Game Changer! Introduction of the regulation of Virtual Assets in the Cayman Islands 

On 25 May 2020 the Cayman Islands government passed The Virtual Asset (Service Providers) Law, 2020 (“VASP Law”), which provides a legislative framework for the conduct of virtual assets business in and from the Cayman Islands through requiring either (i) the registration or (ii) the licensing, of persons providing virtual asset services. The Cayman Islands already has the benefits of a being friendly jurisdiction for token issuers, cryptocurrency funds, and developers of other forms of digital assets. The Cayman Islands Government intends for the VASP Law to place the Cayman Islands with a cutting edge, robust framework which is in alignment with global regulatory standards, protect consumers, and meet the requirements of the Financial Action Task Force recommendations in respect of virtual assets. The new legal framework also makes the Cayman Islands an attractive destination for virtual asset service providers (“VASPs”), as it provides legal and regulatory certainty and supports innovation. For more information on the VASP Law, please see Part 1 of our previous Legal Update.

VASP Regime to commence in Phases

The Cayman Islands Government recently announced that the VASPs regulatory framework is being commenced in two phases. According to the Government, Phase one, which began 31 October 2020, will focus on anti-money laundering (AML) and countering the financing of terrorism (CFT) compliance, supervision and enforcement. Persons engaged in or wishing to engage in virtual asset services must be registered with the Cayman Islands Monetary Authority (“CIMA”) under the VASP Law. Persons engaged in or wishing to engage in virtual asset services currently holding a licence granted by CIMA under another regulatory law must notify CIMA under the VASP Law.

Provisions of the VASP Law which relate to enforcement, penalties or offences will be commenced on 31 January 2021. Persons who have not registered or notified CIMA by CIMA’s application deadline, but who are engaging in virtual asset services on and after 31 January 2021 will be subject to penalties and other enforcement measures. Registration/notification is via the VASP Application Form on CIMA’s REEFS online platform. CIMA will publish a date by which applications have to be received in order to be considered prior to 31 January 2021.

Phase two, which is 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 Virtual Asset (Service Providers) (Amendment) Bill, 2020, which will introduce provisions to better facilitate the phased commencement approach, was published on 29 October 2020 and will be presented at the next sitting of the Legislative Assembly.

For specific advice on the application of the VASP Law to your Cayman company or limited partnership, please contact any of:

E: gary.smith@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: santiago.carvajal@loebsmith.com

The U.S. Internal Revenue Service (“IRS”) has issued a Notice which postpones by six months, from 1 January, 2014 to 1 July, 2014, the effective date for certain requirements under the Foreign Account Tax Compliance Act (“FATCA”).

Among other things, foreign financial institutions (“FFIs”) will not be required to register with the IRS or, where applicable, enter into an FFI agreement with the IRS until June 30, 2014. The IRS will publish the first list of global intermediary identification numbers (“GIINs”) by June 2, 2014, with monthly updates to follow. In order for an FFI to be on the first published list of GIINs, it now will need to register by April 25, 2014.

A copy of the full text of the Notice can be found here.

http://www.irs.gov/pub/irs-drop/n-13-43.pdf

We will be issuing a full legal update on the implications of FATCA for Cayman Islands financial institutions once the terms of the Cayman Islands Government’s Model 1 Intergovernmental Agreement (“IGA”) have been finalized.

If you have any questions regarding the matters covered in the Alert above, please contact the Attorney below or your usual Loeb Smith & Brady contact:

Daniel Loeb
+44 207 183 7966
daniel.loeb@loebsmith.com

The economic substance test (“ES Test”) under the International Tax Co-operation (Economic Substance) Law (2020 Revision) as amended (the “ES Law”) requires that a “relevant entity” (i.e. a Cayman company including, an exempted company, SPC, or LLC) conducting a relevant activity:

i. conducts core income generating activities (“CIGA”) in relation to that relevant activity;

ii. is directed and managed in an appropriate manner in the Cayman Islands in relation to that relevant activity; and

iii. having regard to the level of relevant income derived from the relevant activity carried out in the Cayman Island

a. has an adequate amount of operating expenditure incurred in the Cayman Islands;

b. has an adequate physical presence (including maintaining a place of business or plant, property and equipment) in the Cayman Islands; and

c. has an adequate number of full-time employees or other personnel with appropriate qualifications in the Cayman Islands.

