Amendments to the regulatory framework for virtual assets in the Cayman Islands

Licensing 

A person or entity that provides virtual asset custody services or operates a virtual asset trading platform[2], will need to obtain a virtual asset service licence. Any entity that is already registered with the Cayman Islands Monetary Authority ("CIMA") under the VASP Act (a "VASP") that will, following the implementation of the VASP Updates, require a licence will have until 29 June 2025 (90 days from the commencement date for the VASP Updates) to submit an application for a licence.

Licence applications

The information that will need to be provided to CIMA to apply for a virtual asset service licence is set out in the amendments to the Virtual Asset (Service Providers) Regulations and includes new requirements for custodians and operators of virtual asset trading platforms compared to the information such parties would have been required to submit for registration under the VASP Act prior to the VASP Updates.

Director requirements 

A VASP (whether registered or licenced under the VASP Act) will now also be required to have at least three directors, including at least one independent director without a vested interest in the VASP. Accordingly, existing VASPs and prospective VASPs will need to consider whether the appointment of an additional director(s) and/or independent director is required.

Waiver 

In limited cases CIMA may now grant a waiver to a person or entity, exempting them from the requirement to be registered or licenced to provide virtual asset services under the VASP Act. If a person is a supervised person under another regulatory law in the Cayman Islands (e.g. under the Securities Investment Business Act (as revised)), CIMA may grant a waiver in respect to a person or entity obtaining a registration or licence where CIMA determines that:

• the virtual asset service does not materially change the nature of the activity for which the supervised person is licensed; and
• the supervision and oversight carried out in relation to the business of the existing supervised person is sufficient to include the virtual asset service.

Virtual asset custodians

Persons or entities providing virtual asset custody services will have an expanded set of ongoing obligations, including:

• obligations which will always apply such as:

1. fiat currency custody;
2. record keeping;
3. custodial arrangements with clients;
4. IT practices; and
5. client asset segregation requirements; and

• obligations which may, where necessary, be imposed by CIMA such as:

1. client disclosures;
2. net worth requirements; 
3. reporting requirements; and
4. cyber security and insurance requirements.

Virtual asset trading platforms

Virtual asset trading platform operators will also have an ongoing set of obligations, including:

• obligations which will always apply such as:

1. not engaging in detrimental trading or market making for its own benefit;
2. not allowing clients to trade virtual assets presented in a deceiving manner; and
3. carrying out reasonable due diligence on virtual assets and their issuers; and

• obligations which may, where necessary, be imposed by CIMA such as:

1. marketing restrictions;
2. listing requirements for virtual assets;
3. conflicts of interest / price discovery mechanisms; and
4. client disclosures.

CIMA's powers 

The VASP Updates also provide CIMA with additional powers, including but not limited to:

• examining and confirming that a VASP is in a sound financial position;
• examining and assessing that a VASP's cybersecurity safeguards are sufficient to protect client information and assets;
• requesting information from any person who CIMA has reasonable grounds to believe is carrying on virtual asset services in contravention of the VASP Act; and
• revoking a licence in certain prescribed circumstances. 

Conclusion

The introduction of the VASP Updates is a significant milestone for the Cayman Islands virtual assets regime and provides clarity for centralised exchanges and custodians. It is imperative that existing and prospective VASPs quickly familiarise themselves with the changes. In particular, VASPs who have registered but will now need to apply for a licence will need to move quickly to ensure they can make the new application within the stipulated timeframe.

To discuss whether the VASP Updates impact your business and/or the licensing process further please contact our digital assets team in our Cayman Islands office.