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Cryptocurrency Boom in Cayman Islands Raises Concerns Over Money Laundering
The rapid growth of cryptocurrencies, securities tokens, and utility tokens, which utilize distributed ledger technology (DLT), has led to calls for better regulation due to potential investor protection, money laundering, and market integrity risks. The Cayman Islands, a financial hub, is no exception.
Regulation of Crypto-Assets in the Cayman Islands
The Cayman Islands Monetary Authority (CIMA) is responsible for regulating crypto-assets, which are broadly referred to as “virtual assets” under Cayman Islands law. CIMA has implemented a licensing regime and registration regime for individuals offering virtual asset services using a Cayman Islands entity or operating from within the islands.
Virtual Asset Service Providers (VASPs)
The Virtual Asset (Service Providers) Act (Revised) is being phased in, with the first phase focusing on anti-money laundering (AML) and counter-terrorism financing (CFT) compliance, supervision, and enforcement. The second phase, expected to commence in 2023, will introduce licensing and virtual asset issuance approval processes.
Defining Crypto-Assets
The concept of “virtual asset” is key to determining whether a person is offering a virtual asset service and is therefore a VASP. Under the VASP Act, a virtual asset is defined as a digital representation of value that can be digitally traded or transferred and used for payment or investment purposes.
Money Laundering Regulations
The Cayman Islands Proceeds of Crime Act requires entities conducting “relevant financial business,” including providing virtual asset services, to comply with AML regulations. Registered or licensed VASPs will be subject to ongoing AML requirements, including:
- Audits
- Prior approval for senior officers and AML compliance officers
- Notification of compliance
Promotion of Crypto-Assets
The VASP Act regulates the issuance of virtual assets. The sale of newly created virtual assets to the public, in exchange for consideration, is included in the definition of virtual asset service. This means that some token issuers will be required to register with CIMA.
Virtual Asset Trading Platforms (VATPs)
The VASP Act introduces the concept of VATP, defined as a centralized or decentralized digital platform facilitating the exchange of virtual assets for fiat or other virtual assets on behalf of third parties for reward. VATPs do not include platforms providing only a forum for sellers and buyers to post bids and offers.
Different Crypto-Asset Rules
The VASP Act does not distinguish between wholesale and retail markets, focusing instead on whether a virtual asset service is being provided.
Stablecoin Regulation
Stablecoins will generally fall within the definition of “virtual asset,” making them subject to the VASP Act.