A public consultation by the Cayman Islands Monetary Authority on draft rules and guidance for the provision of services by custodians and trading platforms for virtual assets ended on 7 March.
The rules are part of the second phase of the implementation of Cayman’s virtual asset service provider regime. In the first phase, which began January 2021, VASPs were expected to be licensed under the Virtual Asset Service Providers Act.
The proposed rule supports the regulatory requirements of the VASP Act by setting out obligations for both custodians and trading platforms in areas such as governance, conduct of business, prudential requirements and risk management as well as IT and cybersecurity.
CIMA noted that there are no harmonised international standards for the regulation and supervision of service providers in the crypto space, but that the recommendations by the Financial Action Task Force for virtual assets activities and services had been adopted in the authority’s anti-money laundering guidance notes.
The consultation included a jurisdictional comparison of the proposed rules with the regulatory approach of the Bahamas, Bermuda, Gibraltar, Hong Kong, Liechtenstein, Malta and the European Union’s Markets in Crypto Assets Regulation.
It revealed that Cayman’s regulations were the most wide-ranging in terms of areas covered.
While the proposed rule would provide clarity and certainty to custodians and trading platforms in the crypto industry and its benefits outweighed the costs, CIMA acknowledged that “VASPs may choose not to operate in the Cayman Islands due to the comprehensiveness of the regulatory requirements”.
Travel Rule to take effect July
CIMA announced last month that a section of the Anti-Money Laundering (Amendment) (No. 2) Regulations, 2020 that outlines the identification and record-keeping requirements relating to transfers of virtual assets will become effective on 1 July this year.
It follows FATF-issued guidance from 2019 that required virtual asset service providers and financial institutions participating in a transaction to exchange relevant beneficiary and originator know-your-customer information.
The measure, which is derived from traditional wire transfers and applied to virtual asset transactions, is known as the Travel Rule.
The relevant section of the Anti-Money Laundering Regulations contains definitions and provisions covering the identification, verification, production, record-keeping and other relevant obligations relating to transfers of virtual assets including the Travel Rule requirements for VASPs.
Because the rules will take effect July, all VASPs registered or in the process of registering with CIMA are required to advise the authority on how they will comply with the Travel Rule-related provisions, by submitting, by the end of March, details of their compliance arrangements, including the relevant policies and procedures and the use of technology.
New applicants will have to submit the required information as part of their VASP registration or licence application.
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