The Cayman Islands government has issued a proposed legislative framework for virtual asset service providers that seeks to align the crypto space with international anti-money laundering standards.
The Virtual Asset Service Provider Bill proposes a registration process for digital asset businesses in Cayman.
Virtual assets are defined in Cayman as a digital representation of value that can be electronically traded and used for investment purposes covering, for example, cryptocurrencies such as bitcoin.
Financial Services Minister Tara Rivers said in a press release announcing the proposed bill, “The Cayman Islands would be one of the few countries in the world to adopt such a cutting-edge framework that is in alignment with global regulatory standards.”
She added, “At a time where innovation is needed to support the economy given the effects of the COVID-19 pandemic on the more traditional economic pillars, this type of regulated FinTech activity will help our financial services industry attract new clients and, in turn, contribute further to government revenue.”
The legislative proposal demands that anyone who provides virtual asset services must be licensed by the Cayman Islands Monetary Authority.
Licensed crypto service providers are not allowed to issue virtual assets directly to the public above a prescribed threshold, without the regulator’s permission.
The licensing process will consider, among other things, if “the applicant has the necessary skills, knowledge, experience, facilities, adequate capital and cybersecurity measures as appropriate having regard to the size, scope and complexity of the business”.
Licensed virtual asset service providers must comply with anti-money laundering rules, prepare annual accounts and have a registered office in Cayman.
CIMA will maintain a public register of all licensees.
Custodians of crypto assets must enter into a custodian arrangement with the virtual asset owner, according to the proposed regulations. This agreement should, for example, disclose how the assets are held, as well as the risks and fees involved.
Crypto trading platforms are subject to specific requirements concerning how users access the platform, which virtual assets can be traded, the clearing and settlement process, the financing of virtual asset purchases and anti-money laundering controls.
The bill will also introduce a regulatory sandbox regime that allows CIMA to issue licences for virtual asset services that represent an innovative use of technology, but which should be temporarily restricted in the interest of the public or the financial markets.
Such restrictions could, for example, limit the number of clients, impose reporting requirements and restrict advertising of the service.
At the same time, the regulatory sandbox enables businesses to test new products, services and business models without being subjected to all regulations and licensing requirements.
In addition to the Virtual Asset Service Provider Bill, the legislative proposal seeks to amend the Monetary Authority, the Securities Investment Business, the Mutual Funds and the Stock Exchange Company laws at the next sitting of the Legislative Assembly.
In announcing the five bills, the Ministry of Financial Services said in the press release, “Together, the legislative framework proposes a flexible foundation which promotes the use of new technology and innovative enterprise in the jurisdiction, while complying with newly adopted international standards set by the (Financial Action Task Force).”
The new regulatory framework would provide for the supervision of individuals and entities which facilitate virtual asset activities as a business.
Government consulted the financial services industry in the development of the legislation, Rivers said.
“The legislative enhancements being put forward are designed to increase the jurisdiction’s attractiveness as a domicile for virtual assets business while ensuring Cayman meets international obligations,” she added.
Other AML-related bills released
The Caribbean Financial Action Task Force is still reviewing the islands’ anti-money laundering regime and practices after the regional affiliate of the global standard-setter in anti-money laundering issued a critical report of Cayman last year.
The ministry said it expects Cayman’s technical re-rating by the CFATF to be announced in October, with the FATF’s review and final rating to be completed shortly thereafter.
In this context, the ministry has released four other pieces of legislation to enhance Cayman’s anti-money laundering regime.
The Companies (Amendment) (No.2) Bill, 2020 and Limited Liability Companies (Amendment) (No.2) Bill, 2020 will introduce stricter administrative fines for Cayman’s beneficial ownership regime, and ensure basic regulatory powers are listed on a company register and made available for public inspection.
The Trusts (Amendment) Bill 2020 and Banks and Trust Companies (Amendment) Bill, 2020 will provide clarification for individuals conducting trustee services as a business.