Back to Index of Cryptoasset Regulations

According to the Cayman Islands Monetary Authority (CIMA), virtual currencies are not considered legal tender in the Cayman Islands. While there are no laws or regulations specifically geared towards governing virtual currencies, there are laws that appear to be more generally applicable, including the Securities Investment Business Law and anti-money laundering laws and regulations. Apart from a public advisory, CIMA has not provided specific guidance on exactly how these laws regulate virtual currencies. However, Cayman Island lawyers have provided some guidance on how they may be applicable.

I. Approach to Assets Created Through Blockchain

The Cayman Islands appear to have a fairly flexible regulatory environment for cryptocurrencies and blockchain technologies. The Cayman Islands Monetary Authority (CIMA) “has not issued statements or guidance on virtual currencies, blockchain technology, ICOs or STOs, other than a warning notice dated 23rd April 2018 which specifically flagged a number of risks specifically associated with ICOs and virtual currencies.”[1] According to that public advisory, “[v]irtual currencies are not legal tender in the Cayman Islands.”[2]

While there does not appear to be any specific legislation geared towards regulating cryptocurrencies, there are laws that may be applicable in certain circumstances. These include the Securities Investment Business Law (2015 Revision), Anti-Money Laundering (AML) Law and associated regulations, Money Services Law (2010 Revision), and Electronic Transactions Law (2003 Revision). Lawyers Chris Humphries and James Smith predicted in February 2018 that

more-specific legislation will eventually be created although, for the time being, the regulators and lawmakers in the Cayman Islands are keen to avoid rushing through any legislation before the potential benefits and pitfalls of blockchain technology, cryptocurrencies and ICOs are properly understood.[3]

A. Financial Regulation and Consumer Protection

Securities licensing requirements are set by the Securities Investment Business Law (SIBL) (see part III, below).[4] This is the “primary legislation relating to the regulation of investments in ‘securities’ and associated businesses.”[5] In addition, certain categories of mutual funds are regulated under the Mutual Funds Law (MFL).[6] 

The MFL grants CIMA “responsibility for regulating certain categories of funds operating in and from the Cayman Islands. . . . The law also provides for the regulation of mutual fund administrators by CIMA.”[7] To be categorized as a mutual fund a fund must be issuing “equity,” in other words “shares, limited partnership interests, LLC interests or trust units.”[8] This “excludes most ICO issuers, as tokens are not considered to be equity interests and therefore ICO issuers (as distinct from any Blockchain or cryptocurrency asset class focused fund) should not be impacted by the MFL.”[9]

B. Anti-Money Laundering Law

CIMA also plays a “central role in the fight against money laundering and terrorism financing.”[10] Section 6(1)(b)(ii) of the Monetary Authority Law grants CIMA the legal mandate, as part of its regulatory functions, “to monitor compliance with the money laundering regulations.”[11] The Cayman Islands anti-money laundering (AML) regime consists of the following laws and regulations: the Proceeds of Crime Law (2019 Revision),[12] the Anti-Money Laundering Regulations (2018 Revision),[13] and the Guidance Notes on the Prevention and Detection of Money Laundering and Terrorist Financing in the Cayman Islands.[14] According to CIMA,

[t]hese regulations prescribe measures to be taken to prevent the use of the financial system for the purposes of money laundering and terrorist financing. In addition to the Anti-Money Laundering Regulations, the regulatory framework against financial crime in the Cayman Islands includes the Proceeds of Crime Law, the Terrorism Law and the Proliferation Financing (Prohibition) Law.[15]

Under the anti-money laundering laws and regulations, any person or business formed, registered, or based in the Cayman Islands that is conducting a “relevant financial business” is “subject to various obligations aimed at preventing, identifying, and reporting money laundering and terrorist financing.”[16] The definition of “relevant financial business” is set out in section 2(1) and schedule 6 of the Proceeds of Crime Law.[17]  According to a recent report on cryptocurrency regulation in the Cayman Islands, the definition “encompasses a broad variety of activity, including the following which may be a particular relevance in the context of Digital Assets”:

• Money or value-transfer service;
• Issuing and managing means of payment (specifically including electronic money);
• Trading in transferable securites;
• Money broking;
• Securities investment business; and
• Investing or administering funds or money on behalf of others.[18]

The report also notes that,

[a]s such, the relevant requirements may depend on the type of Digital Asset in question; for instance, whether it can best be classed as a currency or money substitute, a security, a utility token or something else. We would thus generally expect businesses that engage in the operation of cryptocurrency exchanges, cryptocurrency issuances, brokering transactions in cryptocurrency, the trading and management of Digital Assets that are properly classed as securities, and the investment of funds (whether in the form of fiat currency or cryptocurrency) on behalf of other into Digital Assents, to come within the scope of the AML Laws. Notably Digital Assets that are purely in the nature of utility tokens may fall outside of the ambit of the regime.[19]

