Regulatory framework for virtual asset services adopted

Financial Services Minister Tara Rivers.

Lawmakers this week passed a package of five bills to regulate virtual asset service providers.

The Virtual Asset Service Provider Law, the central piece of legislation in the regulatory framework, demands that digital asset businesses must be registered with the Cayman Islands Monetary Authority.

Presenting the bills in the Legislative Assembly Wednesday, Financial Services Minister Tara Rivers said the goal of the framework was to facilitate innovation in financial services, to provide regulatory certainty for virtual asset service providers, to protect consumers and to meet the recommendations by the Financial Action Task Force.

She said the new legislation “aims to attract legitimate business” by offering regulatory certainty and meeting international anti-money laundering standards.

Rivers said the new regulatory regime would put Cayman into “a select group” of countries that have fully implemented the latest Financial Action Task Force standards for dealing with digital assets and crypto services providers.

In June 2019, the FATF recommended appropriate risk-based supervision of the virtual asset sector. The guidance said virtual asset service providers should be registered, licensed and subject to supervision and monitoring. In addition, there should be adequate record keeping and due diligence in relation to the transfer of virtual assets.

The new law defines virtual assets as a representation of value that can be digitally traded or transferred and used for payment or investment purposes, such as Bitcoin or Ethereum. Virtual asset services include the exchange, safekeeping and issuance of virtual assets.

Core to the new laws is the licensing of virtual asset services providers by financial services regulator CIMA.

Prospective licensees must demonstrate that they have the necessary knowledge, experience, infrastructure and funding in line with the scope and complexity of the business.

Licensed virtual asset service providers must also comply with anti-money laundering rules, prepare annual accounts and have a registered office in Cayman.

Rivers said that virtual asset services involving custody and trading platforms pose a larger risk to users and call for greater transparency. “It is the government’s goal that the added transparency will help instil greater confidence in the use of these technologies,” she said.

Under the new rules, custodians of crypto assets must disclose to their customers how the assets are held, how risks are managed and the 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.

Trading platforms must disclose to their clients any market making activities they may be engaged in for their own accounts. They must perform appropriate due diligence on any virtual assets listed or traded on the platform and ensure that users are sufficiently aware of the risks of purchasing or trading virtual assets.

The issuance of virtual assets, which has been the subject of many scams in recent years, is another high-risk area, the minister said. Under the new regime, licensed virtual asset service providers must therefore notify the regulator and receive permission before they can issue virtual assets above a prescribed threshold.

Attorney General Samuel Bulgin lent his support to the bill, stating that it strikes a balance between new, innovative ways of conducting business and the public interest.

Bulgin emphasised new technologies as a main driver of change that are not solely used for legitimate purposes. He said the ability to use virtual assets to transfer value anonymously and in an unregulated way could be exploited by criminals.

“As advances in technology create new opportunities, those who engage in criminal activity seek out and also find novel ways to add these technologies to their toolbox.”

While some jurisdictions have prohibited virtual asset services, Bulgin said Cayman welcomed technological progress and change, while implementing measures that limit the potential for abuse.

Regulatory sandbox
The new framework further includes a regulatory sandbox regime, which allows new innovative services to be offered with certain restrictions without the need for a full licence.

The minister explained that the sandbox licence allows CIMA to tailor restrictions, monitor covenants, set limits on the offering of the service or specify obligations “to allow it to adequately supervise an innovative activity which uses new technology”.

The sandbox is intended to be for a limited timeframe and would allow the authority to assess the activity and whether legislative changes are required to existing laws, she added.

“This innovative approach to regulation will help ensure that the jurisdiction is prepared to review regularly and adopt innovative technologies and practices,” the minister said.
In addition to the new Virtual Asset Service Provider Law, government and independent opposition lawmakers amended the Monetary Authority, the Securities Investment Business, the Mutual Funds and the Stock Exchange Company laws.

Members of the Official Opposition had earlier walked out of the Legislative Assembly in protest, claiming the government was using its majority to prevent the Opposition from raising motions and questions.

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