset is “a digital representation of value that can be traded or transferred electronically and used for payment or investment, but does not include a digital representation of legal tender.”
We understand that common Bitcoin (BTC), Ethereum (ETH), etc. are within the scope of the above definition.
Virtual Asset Service
Refers to the following services provided for or on behalf of another party:
• Virtual asset exchange (exchange with legal assets or other virtual assets)
• Virtual asset transfer
• Hosting Services
• Participate in and provide financial services related to the issuance or sale of virtual assets
Virtual Asset Service Providers
Any business or enterprise that provides virtual asset services in or from the Cayman Islands falls within the scope of Virtual Asset Service Providers (VASPs).
The Virtual Assets Law and its supporting rules are as follows:
1. Any entity engaged in virtual asset services must register with CIMA (if it is already a licensed entity under other Cayman regulations, it can apply to CIMA for exemption).
2. If such entities are engaged in virtual asset custody services or virtual asset trading platform services, they should apply for a license in addition to registration.
Registration, licensing requirements and obligations for virtual asset service providers
According to the degree of regulation, regulated virtual asset service providers are mainly divided into three categories, as shown in the figure below:
In general, VASPs must completeCIMA Registration,Apply for a virtual asset service license or have a sandbox license, only then can it conduct business as a virtual asset service provider in accordance with the Virtual Asset Law.
1. Register with CIMA
For entities that are not involved in custody or virtual asset trading services, no license is required and they only need to register with CIMA. Registration requires submitting a registration application to CIMA and paying the prescribed assessment fee.
2. Apply for a licensed Virtual Asset Services License (VASL) from CIMA
VASPs must hold a Virtual Asset Services License (VASL) to provide virtual asset custody services or operate a virtual asset trading platform.
CIMA focuses on three main areas when reviewing Virtual Asset Services License (VASL) applications:
• Not contrary to public interest
• Applicants should have appropriate personnel and facilities based on the size, scope and complexity of their business, including well-trained and experienced staff, facilities and equipment, accounting systems, funding and cybersecurity measures
• The applicant complies with such other legal requirements as CIMA requires it to comply with.
3. Apply for a licensed sandbox license from CIMA
According to CIMA, virtual asset service providers that meet any of the following conditions should apply for a sandbox licence:
• The virtual asset services it provides include innovative use of technology or transmission methods
• The virtual asset services it provides (or the technology or transmission methods therein) may pose systemic risks to the financial markets or other areas of the Cayman Islands
• The virtual asset services it provides may generate risks such as money laundering and terrorist financing
• requiring the virtual service provider to apply for a sandbox license is in the public interest, the interests of other licensed persons, registered persons or the Cayman financial market as a whole
Unlike general virtual asset service licenses, sandbox licenses are only valid for one year.
CIMA may review service providers that have obtained a sandbox license at any time it deems necessary and, after review, decide to amend the terms or restrictions in the license, extend the term of the license, revoke the license or require the service provider to apply for registration or licensing.
4. Other obligations to be fulfilled
Virtual asset service providers need to continuously meet a series of compliance requirements under the Virtual Asset Service Providers Law and its supporting regulations, including but not limited toAnti-money laundering, anti-terrorist financing, securities investmentAmong them, the key points to focus on include:
(1) Service providers must comply with the Cayman Islands’Anti-money laundering regulations” (Anti-Money Laundering Regulations), including the appointment of an anti-money laundering compliance officer (but CIMA’s prior approval must be obtained) and the formulation of internal anti-money laundering regulations and systems
(2) Not in accordance withSecurities Investment Business Law” (Securities Investment Business Law) Service providers who have obtained a license or registered are not allowed to conduct securities investment business
(3) Issuance by service providers10% or more of the shares or interests or transfer/disposal of any issued shares or interests, you need to obtain CIMA's approval in advance
(4) When a service provider transfers virtual assets, it shall collect and retainInformation about the transferor and transferee for CIMA's verification
If a service provider violates the provisions of the Virtual Asset Service Provider Law, CIMA may takeFines, restraining orders, license revocation, deregistration,Apply to the court for compulsory closureand other punitive measures.
——Written at the end——
One of the most important impacts of the Virtual Asset Service Provider Law and its supporting regulations is that virtual asset service providers need to register or apply for a license with CIMA. The Cayman Islands Government’s Financial Services Department said: “This move enhances Cayman’s ability to regulate and attract individuals and entities that trade virtual assets as businesses.”
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