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A relevant entity is subject to the ES Test from the date on which the relevant entity commences a relevant activity unless the relevant entity was in existence prior to 1 January 2019 (i.e. the date when the ES Law came into force), in which case it must have started compliance with the ES Law by 1 July 2019. However, Cayman companies which are carrying on business as investment funds (or entities through which investment funds directly or indirectly invest or operate) and Cayman exempted limited partnerships and trusts are excluded from the scope of the ES Law. Cayman companies which are tax domiciled outside the Cayman Islands do not have to pass the ES Test but are nonetheless required to make a filing to show that they are tax domiciled overseas.

CIGA means activities that are of central importance to a relevant entity in terms of generating relevant income and must be carried on in the Cayman Islands. A relevant entity conducting a relevant activity may satisfy the ES Test by outsourcing the conduct of its CIGA to another person in the Cayman Islands. A relevant entity that outsources its CIGA must be able to monitor and control the carrying out of the CIGA.

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David M. Harby

 

Head of Commercial Disputes and Litigation
+1345 749 7494
david.harby@loebsmith.com

 

Loeb Smith is pleased to welcome David M. Harby to the firm as Head of Commercial Disputes and Litigation in the Cayman office, where his practice focuses on advising investment funds, financial institutions, shareholders, banks, public and private companies, and high net worth individuals.

 

David has previously practised at the English Bar and has extensive experience of corporate and commercial litigation and advocacy in England and the British Virgin Islands. His practice is primarily focused on cross-border corporate insolvency and restructuring, minority shareholder disputes and derivative actions, merger disputes, trust litigation and fraud and asset tracing. David also has a broad experience of alternative dispute resolution (ADR). He is an Associate Member of the Chartered Institute of Arbitration (ACIArb) and a mediator accredited by the Centre for Effective Dispute Resolution (CEDR).

 

 

David’s addition adds greater depth and expertise to the firm’s commercial disputes and litigation practice for its international clients.

 

BAR ADMISSIONS

• • Cayman Islands
  • British Virgin Islands

EDUCATION

• • University of London,Master of Laws (LL.M)
  • University of Birmingham, Bachelor of Laws (LL.B Hons)

 

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On October 25, Loeb Smith Attorneys’ Cayman Islands-based corporate lawyer Ramona Tudorancea will chair and moderate the panel titled “Caribbean Offshore Jurisdictions as Stepping Stones for Cross-Border Investments in the Americas“, scheduled as part of the Miami Fall Meeting of the Section of International Law of the American Bar Association and taking place at the JW Marriot Marquis, Met Ballroom 4, starting 4.30 PM.

Panelists include James H. Barrett from Baker & McKenzie LLP (Miami), Fernanda Bastos from Buhatem, Souza, Cescon, Barrieu & Flesch Advogados (Brazil), Pablo Falabella from Bulló Abogados (Argentina), Fabian A. Pal (Miami), and Kevin P. Scanlan from Kramer Levin Naftalis & Frankel LLP (New York).

The panel is sponsored by the Lawyers Abroad Committee (LAC), where Ms. Tudorancea currently serves as a Vice-Chair of Publications, and co-sponsored by the International M&A and Joint Venture Committee, the Latin America and Caribbean Committee, and the International Tax Committee.

Introduction

Initial Coin Offerings (ICOs), used during the past few years as a source of raising capital for early stage blockchain projects, have started to appear so frequently in the financial and/or IT media during the last couple of years that they now seem to be part and parcel of the new social economy. Ethereum launched itself in 2014 by way of an ICO and is now the second largest crypto-currency. According to an ICO-tracking initiative by Coindesk.com, coin and/or token sales worth in excess of US$2.2 billion have been recorded to date.

In brief, ICOs represent a type of unregulated crowdfunding built on blockchain technology and use of cryptocurrencies. Coins or tokens may be issued to represent virtual currencies, equity interests, voting rights, units which are part of a company-wide reward or bonus scheme, membership interests, pre-paid services or products, etc.. However, together with all legitimate ICOs came over 2,000 phishing, hacks or Ponzi schemes, which led to rising interest and warnings from regulators worldwide, especially since another criticism related to ICOs is that investors rush to buy coins/tokens in the hope of “flipping” them later in the market without any due diligence or regard to the value of the underlying product, project or company.

In the first issue of our series dedicated to FinTech-specific risk factors which may impact the Cayman Islands fund industry, we focused on risk factors related to bitcoin and other cryptocurrencies in general (see Top Ten Risks for the Crypto-Currency Investor: A View from the Cayman Islands). In this second issue, we will take a closer look at ICOs, including views from regulators in various countries, and discuss certain provisions of the existing Cayman Islands laws which may be triggered in connection with an offering of coins / tokens.

Loeb Smith Attorneys adds to its expanding Corporate Team with the hire of English Solicitor, Elizabeth Kenny.