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Understanding the New Rules of the Judicial Committee of the Privy Council

The Cayman Islands' Virtual Asset (Service Providers) (Amendment) Bill, 2024, published on 16 November 2024, represents a significant update to the jurisdiction’s regulatory framework for virtual assets. Designed to enhance oversight and align with global standards, the Bill introduces structural reforms across licensing, operational requirements, and enforcement mechanisms. Below is a detailed breakdown of its key provisions and implications:

 

Definitions and Scope Clarifications

 

The Bill modernizes terminology to reflect evolving industry practices and international norms. Key updates include:

 

  • Introducing "convertible virtual asset" to distinguish assets exchangeable for fiat currencies or other virtual assets.

  • Replacing "existing licensee" with "supervised person", broadening regulatory oversight to include entities under other financial laws.

  • Defining "originator" and "beneficiary" to strengthen anti-money laundering (AML) compliance for asset transfers.

  • These changes align the Cayman framework with FATF recommendations and reduce ambiguity for market participants.

 

Licensing and Supervision Enhancements

 

The Bill tightens licensing requirements and expands the Cayman Islands Monetary Authority’s (CIMA) supervisory powers:

  • Streamlined Licensing: Existing virtual asset custodians and trading platforms must apply for full licensure within 90 days of the Act’s commencement.

  • Conditional Approvals: CIMA may impose restrictions on licensees based on business size, complexity, or risk profile.

  • Licence Revocation: Licenses or registrations can be revoked for non-compliance, misleading practices, or threats to client interests.

 

Notably, the Bill eliminates refunds for application fees, emphasizing stricter due diligence.

 

  • Operational and Disclosure Standards Virtual Asset Service Providers (VASPs) face heightened operational obligations:

  • Audit Requirements: Mandatory audited financial statements for businesses with complex or high-risk profiles. Transparency Mandates: Providers must ensure accuracy in communications, disclosures, and advertising materials.

  • Governance: VASPs must appoint at least three directors, including one independent director, and notify CIMA of litigation within 30 days.

 

These measures aim to bolster accountability and reduce risks of mismanagement.

 

Custodial Safeguards Client asset protection is prioritized through:

 

  • Segregation: Mandatory separation of client and proprietary assets.

  • Fiat Currency Handling: Client fiat holdings must be stored in CIMA-regulated or low-risk jurisdiction banks.

  • Record-Keeping: Accurate, real-time records of client transactions and holdings.

 

These rules align with custodial standards in traditional finance, enhancing consumer confidence.

 

Regulatory Enforcement Tools

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CIMA gains expanded authority to investigate and penalize non-compliance:

 

  • Inspections: Authority to examine VASPs’ books, assets, and operations.

  • Cross-Regulatory Coordination: Power to direct VASPs to comply with other financial laws (e.g., securities or insurance regulations).

  • Anti-Fraud Measures: Framework to address misleading business practices, including public corrective directives.

 

These tools position CIMA to proactively address systemic risks and misconduct.

 

Transitional Provisions

 

The Bill includes phased implementation measures:

 

Pending Applications: Existing applications for registration or licenses will be processed under updated criteria. Sandbox Transition: Entities testing innovative services must transition to full licensure upon meeting predefined milestones.

 

These provisions ensure continuity while enforcing stricter standards.

 

Impact and Global Alignment

 

The amendments reflect the Cayman Islands’ commitment to balancing innovation with robust oversight. By aligning with FATF guidelines and EU’s Markets in Crypto-Assets (MiCA) regulations, the jurisdiction aims to:

 

  • Strengthen AML/CFT compliance through detailed transaction tracking.

  • Attract institutional investors by mirroring traditional financial safeguards.

  • Mitigate risks associated with virtual asset trading platforms and custodians.

 

Industry stakeholders, including Cayman Finance, have endorsed the reforms as critical for maintaining the jurisdiction’s competitiveness in the digital asset sector.

 

The Bill is expected to take effect imminently, with further guidance from CIMA anticipated to address operational nuances.

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