Virtual Asset Regulation in the Cayman Islands and the Isle of Man
As leading offshore financial centers of excellence and recognised digital hubs, it is no wonder the Isle of Man and the Cayman Islands boast attractive fintech sectors. They have worked hard to develop their prestigious reputations in transparent finance over the years and have done this by developing top-tier regulation. In the emerging digital asset sector, they have continued to demonstrate this and have been fast-movers in implementing regulation which is a testament to their credibility and pro-active Governments.
In this article, we outline the fintech markets and delve into the regulation on virtual assets in the Isle of Man and the Cayman Islands.
Fintech in the Cayman Islands
As a major global financial centre, the Cayman Islands has been long regarded as a top tier jurisdiction for banking, capital markets, investment vehicles, trusts and fiduciary services. In recent years, it has been categorised as a global hub for digital innovation and technology, its advanced infrastructure and competitive fiscal regime are stand out factors, however with the support of the jurisdictions ambitious Government, they have created a digital eco-system for business thrive.
An example is the Cayman Tech City, which is a special economic zone set up by Cayman Enterprise City. Ranked as the number 1 free zone in the Americas and 5th globally, it is a recognised sphere for innovation and its environment attracts the most cutting edge start-ups and houses some of the biggest blockchain and fintech companies in the world.
As a result, the Cayman Islands fintech sector has developed rapidly, with the ability to generate active business income offshore; digital asset-related activities that take place include crypto exchange services, fund-issuing tokens and initial coin offerings (ICO). It even housed the largest ICO in the world, which is a testament to its leading position in the sector.
It has also come apparent that business owners are seeking jurisdictions based on the quality of life they provide. As for the Cayman Islands, it has one of the highest living standards in the world; its vibrant cultural community is safe, friendly and welcoming. It’s beautiful tropical environment boasts a thriving tourist sector and excellent healthcare, education and real estate.
Regulation in the Cayman Islands: The Virtual Asset Service Provider Act
In 2020, the Cayman Islands introduced The Virtual Asset (Service Providers) Law (VASPs), a legislative framework for the registration and licensing of virtual asset services from a Cayman Islands entity or from within the Cayman Islands. In this case, they are recognised as virtual asset service providers (“VASPs”).
In keeping with the jurisdictions transparent reputation, the Government introduced the VASP regulation to instil compliant measures on digital assets; this mitigates any harmful risk to the jurisdiction, businesses and consumers.
A virtual asset can be defined as a digital representation of value that can be digitally traded or transferred, which can be used for payment or investment purposes. Financial Action Task Force (FATF) defines these digital representations of value as cryptocurrencies, security tokens, utility tokens and commodity or fiat-backed stablecoins. A digital representation of a fiat currency is excluded.
As a framework utilised to regulate the use of digital assets, the VASP act is required for any virtual asset service; this can be defined as storing, issuing, transferring or exchanging virtual assets. It also applies to engaging or providing financial services related to an offer or sale of a virtual asset.
The initial process requires any entity that wishes to, or is engaged in virtual asset services to register as a VASP under the VASP Act with the Cayman Islands Monetary Authority (“CIMA”). Once this is complete, it is possible to apply for a licence under the VASP Act.
The Cayman Islands Monetary Authority (CIMA) have begun drafting a second phase of the VASP Act, which includes a consultation on the obligations for the provision of services by virtual-asset custodians and virtual-asset trading platforms. The regulation aims to provide clarity and guidance for both the CIMA and virtual-asset providers on the rules required.
The Cayman Islands aims to, with the implementation of the VASP, demonstrate the jurisdiction as an attractive place to operate, by providing a clear framework for providers and the reassure of compliance with international standards. The robust regulation and stable political, legal and economic landscape is an ideal environment for an innovative fintech business.
The jurisdiction has also covered regulation for forward technological development, which is defined as a sandbox licence. Depending on a VASPs nature of operations, The Cayman Islands Monetary Authority will assess the virtual asset service to see if it will be utilising technology, or innovation in technology that requires an additional assessment. A sandbox environment encourages businesses to the jurisdiction as it allows businesses to test their practices, which is useful analyse performance before it achieves conditional approval from regulators. This attracts many fintech start-ups to the jurisdiction.
