Cayman Islands Virtual Asset Service Providers Act takes effect

A range of legislation implementing the Cayman Islands Virtual Asset (Service Providers) Act, 2020 (as amended) (VASP Act) came into effect on 31 October 2020.

This now means that virtual asset service providers (VASPs) and existing businesses qualifying as VASPs must make an application to be assessed for registration with the Cayman Islands Monetary Authority (CIMA) before 1 February 2021 and if approved complete a registration application.

VASPs providing custody services or operating virtual asset exchanges must register with CIMA, but the licensing regime is not yet in force.

This is stage one of a two stage implementation of the VASP Act, with stage 2 beginning in June 2021.

What is a virtual asset service and what is a VASP?

Please see our previous alert on this topic: “Cayman Islands introduces regulatory regime for virtual asset service providers” for an overview of the VASP Act. In short, VASPs that are currently operating or intend to operate must register with CIMA in stage 1 before 31 January 2021. As a reminder, a VASP is

• A Cayman entity or vehicle (but not a natural person)
• Which provides a virtual asset services
• As a business or within the course of a business in or from within the Cayman Islands
• And is registered or licensed in accordance with the VASP Act or is an existing licensee that is granted a waiver

A virtual asset service means the issuance of virtual assets or conducting any of the following businesses provided for or on behalf of another party:

• Virtual asset exchange (whether to or from fiat or other virtual assets)
• Transfers of virtual assets
• Custody services
• Participation in, and provision of, financial services related to a virtual asset issuance or the sale of a virtual asset

Which VASPs are affected by the introduction of the VASP Act?

All VASPs should now review and consider the new registration requirements. In particular:

• Cayman entities wishing to perform virtual asset services for the first time after 31 October 2020 must be registered before they can provide such services
• Cayman entities providing virtual asset services prior to 31 October 2021 may continue to provide such services provided that they are registered before 1 February 2021

Entities which have conducted an issuance of virtual assets prior to 31 October 2020, but which have no plans to conduct any further issuances do not currently have to register.

Cayman entities licensed by CIMA under other regulatory acts (for example banks or insurance companies) that provide or propose to provide virtual asset services must notify CIMA through the REEFS portal. Entities that are registrants (for example an entity that is a Registered Person under the Securities Investment Business Act) must make an application to operate as a VASP.

What must VASPs now do before 31 January 2021?

VASPs that are currently conducting a virtual asset service must:

• Continue to comply with the Cayman Islands money laundering, countering the financing of terrorism, countering proliferation financing and sanctions regimes. This includes appointing natural persons to act as the VASP’s anti-money laundering compliance officer, money laundering reporting officer and deputy money laundering reporting officer
• Either register with or notify CIMA (if already a licensee under other regulatory acts) through the CIMA online REEFS portal
• Pay a non-refundable assessment fee of KYD$1,000 (approximately US$1,220)

CIMA will require information as part of this application such as:

• Details of anti-money laundering compliance policies, procedures and appointments of officers
• Details of the virtual asset service
• Prior or forecasted revenue
• How the service will be provided to the public
• A risk identification and mitigation strategy

A non-refundable assessment fee is paid on the initial filing and then a further application fee will be payable if the registration application is approved. Fees are calculated as set out in the and the Virtual Asset (Service Provider) Regulations 2020 (VASP Regulations) and range from KYD1,000 (approximately US$1,220) to KYD$15,000 (approximately US$18,293). The fee will be determined by expected revenue and whether the service will be provided in the Cayman Islands only, or more widely.

There will also be an annual fee payable to CIMA which will be in an amount equal to the final application fee.

CIMA have stated that applications received after 12 December 2020 may not be processed before 31 January 2021 so it is important for all VASPS to act now.

What next?

VASPs should start the CIMA registration process as soon as possible and in any event prior to 12 December 2020 to avoid missing the 31 January 2021 registration deadline and potentially facing action from CIMA under enforcement powers that become active on 31 January 2021.

We understand that CIMA will issue a Statement of Principles in the near future, which will provide a broad framework and guidance for the conduct of virtual asset activities in and from the Cayman Islands.

The implementation of the VASP Act was accompanied by amendments to other Cayman Islands legislation, such as amendments to the Securities Investment Business Act and the Mutual Funds Act which legally recognise virtual asset representations of securities or equity interests and clarifies that virtual asset representations of scheduled securities will themselves be securities.

Harneys’ Regulatory and Digital Assets team is closely monitoring the development and implementation of the VASP Act and will publish a detailed client guide on this Statement of Principles together with the wider licensing framework when available.