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1 Legal and enforcement framework
1.1 What basic regulatory regimes and points ought to
blockchain builders contemplate when constructing the governance
framework for the operation of blockchain/distributed ledger
know-how protocols?
The main regulatory regime to think about within the Cayman Islands
is the Virtual Assets (Service Providers) Act (‘VASP Act’).
The VASP Act regulates sure blockchain-related actions and
due to this fact could also be related for sure protocols.
The different regulatory regime that could be related for protocols
with an related token or which allow buying and selling of securities is
the Securities and Investment Business Act (SIBA).
1.2 How do the foregoing concerns differ for public and
non-public blockchains?
The Cayman Islands regulator, the Cayman Islands Monetary
Authority (CIMA), doesn’t differentiate between private and non-private
blockchains. However, the VASP Act and SIBA might be related for
private and non-private blockchains, relying on their traits
and operation. For instance, each a personal and public blockchain
might contain the issuance of a token which might be captured below
the VASP Act and might also be thought of a safety below SIBA.
Specialist recommendation is really helpful.
1.3 What basic regulatory points ought to customers of a blockchain
utility contemplate when utilizing a selected blockchain/distributed
ledger protocol?
The consumer of a blockchain or protocol ought to contemplate:
- the safety of the blockchain or protocol; and
- the recourse it might need within the occasion of a loss attributable to
hacking or some occasion detrimental occasion.
1.4 Which administrative our bodies are chargeable for imposing
the relevant legal guidelines and laws? What powers have they got?
CIMA (as outlined above) is the federal government physique tasked with
imposing the VASP Act and retains wide-reaching powers to manage
individuals and entities regulated pursuant to the VASP Act.
1.5 What is the regulators’ basic method to
blockchain?
CIMA has usually been pretty open and pleasant in its method
to blockchain, whereas on the identical time adopting a level of warning
with a view to keep the very excessive requirements of the monetary
companies business.
1.6 Are any business or commerce associations influential within the
blockchain area?
The most influential business physique is the Cayman Islands
Blockchain Association, whose acknowledged purpose is to “promote
all the pieces blockchain associated within the Cayman Islands”.
2 Blockchain market
2.1 Which blockchain purposes and protocols have turn into
most embedded in your jurisdiction?
The principal blockchain purposes which have turn into embedded
within the Cayman Islands relate to digital property and cryptocurrencies
– particularly:
- governance and utility tokens;
- buying and selling and alternate platforms; and
- decentralised finance and non-fungible tokens.
2.2 What potential new purposes/protocols are most actively
being explored?
In the Cayman Islands, a variety of purposes and
protocols are being explored, with decentralised autonomous
organisations the preferred given the existence of the Cayman
Islands basis firm.
2.3 Which industries inside your jurisdiction are making
materials investments throughout the blockchain area?
Many service suppliers (eg, attorneys, accountants, company
service suppliers) are investing time and assets in having the ability
to grasp, advise on and facilitate newer blockchain
purposes by way of the availability of essential infrastructure and
assist. There are additionally particular anti-money laundering and
compliance companies for cryptocurrency-related tasks.
2.4 Are any initiatives or governmental programmes in place to
incentivise blockchain improvement in your jurisdiction?
Aside from the Virtual Assets (Service Providers) Act mentioned
inquestion 1, there are numerous organisations and our bodies seeking to
appeal to expertise within the Cayman Islands, together with:
- Cayman Enterprise City, which facilitates entry into the
particular financial zone; and - Tech Cayman.
3 Cryptocurrencies
3.1 How are cryptocurrencies and/or digital currencies outlined
and controlled in your jurisdiction?
The Virtual Assets (Service Providers) Act (‘VASP Act’)
governs any entity that points digital property or gives sure
digital asset companies.
The VASP Act’s implementation is happening over two phases
and started in October 2020. Phase 1 introduced into pressure the
anti-money laundering, counter-terrorist financing of terrorism,
compliance and supervision provisions of the VASP Act.
Phase 2 has but to return into pressure. When carried out, Phase 2
will introduce further licensing necessities relevant to
custody companies and buying and selling platforms and can present for sandbox
licences.
The VASP Act defines ‘digital property’ as “a digital
illustration of worth that may be digitally traded or transferred
and can be utilized for cost or funding functions however doesn’t
embody a digital illustration of fiat currencies”. In this
regard, the VASP Act distinguishes between digital property and
‘digital service tokens’, that are outlined as
“digital representations of worth which aren’t transferable
or exchangeable with a 3rd occasion at any time and contains digital
tokens whose sole operate is to supply entry to an utility
or service or to supply a service or operate on to its
proprietor”.
