Commencement Of The Virtual Assets Service Providers (VASP) Regime – Technology

The Virtual Asset (Service Providers) Act, 2020 (VASP
Act) came into effect on 31 October 2020 and provides a
framework for the regulation of virtual asset service providers
(VASPS).

Cayman has been a particularly attractive jurisdiction for the
establishment of virtual asset service providers and, up until now,
service providers have operated within the existing regulatory
regime.

The new framework provides greater certainty, ensures compliance
with internationally recognised standards and provides an exchange
of information with the Cayman Islands Monetary Authority
(CIMA) which will enable the regulator to stay
abreast of industry practice and support development.

By 31 January 2021, entities which are engaged in or wishing to
engage in virtual asset services must register with CIMA under the
VASP law. Entities which are engaged in or wishing to engage in
virtual asset services and are currently holding a license granted
by CIMA under another regulatory authority must notify CIMA under
the VASP Law.

What are virtual assets?

A virtual asset is defined as “a digital representation of
value that can digitally traded or transferred and can be used for
payment or investment purposes but does not include a digital
representation of fiat currencies”.

The definition is wide and adopts the definition used by FATF
and will include all cryptocurrencies, security tokens and utility
tokens and commodity or fiat-backed stablecoins. We do not yet have
clear guidance on the definition of “digital representation of
fiat currencies” which are excluded, but this is likely to
apply to government-issued virtual currencies and not stablecoins,
which are backed by fiat but which do not directly represent fiat
and which would fall within the definition of “virtual
asset”.

What is a virtual asset service?

Virtual asset service is:

• the issuance of virtual assets; or




• the business of conducting one or more of the following
  activities or operations for or on behalf of another person:

1. exchanging between virtual assets and fiat currencies;




2. exchanging between one or more other forms of convertible
   virtual assets;




3. transferring virtual assets;




4. safekeeping or administrating virtual assets or instruments
   enabling control over virtual assets; and




5. participating in and providing financial services related to an
   issuers offer or sale of a virtual asset.

Investment funds may fall within the VASP regime if they accept
in kind subscriptions or redemptions.

What do virtual asset service providers need to do?

The VASP Act requires all VASPS carrying on, or purporting to
carry on, virtual asset service in or from within the Cayman
Islands to:

• register with CIMA;




• obtain a virtual asset service licence;




• if an existing licensee, be granted an exemption by CIMA from
  the obligation to be licenced under the VASP Act; or




• obtain a sandbox licence.

VASPS which provide virtual asset custody services or operate a
virtual asset trading platform are required to apply for a virtual
asset service licence. Other types of VASP will only be required to
register, but will not need to obtain a licence unless CIMA directs
them to apply for a licence or a sandbox licence.

VASPS which are issuers of virtual assets will be required to be
registered. The requirement only applies if virtual assets are
issued to the public. Although there is no definition of this,
issues to directors, shareholders and employees are likely to be
excluded. Following registration, a VASP which issues virtual
assets must submit a request to CIMA for approval of the issuance
which will be subject to a threshold of fiat that may be raised
through such issuance. Issues over the threshold will need to be
conducted through a licensed exchange. The threshold has not yet
been determined.

VASPS already licensed or registered by CIMA must notify CIMA
and may be required to obtain a virtual asset service licence. In
addition, CIMA may direct a VASP to obtain a virtual asset service
licence.

Ongoing obligations

VASPS are required to:

• prepare accounts annually and make them available for
  inspection by CIMA;




• ensure that its senior officers, trustees and beneficial owners
  are fit and proper;




• take steps to protect and secure personal data of clients;




• ensure communications relating to virtual assets are
  accurate;




• comply with the Anti-Money Laundering Regulations (2020
  Revision) (AML Regs) and other laws relating to anti-money
  laundering, proliferation financing and countering the financing of
  terrorism (AML/CFT);




• put in place anti-money laundering systems and procedures;




• designate employees to fulfil the roles of AMLCO, MLRO and
  DMLRO that have the responsibility for procedures for combating
  money laundering, terrorist financing, proliferation financing and
  targeted financial sanctions;




• have a registered office in the Cayman Islands;




• provide documents and information required by CIMA; and




• notify CIMA of:
  
  • any licence or registration in another jurisdiction;

  
  

  • the opening of an office or establishing a physical presence in
    another jurisdiction;

  
  

  • penalties imposed or enforcement actions taken against it in
    another jurisdiction; or

  
  

  • the holding of or the acquisition of a controlling interest in
    another person or legal arrangement engaged in virtual asset
    service.

Following the amendments to the Proceeds of Crime Act (as
revised) and the AML Regs made in 2020, VASPS are subject to
Cayman’s anti-money laundering, proliferation financing counter
terrorist financing and targeted financial sanctions. Tailored
guidance has been issued by CIMA in relation to the compliance of
VASPS with the AML/CFT regime.

Custody providers and virtual asset trading platforms are also
subject to additional obligations including capital adequacy
requirements.

Phased approach

The VASP framework is being implemented in phases.

Phase one commenced on 31 October 2020, and is focused on AML
and CFT supervision and enforcement. It states that:

• Persons engaged in or wishing to engage in virtual asset
  services must be registered by CIMA under the VASP Law by 31
  January 2021.




• Persons engaged in or wishing to engage in virtual asset
  services currently holding a licence granted by CIMA under another
  regulatory authority must notify CIMA under the VASP Law by 31
  January 2021.

Persons who have not registered or notified CIMA by the
authorities application deadline, but who are engaging in or
wishing to engage in virtual asset services on and after 31 January
2021 will be subject to penalties and other enforcement measures.
Registration and/or notification is through the CIMA REEFs online
platform.

Phase two, expected to begin in June 2021, will bring into force
the remaining provisions of the VASP Law, including the licensing
requirement for virtual asset custodians and trading platform
operators, the sandbox licensing regime and other elements of the
VASP Law.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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