The Cayman Islands have recently overhauled their regulatory framework for virtual assets, implementing stricter licensing requirements for service providers. This move aims to bolster consumer protection and align with international standards. The new regulations are set to take effect on April 1, 2025.
New Licensing Regime
Under the revised Virtual Asset (Service Providers) Act (VASP Act), virtual asset custody providers and trading platform operators must now obtain a license. A transitional period of ninety days from April 1, 2025, allows existing Virtual Asset Service Providers (VASPs) to submit their license applications to the Cayman Islands Monetary Authority (CIMA). Entities performing activities that require both registration and licensing under the VASP Act will only need a license. (spencer-west.com)
The new licensing regime introduces various additional requirements for VASPs, including enhanced prudential standards, segregation of client assets from proprietary assets, and improved disclosure obligations to clients. Applicants must submit cybersecurity plans, risk management strategies, and details on how they intend to prevent asset loss or theft. (spencer-west.com)
Investor Identification, Introduction, and negotiation.
Governance and Operational Standards
VASPs are now required to appoint at least three directors, including one independent director without a vested interest in the VASP, to strengthen oversight and governance structures. Additionally, VASPs must ensure the accuracy of all disclosures, advertising materials, and communications related to their virtual asset services with clients and the public. (ogier.com)
Custody and Safeguarding Requirements
VASPs providing custodial services must segregate and safeguard client assets. CIMA can also require custodians to provide enhanced disclosures to clients regarding insurance arrangements, regulatory obligations, grievance procedures, third-party sharing of client information, and internal custodial governance arrangements. (ogier.com)
Financial Reporting and Regulatory Oversight
CIMA now has the discretion to require a registered VASP to provide audited financial statements if it determines they are necessary due to the business’s nature, size, and complexity, or if it has reasonable grounds to believe that the registered person has provided false or misleading accounts. CIMA also has enhanced powers to impose conditions on license and registration applicants based on the nature, risk, and scale of the applicant’s business, direct entities to cease and desist from activities that contravene the VASP Act, and impose penalties on VASPs who knowingly make, issue, or permit misleading representations to the public regarding their activities. (ogier.com)
Regulatory Sandbox and Special Economic Zone
The VASP Act introduces a sandbox license intended for providers of virtual asset services or other fintech services that utilize innovative technology or methods of delivery. A sandbox license provides flexibility, allowing CIMA to impose additional requirements or allow certain exemptions to cater to the relevant business. These licenses are temporary, available for a maximum of one year, during which CIMA will assess how best to regulate the business in the future, including whether legislative changes are required to further promote and monitor the use of the relevant innovation. (careyolsen.com)
Additionally, the Cayman Islands Government has been active in promoting the Special Economic Zone (SEZ) to those wishing to develop fintech-related products from the jurisdiction. The SEZ offers businesses focused on the fintech industry the opportunity to establish physical operations within the Cayman Islands in a more streamlined manner. It provides several benefits, including a simpler, more rapid, and cost-effective work permit process, concessions with respect to local trade licenses and ownership requirements, the ability to be operational within four to six weeks, and allocated office space. (careyolsen.com)
Enforcement Actions and Compliance
CIMA has broad enforcement powers under the VASP Act, which were expanded by the Virtual Asset (Service Providers) (Amendment) Act, 2024, representing a shift towards fuller prudential oversight for VASPs. Enforcement powers allow CIMA to apply to the court for injunctions or license revocation to protect customers or creditors, revoke a license or waiver, cancel a registration, and impose conditions on a license, registration, or waiver. CIMA may also levy administrative fines for regulatory breaches. (practiceguides.chambers.com)
The VASP Act contains a number of offenses, including for carrying out virtual asset services without the requisite registration or license, and vicarious liability provisions relating to acts of senior officers. No published penalties have yet been imposed on a VASP by CIMA, but similar powers have been used against traditional securities firms, underscoring real enforcement risk. (practiceguides.chambers.com)
In a recent example of soft enforcement, on April 11, 2025, CIMA issued a public notice naming Gate.io/Gate Global Corp as not registered or licensed in Cayman, cautioning the public against misrepresentations of regulatory status. (practiceguides.chambers.com)
These developments reflect the Cayman Islands’ commitment to creating a robust and transparent regulatory environment for virtual assets, aiming to attract reputable service providers while safeguarding consumers and maintaining the jurisdiction’s integrity in the global financial landscape.
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