The VASP Act requires all digital asset service suppliers
(VASPs) to register or receive a licence (as relevant). A
‘digital asset service’ is outlined because the issuance of
digital property or the enterprise of offering one among extra of the
following companies or operations for or on behalf of a pure or
authorized particular person or authorized association:
- alternate between digital property and fiat currencies;
- alternate between a number of different types of convertible digital
property; - switch of digital property;
- digital asset custody service; or
- participation in, and provision of, monetary companies associated
to a digital asset issuance or the sale of a digital asset.
3.2 What anti-money laundering provisions apply to
cryptocurrencies?
Under the Proceeds of Crime Act (2020 Revision) and the
Anti-Money Laundering Regulations (2020 Revision), and their
relevant steerage notes (collectively, ‘the AML legal guidelines’), any
particular person, fashioned, registered or based mostly within the Cayman Islands
conducting “relevant financial business” is topic to
numerous obligations aimed toward stopping, figuring out and reporting
cash laundering and terrorist financing. VASPs should adjust to
the AML legal guidelines.
The necessities embody (however should not restricted to) the
following:
- appointing a managerial degree worker as an AML compliance
officer (who should be authorized by the Cayman Islands Monetary
Authority (CIMA) below the VASP Act); - appointing a managerial-level worker because the money-laundering
reporting officer and a deputy for a similar; and - implementing complete procedures to make sure that shoppers
are correctly recognized, dangers assessed and requisite information
maintained.
3.3 What shopper safety provisions apply to
cryptocurrencies?
Aside from the necessities of the VASP Act, which gives a
degree of shopper safety, CIMA has prior to now made statements
regarding the operation of sure exchanges from the jurisdiction
the place these exchanges might have been working with out licences or
registration.
3.4 How are cryptocurrencies handled from a tax
perspective?
No Cayman Islands taxes at present apply to cryptocurrencies.
3.5 What regulatory necessities apply to a cryptocurrency
dealer/alternate?
No regulatory necessities apply to a person who’s buying and selling
cryptocurrencies on his or her personal behalf, offered that she or he
isn’t providing any digital asset companies as outlined below the
VASP Act. An alternate working as a enterprise could also be topic to the
VASP Act and due to this fact might want to register as a ‘registered
particular person’ or receive a licence below the VASP Act.
3.6 How are preliminary coin choices and securities token
choices outlined and controlled in your jurisdiction?
On the idea that the coin being supplied falls throughout the
definition of a ‘digital asset’ as outlined in query 3.1,
and that the preliminary coin providing falls throughout the definition of
an ‘issuance of digital property’ as set out in query 3.1,
the entity conducting the issuance can be required to register as
a ‘registered particular person’ below the VASP Act.
A securities token providing could also be regulated by each the VASP
Act and the Securities and Investment Business Act (SIBA). This
would be the case the place the token falls throughout the definition of a
‘digital asset’ as set out in query 3.1 and the
definition of a ‘safety’ as set out in Schedule 1 of
SIBA. Currently this could require the issuing entity to turn into
regulated below each acts; nevertheless, a waiver course of is anticipated to
be launched whereby regulation below each regimes shouldn’t be
required.
Once the waiver provisions are introduced into pressure, CIMA might
grant a waiver to any particular person already licensed below one other
regulatory act (eg, SIBA). Section 16 of the VASP Act expressly
gives that CIMA might difficulty such waiver if it determines that:
- the digital asset service doesn’t materially change the character
of the exercise for which the present licensee is already
licensed; and - the supervision and oversight in relation to that licensee is
enough to incorporate the digital asset service carried on by
it.
The aforementioned waiver provision within the VASP Act seems
designed particularly to handle a securities token providing
scenario and in that context, have been the entity already regulated by
SIBA, it might apply for a waiver from the VASP Act (or vice
versa).
4 Smart contracts
4.1 Can a wise contract fulfill the authorized necessities of a
authorized contract below the legal guidelines of your jurisdiction? What can be
thought of when making this dedication?
While there isn’t a Cayman Islands precedent addressing this
query, we see no cause why a wise contract couldn’t be
enforceable as a authorized contract below the legal guidelines of the Cayman
Islands.
4.2 Are there any regulatory or governmental pointers or
insurance policies inside your jurisdiction which give steerage on
regulating/defining sensible contracts?
There aren’t any regulatory or governmental pointers concerning the
enforceability of sensible contracts. However, the Electronic
Transactions Act (2003 Revision) helpfully gives that that the
provide and acceptance of a contract could also be expressed by way of
digital file. On the face of it, this could counsel that sensible
contacts are enforceable below Cayman Islands regulation.
