A new phase for the Cayman Island VASP regime

On 13 February 2024, the Cayman Island’s Ministry for Financial Services (MFS) issued their long-awaited Virtual Asset (Service Provider) Act (VASP Act) amendments for consultation. This is a significant milestone as it signals that the second phase (Phase 2) of VASP Act implementation is on its way.

The Cayman Islands VASP Act was passed in May 2020, with certain provisions being commenced in October 2020 and January 2021. The commencement of these provisions signified the implementation of the first phase (Phase 1), which was an anti-money laundering (AML), combating the financing of terrorism (CFT) and cybersecurity-focused registration regime.

Phase 2 of the VASP Act includes:

• a licensing regime for virtual asset trading platforms and custodians,
• an issuance approval regime for virtual asset issuers, and
• a sandbox regime for innovative financial technologies.
  

It remains unclear whether all of the remaining provisions of the VASP Act will be commenced but the MFS has signalled that the licensing regime for trading platforms and custodians will begin. This high-level summary introduces some of the key changes proposed.

The proposed amendments

Here are a number of the key provisions of the VASP Act and VASP Regulations that are being proposed for amendment.

Clarity on the applicability of the VASP Act to decentralised finance (DeFi)

The applicability of the VASP Act to DeFi has always been a source of consternation for the industry. The proposed amendments to the definition of the term “operator” are intended to provide greater clarity on the VASP Act’s scope of application to DeFi trading platforms, including those that involve decentralized autonomous organizations (DAOs).

Fees

The proposed amendments to the VASP Act remove fee ranges that would have required the Cayman Islands Monetary Authority (CIMA) to make ad hoc decisions with respect to registrant fees. Importantly they also include licensing fees for trading platforms and custodians.

Licensing application requirements

The amendments to the VASP Act include the licensing requirements for custodians and trading platforms, some of which are covered by the existing registration application requirements but also include a range of activity-specific deliverables.

Change of business plans

Under the current VASP Act, changes of information with respect to registered VASP activities (including changes to the business plan) only require notification to CIMA within 15 days of any changes taking effect. The proposed revisions would require registrants and licensees to seek prior written approval from CIMA in order to make a change to an already approved business plan.

Clean up revisions

There are also a variety of clean-up revisions throughout the proposed amendments, which will require further analysis to ensure they do not have any material impact on the application of the VASP Act.

Conclusion

The proposed VASP Act amendments are a welcome and long-awaited step towards the full implementation of the VASP Act and regulatory clarity and certainty associated. The decision of the MFS to conduct the consultation through Github, a collaborative online platform, signals an intention to engage with industry and a willingness develop a VASP regime that incorporates the views of the Cayman Island’s vibrant virtual asset industry.

Prior to the 20 March closing date of the consultation period, XReg will publish further views and insights on the proposed changes and other potential amendments that could enhance the Cayman Islands as a well-regulated and leading jurisdiction for virtual assets.