As perhaps one of the most publicly recognised applications of fintech, cryptocurrencies are virtual currencies that use cryptography to secure and verify transactions, and to control the creation of additional units. But fintech – a shortened form of ‘financial technology’ is broader than just cryptocurrencies.
The Cayman Islands has long been a leading offshore jurisdiction for investment funds, as well as a significant global financial centre overall. The Cayman Islands Government has been keen to attract new business in the expanding FinTech and crypto-asset markets.
Consequently, in May 2020, the Government passed the Virtual Asset (Service Providers) Act, 2020 (“VASP Act”), which provides a legislative framework for the conduct of virtual assets business in the Cayman Islands and for the registration and licensing of persons providing virtual asset services. The VASP Act is intended to provide the Cayman Islands with a cutting-edge, robust framework which is aligns with global regulatory standards, protects consumers and meets the requirements of the Financial Action Task Force recommendations in respect of virtual assets.
The VASP Act defines a “virtual asset” as a digital representation of value that can be digitally traded or transferred and can be used for payment or investment purposes but does not include a digital representation of fiat currencies. For the purposes of the VASP Act, virtual service tokens are not classed as virtual assets. A ‘Virtual Assets Service Provider’ (“VASP”) under the VASP Act is a person carrying on a "virtual asset service" in the course of business using a Cayman Islands entity or otherwise from within the Cayman Islands. A “virtual asset service” means the issuance of virtual assets or the business of providing one or more of the following services or operations for or on behalf of another person:
• an exchange between virtual assets and fiat currencies;
• an exchange between one or more other forms of convertible virtual assets;
• the transfer of virtual assets;
• virtual asset custody service; or
• participation in, and provision of, financial services related to a virtual asset issuance or the sale of a virtual asset.
The VASP Act is being implemented in phases. The first phase, a registration regime, came into effect on 31 October 2020, and focuses on anti-money laundering and the counter-financing of terrorism, compliance, supervision and enforcement. A more extensive licensing regime covering virtual asset custodians and operators of virtual asset trading platforms is expected to come into force during 2024.
Under the VASP Act, there is the potential for the future introduction of a sandbox licence. A sandbox licence is a temporary (up to one year) licence that CIMA may direct a VASP to apply for in certain circumstances.
As perhaps one of the most publicly recognised applications of FinTech, cryptocurrencies are virtual currencies that use encryption technologies to secure and verify transactions, and to control the creation of additional units. But FinTech – a shortened form of ‘financial technology’ – is broader than just cryptocurrencies. FinTech also refers to the use of other technologies such as blockchain that are revolutionising the delivery of financial services via digital applications, retail banking and investment markets.
Particularly in recent years, financial services in Cayman have increasingly reflected the value of delivering products and services through FinTech innovations. Some of the virtual asset and FinTech-related activities that take place within Cayman include crypto exchange services, custodial services, initial coin offerings and innovators working on new centralised and decentralised technologies. The VASP Act has introduced a framework to regulate digital assets, in order to ensure that any risks associated with such activities are analysed and mitigated, and that any benefits are realised in a manner consistent with a well-regulated financial services jurisdiction. As of January 2024, there were 19 VASP registrations with CIMA under the VASP Act, with a number of applications pending.
The Government has introduced a number of other incentives to encourage FinTech firms to set up on Cayman. These include a Special Economic Zone ("SEZ") granting incentives to companies (particularly FinTechs) to relocate their businesses and employees. There is also TechCayman, which was established in 2018 to encourage technology entrepreneurs to establish their businesses in the Cayman Islands, and to create a tech hub for collaboration and expansion.
For updates on the Cayman Islands’ digital assets regulatory framework, visit the Cayman Islands Monetary Authority’s website at www.cima.ky.