Registering a crypto fund in the Cayman Islands

The Cayman Islands persist as the benchmark for jurisdictional excellence for new crypto funds when it comes to legal considerations and fund organizing, granting a "tried and tested" corporate ambiance. Key factors attracting investors interested in setting up cryptocurrency funds in the Cayman Islands include geographic upsides, an esteemed lawful and judicious framework rooted in the principles of British common law, alongside a streamlined regulatory structure for cryptocurrency funds.

The Cayman Islands are keen on attracting fintech and cryptocurrency companies to their shores. They're working closely with regulatory bodies like the Cayman Islands Monetary Authority and industry groups like Cayman Finance to support growth in these sectors. But, they're also adamant about maintaining their reputation for strict financial transparency. They're aiming to find the optimal equilibrium amidst encouraging novelty and keeping their strong regulatory standards intact.

Therefore, in May 2020, identifying the embraced global norms issued by the Financial Action Task Force, the Caymans implemented new financial regulatory standards, specifically addressing the regulation of tokenized currencies, precisely the Virtual Asset Act of 2020.

Regulation of digital currencies in the Caymans

The Virtual Asset Act's first step of implementation places a high priority on AML protocols and requires virtual asset service providers to register. After that, the following stage will set rules for license revisions.

The recently created system upholds the Caymans' appeal as a governing hub for entities offering solutions by virtual asset service suppliers. It achieves this by offering an adaptable overseeing structure that assures individuals establishing cryptocurrency funds while meeting global protocols.

The Virtual Asset Act explains cryptocurrencies as intangible cyber estate, lacking physical backing like traditional money. This new legislation in the Caymans gives clear juridical status to digital assets and sets rules for firms presenting related services. It obliges all suppliers to get a license or enroll with the Monetary Authority.

A VASP is a legal enterprise initiated in the Cayman Islands that furnishes digital money services as part of its core operations or in the ordinary course of business.

This involves either setting up digital currency assets for someone else or offering solutions associated to those assets on their behalf. This could be for individuals or enterprises, and it falls within the realm of managing digital assets:

  • Virtual-fiat swap
  • Convertible asset change
  • Virtual asset transaction
  • Asset storage
  • Financial services for the issuance and sale of assets

In simpler terms, if a firm in the Caymans is involved in creating or vending virtual assets, providing financial services related to virtual assets, or transferring crypto assets for someone else, they have to get a permit or enroll with the Cayman Islands Monetary Authority. This ensures that they're operating legally and following regulations regarding cryptocurrency exchanges.

Guidelines for introducing new virtual assets are outlined in the VASP Act and require prior approval from CIMA. When we talk about "issuance," we mean the first time these assets are made available for purchase for any kind of charge, currency, or other digital asset. The regulations distinguish between two types of offerings: a "private placement," which consists of a quiet sale to a small group of eligible investors, and a "public offering," which for some transactions may need registration under the VASP Act.

Investment firms that deal in digital assets and are headquartered in the Cayman Islands are known as cryptocurrency funds. These assets may require a license or registration under certain regulations, such as the Mutual Funds Law or the Private Funds Law, depending on what kind of asset they are. This implies that if the digital assets they manage constitute ownership shares or investment interests, companies must abide by certain restrictions.

What is a crypto fund?

A crypto fund is a novel type of investment vehicle akin to traditional portfolio investments such as hedge funds, albeit exclusively comprising cyber assets. They represent a form of alternative funds.

The necessity for licensing or registration of a cryptocurrency fund in the Cayman Islands will depend on a range of aspects, including issuance conditions and the nature of assets, with nearly half of all crypto funds being domiciled there.

Creating a crypto fund: choosing a fund type

The legal framework of the Cayman Islands enables the adaptation of fund mechanisms to comply with tax requirements, investor preferences, and their numbers, as well as investment strategy. If you are interested in creating a cryptocurrency fund in the Cayman Islands, pay attention to the main types of funds: open-end and closed-end.

Cryptocurrency investment vehicles exist in two primary structures: open-ended and closed-ended. Open-ended funds operate under the regulations outlined in the Mutual Funds Law and can be authorized, managed, documented, or granted exemptions. Investors have the flexibility to acquire and dispose of their holdings at any given time. Conversely, closed-ended funds are not subject to the same level of regulatory oversight within the Cayman Islands. Investors commit capital for the fund's entire lifespan and lack the ability to redeem their shares. This framework is more conducive to long-term investment strategies, as investor liquidity is restricted.

