Financial Crime World

Cayman Islands Takes Step to Tackle Fintech-Related Financial Crime

The Cayman Islands has established itself as a major hub for fintech and financial innovation, but this growth also presents risks. To address these concerns, the island nation’s government has introduced regulations to prevent financial crime in the virtual asset industry.

Background

In May 2020, the Cayman Islands passed the Virtual Asset (Service Providers) Act, which provides a legislative framework for the conduct of virtual assets business and registration and licensing of persons providing virtual asset services. The act aims to:

  • Provide a robust regulatory environment that aligns with global standards
  • Protect consumers
  • Meet the requirements of the Financial Action Task Force recommendations

Definitions

The act defines a “virtual asset” as a digital representation of value that can be digitally traded or transferred and used for payment or investment purposes. A “Virtual Assets Service Provider” (VASP) is an entity that:

  • Issues virtual assets
  • Provides exchange services between virtual assets and fiat currencies
  • Transfers virtual assets
  • Offers custody services
  • Participates in financial services related to virtual asset issuance

Implementation

The act is being implemented in phases, with the first phase focusing on anti-money laundering and counter-terrorism financing. A more extensive licensing regime for virtual asset custodians and operators of virtual asset trading platforms is expected to come into force next year.

Sandbox Licence

The Cayman Islands has introduced a sandbox licence, which allows VASPs to operate temporarily while they apply for a full licence. This is aimed at encouraging innovation in the fintech sector while ensuring that risks are mitigated.

Benefits of Regulation

Financial services in Cayman have increasingly reflected the value of delivering products and services through fintech innovations, including:

  • Crypto exchange services
  • Custodial services
  • Initial coin offerings
  • Innovators working on new technologies

The VASP Act aims to ensure that any benefits from these activities are realized in a well-regulated financial services jurisdiction.

Current Status

As of January 2024, there were 19 VASP registrations with the Cayman Islands Monetary Authority under the VASP Act, with several applications pending. The government has also introduced incentives to encourage fintech firms to set up operations on the island, including:

  • A Special Economic Zone
  • TechCayman, which aims to create a tech hub for collaboration and expansion

Stay Up-to-Date

For updates on the Cayman Islands’ digital assets regulatory framework, visit the Cayman Islands Monetary Authority’s website.