4.3 What components of conventional contract may sensible contracts be
capable of exchange?
Aspects of contracts which require third-party involvement might
be replaceable by sensible contract. Escrow preparations and
notification provisions are two apparent examples. Certain insurance coverage
contracts will also be improved upon by means of sensible contracts
the place set off occasions and pay-outs will be hardcoded.
4.4 What components of conventional contracts may sensible contracts
be unable to exchange?
Due to their self-executing nature, the doable outcomes of a
sensible contract are sometimes restricted to being binary. The dangers of
an unintended consequence will be excessive if the sensible contract itself
accommodates errors or has not been correctly coded. In addition, frequent
but subjective phrases (eg, ‘good religion’) are incapable of
being included into sensible contracts.
4.5 What points may current themselves in your jurisdiction
with regard to judicial enforcement of sensible contracts?
No particular points have offered themselves earlier than the courts
within the Cayman Islands. However, points which may come up are seemingly
to centre on the best way by which a wise contract is likely to be undone or
amended.
4.6 What are some sensible concerns that events ought to
contemplate when drafting a wise contract?
Given that sensible contracts are immutable, this can be very
necessary to think about intimately all features of the contract earlier than
executing it. Such concerns embody:
- efficiency measures;
- pricing metrics;
- discover;
- execution authority (together with the potential use of
multi-signature mechanisms for added safety); and - pockets addresses.
4.7 How will the foregoing concerns differ when sensible
contracts are operating on a personal versus public blockchain?
Presumably a personal blockchain can be extra amenable to alter
and alteration, and due to this fact points which might come up could also be extra
simply resolved for a personal blockchain in contrast with a public
blockchain (which can seemingly require the consensus of a a lot
bigger group).
5 Data and privateness
5.1 What particular challenges or issues does blockchain
current from a knowledge safety/privateness perspective?
The Cayman Islands has carried out information safety laws
largely based mostly on the UK/EU requirements of the General Data Protection
Regulation (GDPR).
The GDPR and different information safety legal guidelines are constructed round
the notion that centralised entities ought to management and course of
private information, with statutory obligations regarding attributed to
‘information controllers’ and ‘information processors’.
This method is basically at odds with blockchain’s
decentralised nature, making it onerous to reconcile present information
safety legal guidelines with blockchain’s different principal
traits – that’s:
- the shortage of centralised management and storage;
- the immutability of the blockchain; and
- the storage of information endlessly.
The following principal points come up:
- It is usually troublesome (if not unattainable) to determine inside a
blockchain utility who the ‘information controllers’ and
‘information processors’ truly are for the needs of
compliance with information safety laws. - Stakeholders within the blockchain area might have a unique
perspective to anonymity and pseudonymity, which has an affect on how
information safety and privateness legal guidelines can (or ought to) apply. - The international participation in blockchain purposes (eg, within the
buying and selling of cryptocurrencies) implies that transactions are sometimes
performed on a cross-border foundation, which raises questions of: -
- whether or not any restrictions may apply to the switch of
private information to a different jurisdiction; or - whether or not that different jurisdiction has equal information safety
or privateness laws.
- whether or not any restrictions may apply to the switch of
- It should additional be thought of whether or not, in a blockchain
utility, the usage of private information is for official
functions. - An particular person’s ‘proper to be forgotten’ is
troublesome to reconcile with the blockchain’s immutable nature
– a knowledge topic might discover his or her private information encased
onto a blockchain endlessly.
5.2 What potential benefits can blockchain provide within the information
safety/privateness context?
The space of information safety/privateness on which blockchain might
seemingly have the most important constructive affect is the recording and
retention of anonymised information. The means to constantly replace
and file necessary information and statistics (eg, medical journals,
authorities statistics) might provide the power to make sure that such
info is public, simply accessible, auditable and on the identical
time safe and uneditable. This has many potential advantages
– one among which is that an individual needn’t rely a on a 3rd
occasion to supply protected conserving of necessary information.
6 Cybersecurity
6.1 What particular challenges or issues does blockchain
current from a cybersecurity perspective?
Private keys: Private keys are used to work together
with the blockchain and, in distinction to consumer passwords, can’t be
restored. If a consumer loses the non-public key, all information encrypted with
it’ll most probably be unattainable to get well. This will be mitigated
by means of third-party custody companies; albeit that in actuality,
this passes the duty of making certain safekeeping to the third
occasion.
Hacking: Like all know-how, blockchain
purposes are vulnerable to hacking or being compromised. This danger
will be mitigated by means of third-party custody options;
nevertheless, these suppliers can themselves be hacked.