As a requirement, VASPs in the Cayman Islands must have a registered office and have appointed MLRO, AMLCO and DMLRO officers to carry out AML procedures. As a leading Corporate Service Provider in the fintech space on the Isle of Man, we have been assisting clients with incorporating fintech structures for many years, including registered office services and an appointed MLRO.
Our team are experienced in the fintech sector, and have assisted clients on a number of innovative cases.
Fintech in the Isle of Man
Another prestigious jurisdiction which is regarded globally for digital innovation is the Isle of Man. At the forefront of the industry, the jurisdiction holds a developed fintech sector which is a diverse landscape of businesses utilising virtual assets, such as virtual asset payment service providers, virtual asset exchanges and blockchain startups. An established financial centre with a competitive fiscal regime, the jurisdiction also offers advanced infrastructure that supports technology based innovation.
The forward-thinking Government is a driving force behind the jurisdictions fintech sector, they have created a blockchain office and sandbox testing environment, which has attracted many innovative start-ups in the space. They push for new exploration and creativity in financial innovation by running fintech initiatives, an example is The Fintech Innovation Challenge. In collaboration with Digital Isle of Man, Finance Isle of Man and the Isle of Man Financial Services Authority, applicants will share a business proposition which is an innovative solution, with one winning the opportunity to bring their business idea to the market.
The Government develops the jurisdictions online presence in the fintech sector by providing information on the licence application, legislative and regulatory framework. They also encouraging new business in the space by offering various funding options.
The jurisdictions regulator, The Isle of Man Gambling Supervision Commission, became the first jurisdiction in the world to issue a Blockchain gambling business with a gambling licence and the first jurisdiction to regulate token based software suppliers. Such developments validate the Isle of Man’s leading position in the fintech sector.
Regulation in the Isle of Man: The Designated Business Act
Globally regarded for robust regulation, the Isle of Man was one of the first jurisdictions in the world to bring in regulation on any businesses carrying out activity on virtual assets. In 2015, they introduced the registration regime called the Designated Business Act, a testament to the jurisdictions credibility and excellent standards, the purpose of the regulation was to ensure compliant AML/CFT measures on the use of virtual assets to maintain the jurisdictions transparent reputation.
The Isle of Man Financial Services Authority has defined convertible virtual currency activity as; issuing, transmitting, transferring, providing safe custody or storage of, administering, managing, lending, buying, selling, exchanging or otherwise trading or intermediating convertible virtual currencies, including cryptocurrencies, virtual assets or similar concepts where the concept is accepted by persons as a means of payment of goods or services, a unit of account, a store of value or a commodity.
In order to set up a fintech business on the Isle of Man, it must register under the Designated Businesses Act (2015) which applies to all businesses and professions carrying out activities that fall under the definition of a “designated business” to register with the Isle of Man Financial Services Authority (FSA). Within the category of designated business activities includes ‘Convertible Virtual Currencies’.
To do this, a business must register a business representative person on the DNFBP Portal and provide the following information; the business details, including the activities and business structure, a risk assessment form including the procedures, business profile and client base, and a specified person questionnaire including details of the specified persons associated with the business. A full user guide on this can be found on the FSA website. Once this is complete, the Authority will decide if the business falls within the “designated business” requirements to be registered under the Act.
An initial registration fee is required and the business will thereafter be required to pay annual fees if the business is overseen by the Authority. Or the designated business is overseen by a professional body, which will require annual fees for their services.
Affinity Group’s Services
As a professional corporate body in the Isle of Man, we have been assisting clients in the fintech sector for many years. Our services include support with the Designated Business Act 2015 application and the ongoing fiduciary services thereafter. Our incorporation services include corporate structuring, bank account opening, accounting and preparing financial statements. We also assist with regulatory compliance and can provide a Money Laundering Reporting Officer (MLRO) and Data Protection Officer (DPO). We can also assist with specific fintech activities such as, ICO consulting and advisory, white paper drafting and the development of tokens and smart contracts.
If you would like to know more on our Fintech services or have an enquiry, please visit our contact page here, or alternatively email us at info@affinityco.com