Cayman Islands consults on rules for virtual-asset service provision

Monday, 07 February 2022
The Cayman Islands Monetary Authority (CIMA) has begun a consultation on draft rules and guidance for the provision of services by virtual-asset custodians and virtual-asset trading platforms
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It marks the second phase of the virtual asset service provider (VASP) regime in the jurisdiction, following the January 2021 introduction of a compulsory licensing regime for VASPs under the Virtual Asset (Service Providers) Act 2020 (the VASP Act).

The proposed rule supports the regulatory requirements in the VASP Act by setting out obligations for both custodians and trading platforms in areas such as governance, conduct of business, prudential requirements, risk management, IT and cybersecurity. The rule also separately ascribes obligations to trading platforms and persons providing virtual-asset custody services as appropriate to the nature of their business.

The consultation also makes jurisdictional comparisons of the proposed rules with those of the Bahamas, Bermuda, Gibraltar, Hong Kong, Liechtenstein and Malta, as well as the European Union's proposed regulation of markets in crypto-assets. ‘There are currently no harmonised international standards for the prudential regulation and supervision of virtual assets service providers’, says CIMA, noting that the approach to virtual assets and related activities varies significantly among the various jurisdictions. In some cases, jurisdictions have amended existing financial services regimes to bring virtual assets and related activities within their remit, others have introduced entirely new regimes to deal specifically with virtual assets or applied existing regulatory frameworks to virtual assets.

CIMA notes that the Cayman Islands proposals deal with fit and proper requirements, audit requirements, remuneration, conflicts of interest, full disclosure of fees and other related matters, risk warnings, appropriateness and suitability assessments, record-keeping and outsourcing.

The proposed rule and supporting guidance will ‘provide clarity and certainty’ on the expectations of CIMA in its supervision of VASP custodians and trading platforms, said CIMA. 'This is critical, particularly for an industry that has only recently been included within the Authority’s regulatory remit', it says.

CIMA does not expect that there will be any costs to the jurisdiction as a whole with the implementation of the measure, although it acknowledges that some VASPs may choose not to operate in the Cayman Islands due to the comprehensiveness of the regulatory requirements.

The Financial Action Task Force (FATF) has issued recommendations that address VASPs from an anti-money laundering (AML) perspective and these recommendations have already been adopted in CIMA's AML guidance notes.

Comments on the consultation are to be submitted by 7 March 2022.

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