Out-of-date software program/vulnerability protection:
The quick tempo of the blockchain area implies that it’s usually
troublesome to maintain blockchain software program up to date. In the identical vein, it
is difficult to maintain monitor of safety updates to enterprise blockchain
software program as a result of there’s a lack of protection on related nationwide
databases.
6.2 What potential benefits can blockchain provide within the
cybersecurity context?
Blockchain purposes provide the next main benefits in
the cybersecurity context:
- Secure information storage and processing: Blockchain information are
immutable and any change recorded on the blockchain is clear
and non-removable. Therefore, information saved on a blockchain is
protected higher than conventional digital or paper-based
information. - Transfer of information in a safe method: Blockchain facilitates
quick and safe transactions of information and funds. Features corresponding to
sensible contracts permit for the automated execution of agreements
between a number of events. - Traceability/transparency: All blockchain transactions are
digitally signed and time stamped, so members can hint
transaction historical past and monitor accounts at a time limit. - User confidentiality: The confidentiality of blockchain community
members is excessive as a result of public key cryptography that
authenticates customers. - No single level of failure: Permissionless blockchains are
decentralised so the failure or compromise of a single node will
not compromise the operation or safety of the blockchain as a
complete.
6.3 What instruments and measures might be carried out to mitigate
cybersecurity danger?
The only device we’re conscious of that may assist to
mitigate cybersecurity danger (in all blockchains, however particularly
in new and due to this fact extra centralised chains) is a safety audit.
In quick, this can be a course of whereby a blockchain safety entity is
contracted to run a rigorous evaluation of a blockchains code,
figuring out weak factors and permitting the builders to patch them
previous to (or after) a public launch. Many of the current
decentralised finance hacks and exploits might have been prevented
by an intensive safety audit.
7 Intellectual property
7.1 What particular challenges or issues does blockchain
current from an IP perspective?
One problem for mental property is that completely different
protocols can contain mental property in numerous methods, from
code to branding. For decentralised tasks, it isn’t at all times
clear the place the possession of the related mental property
sits.
7.2 What kind of IP safety can blockchain builders
receive?
Blockchain builders can make the most of the UK Copyright,
Design and Patents Act 1988, which has been prolonged to use (in
half) within the Cayman Islands. This can, for instance, afford
automated copyright safety for code. However, anybody seeking to
register any type of mental property within the Cayman Islands
ought to contemplate the potential affect of the International Tax
Co-operation (Economic Substance) Act.
7.3 What are the very best open-source platforms that might be used
to guard builders’ improvements?
Not relevant.
7.4 What potential benefits can blockchain provide within the IP
context?
It is predicted that blockchain know-how will rework the
manner by which IP rights are recorded or evidenced.
An instance of this development in motion is evidenced by the meteoric
rise in recognition in non-fungible tokens. While they have been
initially used to signify digital paintings, their use in different
industries is rising as a manner of offering digital
identifiability and authenticity for property of all varieties.
8 Trends and predictions
8.1 How do you assume the regulatory panorama in your
jurisdiction will evolve within the blockchain area over the following two
years? Are any pending adjustments at present being thought of?
The most blatant change would be the implantation of Phase 2 of
the Virtual Assets (Service Providers) Act (‘VASP Act’),
mentioned in query 3.1. Aside from that, it’s hoped that the
course of for changing into registered (and licensed when Phase 2 has been
carried out) will turn into extra streamlined and sure with regard
to timing.
8.2 What regulatory adjustments would you want your jurisdiction to
implement to additional advance the blockchain business?
The VASP Act as drafted is a strong piece of laws and
provides certainty to individuals wishing to function within the crypto area
within the Cayman Islands. One change that could be useful can be to
streamline processes in order that an applicant can have some degree of
certainty as to how lengthy it might take for an utility to be
authorized.
8.3 What is the biggest obstacle inside your jurisdiction to
the adoption of blockchain know-how?
Blockchain is sophisticated and comes with difficult technical
ideas and far jargon. It can due to this fact be troublesome for individuals
which might be fully unfamiliar with these to enter the area. That
is more likely to gradual the adoption total as service suppliers come up
to hurry.
9 Tips and traps
9.1 What are your high ideas for efficient use of blockchain
applied sciences in your jurisdiction and what potential sticking
factors would you spotlight?
The most necessary issue when contemplating providing blockchain
know-how to the general public from the Cayman Islands is to grasp
the potential affect of the Virtual Assets (Service Providers) Act.
We would at all times advocate acquiring product-specific recommendation as a
first step to grasp the regulatory implications of the product
earlier than enterprise any blockchain-related actions.
The content material of this text is meant to supply a basic
information to the subject material. Specialist recommendation needs to be sought
about your particular circumstances.
