How to Legally Issue Tokens in the Cayman Islands
If you're reading this, you're probably considering issuing a token within your project. If you haven’t already, check out our general analysis of token types, their legal status, and the best jurisdiction for token issuance. Previously, we’ve explored whether the Cayman Islands is a suitable option for a DAO legal wrapper, and in this article, we examine the Cayman Islands as an option to register a Token Issuance & Distribution company.
The role of a Token Issuance & Distribution Company for a Web3 project
The process of issuing tokens can be classified in different ways. In some cases, there is an initial issue of tokens, when a certain number of tokens are issued and then their distribution is carried out. In other cases there is an "ongoing" issue of tokens, when tokens are issued as a result of their minting or token swap. Another important aspect of the classification of token issuances is the degree of centralization.
In some cases, tokens are issued centrally by the company, especially when it comes to security tokens, which act as a “blockchain-based virtual wrapper” for real assets or existing securities. In other cases, emission is done in a decentralized way, by an on-chain smart contract, which autonomously issues and burns tokens according to predetermined rules, ensuring the operation of tokenomics.
In each of these cases, the role of the Token Issuance & Distribution Company is to ensure compliance with legislation in the process of issuing and distributing tokens. This is achieved by obtaining the necessary token regulatory approvals and regulatory authorizations (such as VASP Authorization in the Caymans). Additional tasks of this company include signing a SAFT / Token Sale Agreement for the sale of tokens to investors and funds, obtaining a Token Legal Opinion and going through the process of listing a token on an exchange/launchpad/in wallets, as well as signing Token Liquidity Provision Agreements with such exchanges.
The regulator’s attitude to different token types in the Caymans
It should be noted from the outset that a certain legal framework for activity in the sphere of virtual assets has been established in the Cayman Islands by means of the Virtual Asset (Service Providers) Act, 2022, (VASPAct). This act completely regulates not only the issuance of virtual assets (tokens), but also any services provision in this sphere (e.g. exchange, custody and financial services in the sphere of virtual assets, etc.).
The VASPAct has a very broad definition for the term “virtual asset”, namely, “a digital representation of value that can be digitally traded or transferred and can be used for payment or investment purposes but does not include a digital representation of fiat currencies”.
Practical understanding of this definition suggests that it includes almost all types of tokens, including; utility tokens, security tokens, stablecoins, digital assets, such as NFTs (in certain circumstances), to name a few examples. It clearly does not include a digital representation of fiat currencies, which, from the practical point of view, would generally mean a virtual asset that represents a fiat currency such as a central bank digital currency (CBDC).
Utility tokens issuance
Under the VASPAct, utility tokens are referred to as “virtual service tokens”, and the definition of this term can be analyzed in two parts. One aspect of the definition is “a token whose sole function is to provide access to an application or service or to provide a service or function directly to its owner”, which many will recognize as the definition similar to that of a utility token. The second aspect of virtual service tokens under VASPAct is that it is “a digital representation of value which is not transferable or exchangeable with a third party at any time”. This means that any utility token which falls into the definition of a virtual service token–one that is not transferable or exchangeable with third parties–does not require any form of VASP authorization to enable it to be issued.
Security Tokens issuance
Above we noted that the category of virtual assets includes the security tokens, but, it is crucial to say that in case of security tokens issuance, the additional license from, or registration with, the Cayman regulator under the Securities Investment Business Act would be required (apart from registration under VASP Act). Therefore, if your token represents or can be converted into any of the classical security (such as stocks or bonds) or represent a derivative of any of such security, specific legal advice should be obtained prior to any issuance.
Cayman Regulatory Requirements for Token Distribution
As stated above, the legal framework of the Cayman Islands provides a very broad definition of a virtual asset, therefore, there is no need to review each type of token from the issuance point of view. We will focus only on the type of token issuance and their requirements.
Under the Virtual Asset (Service Providers) Regulations, 2020, enacted in compliance with the mentioned above VASPAct, “private sale” means a sale, or offer for sale, which is not advertised and is made available to a limited number of persons or entities who are selected prior to the sale by way of a private agreement.
In instances where your issuance is covered by this definition, you will be free from the registration with the Cayman Islands Monetary Authority (CIMA). CIMA is the main regulator in the sphere of virtual assets and, therefore, any tokens issued via a private sale may be done so without taking into consideration any additional compliance measures.
The VASPAct does not contain an explicit definition of the term “public sale”. As a result, it can be concluded that if the issuance is not covered by the definition of “private sale”, it should be deemed as public and the relevant registration will be needed.
The Cayman Islands’ legislation provides for quite a broad range of requirements for obtaining the registration, which, among others, includes the following:
- Substance and personnel qualification requirements. You must have a registered office in the Cayman Islands, with senior officers who have the relevant qualifications and also the beneficial owners (ie, the founders of the company) must also meet relevant standards to hold their position.
- Audit requirements. This includes an audit of your accounts and all anti-money laundering systems and procedures in place.
- Data protection requirements. You must take the necessary steps to protect and secure the personal data and virtual assets of the clients. Additionally, all communications relating to virtual asset services must be accurate.
- Compliance with AML requirements. AML (anti-money laundering) systems and procedures, as well the relevant officer with responsibility for executing these procedures, which combat money laundering, terrorist financing and proliferation financing, must be in place.
- Notification requirements. A notification to the regulator should be made in certain circumstances, such as the holding of, or the acquisition of, a controlling interest in another person engaged in virtual asset service.
- KYC requirements. When performing a transfer of virtual assets, the relevant KYC (Know Your Client) information must be collected, maintained and be available at the request of the regulator in compliance with the applicable AML laws).
In order to comply with these 6 requirements, certain actions should be performed, including the drafting of specific documentation. For example, you will need to draft policies (such as AML and cybersecurity policies) as well as engage an auditor and appoint an AML specialist.
All of these requirements outlined above make your public issuance of tokens in the Cayman Islands more complex and expensive but issuance will be fully in line with what is a relatively straightforward legal framework. This will be a very good sign for your investors, business partners, and business reputation.
Getting started with your token issuance on the Cayman Islands
The Cayman Islands and their legal framework are quite suitable for private token sales and for major reputable public token sales for projects with established teams, strategies and explicit business plans. For public sales within small startups, this jurisdiction may prove to be too expensive and complicated, but, as each project is unique, a final decision should be made following a thorough review.
To learn more about the Cayman Islands as an option for token issuance, and compare it with other jurisdictions that may be suitable locations for token issuance, book a Legal Discovery Session with one of the experts at Legal Nodes. During the 1-hour session, you will get:
- An intro to crypto-friendly countries–specifically which ones may be the best jurisdictions for your token issuance;
- An intro to token legal design to better understand all the implications of issuing a token; and
- A checklist of actions to help you successfully perform token issuance within your project.
Disclaimer: the information in this guide is provided for informational purposes only. You should not construe any such information as legal, tax, investment, trading, financial, or other advice.