Key takeaways
- With effect from 1 April 2025, the licensing regime under the VASP Act will be implemented, requiring those providing virtual asset custody services or operating virtual asset trading platforms to obtain a licence under the VASP Act.
- Existing VASPs performing licensable activities under the VASP Act must submit their licence applications within 90 days from 1 April 2025.
What do you need to know about the VASP implementation phases?
Background
The Cayman Islands introduced virtual asset legislation in 2020 to comply with global standards set out by the Financial Action Task Force in the form of the Virtual Asset (Service Providers) Act (the "VASP Act"). The VASP Act provides legal certainty and has contributed to the rapid growth of the virtual assets sector in the Cayman Islands, including a number of regulated trading platforms, custodians, broker-dealers, lenders and other service providers as well as tokenised investment funds, debt issuances and real assets. The Cayman Islands is also by far the leading jurisdiction for regulated digital asset funds and attractive to those wishing to establish foundation companies as legal wrappers for decentralised autonomous organisations. The implementation of the licensing regime has been eagerly awaited and follows industry consultation.
Registration
The VASP Act introduced a registration regime for any person carrying on a "virtual asset service" in the course of a business using a Cayman Islands entity or otherwise from within the Cayman Islands (each a "virtual asset service provider" or "VASP"). This was introduced with effect from 31 October 2020, with the associated enforcement provisions coming into force on 31 January 2021.
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:
a. exchange between virtual assets and fiat currencies;
b. exchange between one or more other forms of convertible virtual assets;
c. transfer of virtual assets;
d. virtual asset custody service; or
e. participation in, and provision of, financial services related to a virtual asset issuance or the sale of a virtual asset.
The registration regime (but not the licensing regime), as applicable to virtual asset custody providers and trading platform operators and other virtual asset services, was implemented with effect from 31 October 2020.
Licensing
The licensing regime of the VASP Act will be implemented with effect from 1 April 2025. Virtual asset custody providers and trading platform operators must now obtain a licence.
The licensing regime will include a number of additional requirements, including:
• additional prudential requirements;
• additional disclosure requirements to clients (for example covering internal safeguards, insurance arrangements, grievance procedures);
• segregation of client assets from proprietary assets; and
• additional supervision and enforcement powers for the Cayman Islands Monetary Authority ("CIMA").
All applicants must submit cybersecurity plans, risk management strategies, and details on how they intend to prevent asset loss or theft, reinforcing efforts to address vulnerabilities in the virtual asset sector, and, in particular:
a. custody providers must disclose the types and values of digital assets they hold and provide a clear explanation of their custodial purpose; and
b. trading platform operators will be required to report their projected revenue and disclose the physical location of their supporting hardware, with the intention of enhancing regulatory transparency and jurisdictional oversight.
The licensing requirements provide a comprehensive and workable framework. For new applicants applying for a custody provider licence, CIMA application fees start from KY$30,000 (approximately US$36,000), and application fees for a trading platform licence start from KY$50,000 (around US$60,000).
Existing VASPs performing licensable activities under the VASP Act must submit their licence applications within 90 days from 1 April 2025. CIMA intends to issue additional regulatory measures and guidance on the application process and required documentation.
Next steps
The implementation of the licensing regime should help to consolidate the Cayman Islands as a leading and well-established jurisdiction for VASPs, with effective regulation and high standards of compliance.
Walkers has advised on the majority of the existing VASP registrants and accordingly is well placed to advise new applicants or existing registered VASPs on the enhanced application process. We note, in particular, the 90 day period from 1 April 2025 for existing VASPs performing licensable activities to submit licence applications, and recommend early action to plan and implement compliance with the new requirements.
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