The Virtual Asset (Service Providers) Act, 2020 (VASP Act) came into effect on 31 October 2020 and provides a framework for the regulation of virtual asset service providers (VASPS).
Cayman has been a particularly attractive jurisdiction for the establishment of virtual asset service providers and, up until now, service providers have operated within the existing regulatory regime.
The new framework provides greater certainty, ensures compliance with internationally recognised standards and provides an exchange of information with the Cayman Islands Monetary Authority (CIMA) which will enable the regulator to stay abreast of industry practice and support development.
By 31 January 2021, entities which are engaged in or wishing to engage in virtual asset services must register with CIMA under the VASP law. Entities which are engaged in or wishing to engage in virtual asset services and are currently holding a license granted by CIMA under another regulatory authority must notify CIMA under the VASP Law.
What are virtual assets?
A virtual asset is defined as "a digital representation of value that can digitally traded or transferred and can be used for payment or investment purposes but does not include a digital representation of fiat currencies".
The definition is wide and adopts the definition used by FATF and will include all cryptocurrencies, security tokens and utility tokens and commodity or fiat-backed stablecoins. We do not yet have clear guidance on the definition of "digital representation of fiat currencies" which are excluded, but this is likely to apply to government-issued virtual currencies and not stablecoins, which are backed by fiat but which do not directly represent fiat and which would fall within the definition of "virtual asset".
What is a virtual asset service?
Virtual asset service is:
- the issuance of virtual assets; or
- the business of conducting one or more of the following activities or operations for or on behalf of another person:
- exchanging between virtual assets and fiat currencies;
- exchanging between one or more other forms of convertible virtual assets;
- transferring virtual assets;
- safekeeping or administrating virtual assets or instruments enabling control over virtual assets; and
- participating in and providing financial services related to an issuers offer or sale of a virtual asset.
Investment funds may fall within the VASP regime if they accept in kind subscriptions or redemptions.
What do virtual asset service providers need to do?
The VASP Act requires all VASPS carrying on, or purporting to carry on, virtual asset service in or from within the Cayman Islands to:
- register with CIMA;
- obtain a virtual asset service licence;
- if an existing licensee, be granted an exemption by CIMA from the obligation to be licenced under the VASP Act; or
- obtain a sandbox licence.
VASPS which provide virtual asset custody services or operate a virtual asset trading platform are required to apply for a virtual asset service licence. Other types of VASP will only be required to register, but will not need to obtain a licence unless CIMA directs them to apply for a licence or a sandbox licence.
VASPS which are issuers of virtual assets will be required to be registered. The requirement only applies if virtual assets are issued to the public. Although there is no definition of this, issues to directors, shareholders and employees are likely to be excluded. Following registration, a VASP which issues virtual assets must submit a request to CIMA for approval of the issuance which will be subject to a threshold of fiat that may be raised through such issuance. Issues over the threshold will need to be conducted through a licensed exchange. The threshold has not yet been determined.
VASPS already licensed or registered by CIMA must notify CIMA and may be required to obtain a virtual asset service licence. In addition, CIMA may direct a VASP to obtain a virtual asset service licence.
VASPS are required to:
- prepare accounts annually and make them available for inspection by CIMA;
- ensure that its senior officers, trustees and beneficial owners are fit and proper;
- take steps to protect and secure personal data of clients;
- ensure communications relating to virtual assets are accurate;
- comply with the Anti-Money Laundering Regulations (2020 Revision) (AML Regs) and other laws relating to anti-money laundering, proliferation financing and countering the financing of terrorism (AML/CFT);
- put in place anti-money laundering systems and procedures;
- designate employees to fulfil the roles of AMLCO, MLRO and DMLRO that have the responsibility for procedures for combating money laundering, terrorist financing, proliferation financing and targeted financial sanctions;
- have a registered office in the Cayman Islands;
- provide documents and information required by CIMA; and
- notify CIMA of:
- any licence or registration in another jurisdiction;
- the opening of an office or establishing a physical presence in another jurisdiction;
- penalties imposed or enforcement actions taken against it in another jurisdiction; or
- the holding of or the acquisition of a controlling interest in another person or legal arrangement engaged in virtual asset service.
Following the amendments to the Proceeds of Crime Act (as revised) and the AML Regs made in 2020, VASPS are subject to Cayman's anti-money laundering, proliferation financing counter terrorist financing and targeted financial sanctions. Tailored guidance has been issued by CIMA in relation to the compliance of VASPS with the AML/CFT regime.
Custody providers and virtual asset trading platforms are also subject to additional obligations including capital adequacy requirements.
The VASP framework is being implemented in phases.
Phase one commenced on 31 October 2020, and is focused on AML and CFT supervision and enforcement. It states that:
- Persons engaged in or wishing to engage in virtual asset services must be registered by CIMA under the VASP Law by 31 January 2021.
- Persons engaged in or wishing to engage in virtual asset services currently holding a licence granted by CIMA under another regulatory authority must notify CIMA under the VASP Law by 31 January 2021.
Persons who have not registered or notified CIMA by the authorities application deadline, but who are engaging in or wishing to engage in virtual asset services on and after 31 January 2021 will be subject to penalties and other enforcement measures. Registration and/or notification is through the CIMA REEFs online platform.
Phase two, expected to begin in June 2021, will bring into force the remaining provisions of the VASP Law, including the licensing requirement for virtual asset custodians and trading platform operators, the sandbox licensing regime and other elements of the VASP Law.
If you require any assistance with determining whether your entity is in scope of these regulatory amendments, please contact email@example.com.
Not only can Collas Crill Corporate Services assist with the classification and registration, we also provide AML/CFT services such as AML Officers, AML/CFT policy and procedure development and AML audits.