The following AML procedures are required under the regulations currently in force:

i. identification and verification (KYC) procedures for investors/purchasers;

ii. adoption of a risk-based approach to monitor activities;

iii. record-keeping procedures;

iv. procedures to screen employees to ensure high standards when hiring;

v. adequate systems to identify risk in relation to persons, countries and activities which shall include checks against all applicable sanctions lists;

vi. adoption of risk-management procedures concerning the conditions under which a customer may utilize the business relationship prior to verification;

vii. observance of the list of countries, published by any competent authority, which are non-compliant, or do not sufficiently comply with the recommendations of the Financial Action Task Force (FATF);

viii. internal reporting procedures; and

ix. other procedures of internal control, including an appropriate effective risk-based independent audit function and communication as may be appropriate for the ongoing monitoring of business relationships or one-off transactions for the purpose of forestalling and preventing money laundering and terrorist financing.[20]

C. Taxation

The Cayman Islands does not impose any taxation on Cayman entities.[21] There is “no income, inheritance, gift, capital gains, corporate withholding or other taxes imposed by the government.”

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II. Custodianship of Cryptocurrencies by Financial Institutions

No information was found on the issue of custody or custodianship of cryptocurrencies or assets in the Cayman Islands.

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III. Regulation of Cryptocurrencies as Financial Securities

A. Regulation of Cryptoassets in General as Securities

According to the SIBL, persons engaging, “in the course of business,” in securities investment business, as defined in the SIBL, must be licensed unless exempted under schedule 3 (Excluded Activities) or schedule 4 (Excluded Persons). Excluded persons must, however, be registered by CIMA.[22]

Schedule 1 of the SIBL provides a list of items considered “securities” for the purposes of determining “whether a person is engaged in licensable activity.” The definition established in Schedule 1 includes

a list of instruments that are common in today’s financial markets (securities, instruments creating or acknowledging indebtedness, instruments giving entitlements to securities, certificates representing certain securities, options, futures and contracts for differences), and does not in and of itself include virtual currencies.[23]

According to the report referred to above, the SIBL will only apply

to the extent that such Digital Assets constitute “securites” for the purposes thereof. The statute contains a detailed list of assets that are considered securities thereunder. Although such list does not currently make specific reference to any Digital Asset, in our view, certain types of Digital Asset are likely to constitute securities. Consequently, consideration will need to be given on a case-by-case basis as to whether the Digital Asset in question falls within one of the existing categories: for example, instruments creating or acknowledging indebtedness, options or futures. Equally, however, it seems clear that certain Digital Assets are likely to fall outside the definition, and thus outside the scope of the law (for instance, pure utility tokens and some cryptocurrencies).[24]

A further profile of the Cayman Islands notes the following:

Digital assets that take the form of warrants, options, futures or derivatives for securities or commodities may still be securities. If a Cayman entity was deemed to be issuing securities, it would be exempt from any form of licensing under SIBL if the nature of the security was an equity interest, debt interest, or a warrant or similar for equity or debt interests.

If a Cayman entity was issuing or trading digital assets that were options, futures or derivatives, it would need to consider the implications of SIBL in respect of licensing. A business considered to be conducting securities investment business must be licensed under SIBL unless it is considered to be conducting excluded activities, which include those businesses that are only providing services to sophisticated persons, high-net-worth persons or a company, partnership or trust (whether or not regulated as a mutual fund) of which the shareholders, unitholders or limited partners are one or more persons falling within such definitions. Excluded persons must register with the Cayman Islands Monetary Authority (CIMA) and pay an annual fee.[25]

B. Security Token Offerings (STOs)

Whether or not a token is considered a security also appears to be fact-specific. According to lawyers working in this area,

[a]s with ICOs and the issuance of utility tokens, it is imperative that a full analysis on the characteristics of the Security Token be conducted to determine whether or not such token is in fact a “security” for the purposes of the Securities Investment Business Law (Revised) (SIBL).  Notwithstanding the nomenclature, it is possible that some Security Tokens will not actually be considered as securities under Cayman law.  However, where the token is backed by profits or is redeemable for an asset, consideration must be given as to whether such token would be regarded as a debt instrument or an option and therefore a security.  Alternatively, where the Security Token possesses all the rights of a typical share and such rights are acknowledged in the issuer's memorandum and articles of association, it is arguable that such token actually represents a share in the issuer, much like a share certificate albeit in digital form. 

Under Cayman law, a token issuer may not be carrying on “securities investment business” despite issuing securities.  Where a token issuer is issuing its own securities, such activity would typically be regarded as an excluded activity under SIBL in which case the issuer would not be required to be registered or licensed with the Cayman Islands Monetary Authority (CIMA). As several such exclusions or exemptions apply, the token issuer can therefore take steps to structure the STO so that licensing and registration is not required in the Cayman Islands.[26]

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IV. Treatment of Cryptoassets Not Considered Securities

No specific guidance was found regarding the regulation of cryptocurrencies not considered securities. However, it appears that purely utility tokens or other types of tokens may fall outside the AML or securities regulatory regimes. The Cayman Islands is currently considering the Consumer Protection and Guarantees Bill,which is undergoing consultation[27] and may be delayed.[28]

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V. Distinctions in Treatment of Different Categories of Cryptocurrencies

No further guidance was located regarding the treatment of different types of cryptocurrencies.

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Prepared by Tariq Ahmad
Foreign Law Specialist
April 2019

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Last Updated: 12/30/2020