Taxes

In the Cayman Islands, you won't have to deal with the hassle of many different levies that are common in other locations. In this scenario, the government doesn't impose various types of taxes such as income tax, inheritance tax, gift tax, capital gains tax, and corporate tax. This absence of taxation extends to digital assets like cryptocurrencies as well. Consequently, this location becomes appealing to individuals and companies aiming to reduce the amount of taxes they owe.

In the Cayman Islands, businesses have the opportunity to apply for a tax exemption certificate by paying a reasonable fee. These certificates typically range from 20 to 50 years in duration, depending on the type of company. This provision offers investors the chance to enjoy tax perks over an extended period, making it an appealing option for many.

Cayman Islands cryptocurrency funds: AML requirements

Digital assets come with unique qualities that could make it easier for people to break AML rules. These qualities include not having a central authority to oversee them, being hard to track, and allowing for easy international transactions. Because of this, officials in different areas are always working hard to stop illegal activities and make sure things are transparent and strict.

Instead of creating a brand new set of rules just for digital assets, we achieved our goal by fitting regulations into the current system. This way, we focused on what these assets can actually do and how they behave, which helped us understand the risks they pose for illegal activities better.

It's critical to comprehend the guidelines before incorporating a cryptocurrency fund in the Cayman Islands. Laws such as the Proceeds of Criminal Conduct Law and AML legislation mandate stringent compliance guidelines for any Cayman-based firm with operations in financial transactions. These regulations need thorough examinations and measures to identify and reduce associated hazards in an effort to halt money washing.

Virtual asset services fall within the scope of pertinent financial enterprises. Any individual bound by this system must, among other responsibilities:

  • Designate an AML compliance officer who has been vetted and authorized by the Monetary Authority. This individual will be liable for ensuring conformance to AML stipulations and directives within the organization. Their role involves incorporating measures to detect and prevent illicit financial activities, as mandated by regulatory standards. By appointing a qualified officer endorsed by the Monetary Authority, the organization demonstrates its commitment to upholding integrity and transparency in its financial operations.
  • Designate an individual for the reporting of money laundering with a deputy.
  • Establish procedures for accurate counterparty identification and risk-based monitoring, especially concerning counterparties, operational regions, and new technologies like virtual assets.
  • Conduct thorough training for employees.

Additional juridical ramifications for the Cayman Islands tokenized money fund enrollment

Licensure issues

Sandbox licenses

Special Economic Zone (SEZ)

  • The VASP Act introduced a dedicated supervisory sandbox program catering to VASPs and alternative monetary entities harnessing groundbreaking technologies.
  • Owing to the flexibility of the sandbox license, CIMA can formulate new regulations or provide peculiar exemptions to satisfy pertinent corporate requirements.
  • The duration of these permits is one year. CIMA will evaluate the firm's management needs at this time and determine whether any justifiable changes are required.
  • Authorities in the Cayman Islands are aggressively promoting the establishment of Special Economic Zones (SEZs) for businesses such as fintech companies and cryptocurrency funds. SEZs encourage growth and innovation in these industries within the region by providing incentives and assistance to enterprises operating in them.
  • The opportunity to more effectively simplify physical operations on the Islands is provided by SEZs. Among the many benefits of these zones is a swift and cost-effective authorization procedure that enables companies to begin operations in as little as 4–6 weeks. SEZs also provide assigned workspace, which helps to further facilitate efficient business operations.
  • In addition to the newly enhanced IP legislation and various jurisdictional benefits, SEZs are gaining popularity as a location for the fintech industry, as evidenced by the consistent increase in the quantity of cryptocurrency contribution pools and corporate formations inside their boundaries.

Conclusion

The Cayman Islands have emerged as a favored locale for crypto fund administrators. However, it's crucial to acknowledge that the Islands have enacted novel legislative frameworks designed to govern and oversee VASPs. Diligent observance of a wide range of legal procedures is imperative for the creation and ongoing operations of a crypto fund.

Our company's services encompass, but not limited to:

  • consultations with advisors on choosing the best setup for a crypto investment fund;
  • aid in cryptocurrency fund documentation development;
  • advising on sticking to AML/CTF stipulations;
  • help in starting a cryptocurrency fund in the Caymans.
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