Key changes to the regulatory framework for digital assets in the Cayman Islands
The Cayman Islands introduced the Virtual Asset (Service Providers) Act (the “VASP Act”) in 2020 to comply with the standards set by the Financial Action Task Force. It was one of the first offshore jurisdictions to do so, which has arguably given it an edge in attracting cryptocurrency funds and decentralised autonomous organisations that wish to establish a foundation company as a legal wrapper. Other market participants in the blockchain space, such as custodians, trading platforms and broker-dealers, have also been drawn to the Cayman Islands owing to the certainty provided by the VASP Act and helpful guidance issued by the Cayman Islands Monetary Authority (“CIMA”).
Registration
As is widely known, the VASP Act initially introduced a registration regime with effect from 31 October 2020 for any person conducting a “virtual asset service” in the course of a business using a Cayman Islands entity or otherwise from within the Cayman Islands (a “VASP”). A “virtual asset service” means the issuance of virtual assets or the business of providing one or more of the following services or operations for or on behalf of another person: (a) the exchange between virtual assets and fiat currencies, (b) the exchange between one or more other forms of convertible virtual assets, (c) the transfer of virtual assets, (d) virtual asset custody service, or (e) participation in, and provision of, financial services related to a virtual asset issuance or the sale of a virtual asset.
New Licensing Regime
As of 1 April 2025, virtual asset custody providers and trading platform operators must now obtain a license. There is however a transitional period of ninety (90) days from 1 April 2025 within which an existing VASP performing a licensable activity under the VASP Act must submit its license application to CIMA. An entity that performs activities that require a registration and a license under the VASP Act will only require a license.
The new licensing regime of the VASP Act introduces various additional requirements on virtual asset custody providers and trading platform operators, including additional prudential requirements, segregation of client assets from proprietary assets and enhanced disclosure requirements to clients (including internal safeguards, insurance arrangements and grievance procedures). In addition, all applicants must submit cybersecurity plans, risk management strategies, and details on how they intend to prevent asset loss or theft.
Director Requirements
Irrespective of whether it is registered or licensed under the VASP Act, a VASP is now also required to appoint at least three (3) “fit and proper” directors. This must include at least one (1) independent director without a vested interest in the VASP.
Audited Accounts
Keeping to the risk-based approach to regulation that is adopted in relation to VASPs, the VASP Act does not, by default, specify that a VASP must audit in its annual accounts. However, CIMA now has the discretion to require a VASP to provide audited financial statements if it determines that is necessary due to the nature, size and/or complexity of the business, or where it has reasonable grounds for believing that the VASP has provided false or misleading accounts.
Waivers
In limited circumstances, CIMA may now grant a waiver to a person or an entity with respect to the requirement to be registered or licensed under the VASP Act. For example, if a person is licensed under another regulatory law in the Cayman Islands (such as the Securities Investment Business Act (As Revised)), CIMA may grant such a waiver where it determines that: (a) the virtual asset service does not materially change the nature of the activity for which the person is licensed, and (b) the supervision and oversight that is carried out in relation to the business of the existing licensed person is sufficient to include the virtual asset service.
Next Steps
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This article first appeared in the May 2025 issue of the Hong Kong Lawyer, the official journal of The Law Society of Hong Kong.
Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication. This article was last updated on 13 May 2025.
