The Cayman Islands Implements Phase Two of Virtual Asset Service Providers Legislation

The Cayman Islands has enacted significant amendments to the Virtual Asset (Service Providers) Act (VASP Act), effective on April 1, 2025, marking the start of Phase Two of its virtual asset regulatory framework.

These long-awaited changes now in effect will impact Virtual Asset Service Providers (“VASPs”), providing virtual asset custody and virtual asset trading platform services in or from the Cayman Islands by introducing new licensing requirements, governance standards, and operational protocols.

In addition, certain amendments will impact all VASPs through enhanced prudential requirements, minimum director requirements and fee obligations.

Under the amended VASP Act, entities providing virtual asset custody services or operating virtual asset trading platforms (both defined within the act) must obtain a license from the Cayman Islands Monetary Authority (“CIMA”). Existing VASPs engaged in these activities must submit their license applications within 90 days of the commencement date, i.e., by June 29, 2025, with such a registered person being permitted to continue operations whilst the license application is being reviewed. This move aims to enhance regulatory oversight and align with international standards.

The Virtual Asset (Service Providers) (Amendment) Regulations 2025 sets out the information and documentation requirements for the license application.

All other VASP activities as defined under the VASP Act will still require VASP registration, unless they are a supervised person granted a waiver under the VASP Act. 

The amendments introduces enhanced governance measures, requiring VASPs to appoint at least three directors, including one independent director who does not have a vested interest in the VASP. This requirement is designed to strengthen oversight and governance structures within VASPs.

VASPs must ensure the accuracy of all disclosures, advertising materials, and communications related to their services. Additionally, they must segregate client assets from proprietary assets, enhancing consumer protection and trust in virtual asset transactions.

The amendments also revise the fee structure for VASPs. For instance, the application fee for a virtual asset service license is set at KYD 5,000. Annual fees vary based on the type of service and the revenue generated, with specific fees outlined for different categories of services and entities.

The impact these legislative amendments are expected to have in the financial services sector in the Cayman Islands include:

• Enhanced Compliance Obligations: Financial institutions involved in virtual asset services will need to invest in operational, compliance and governance infrastructure to meet the new licensing and operational regulatory requirements.
  
• Increased Consumer Confidence: Strengthened governance and operational standards are intended to bolster consumer trust in virtual asset services, potentially attracting more clients to the sector.
• Alignment with International Standards: By updating its regulatory framework, the Cayman Islands continues to position itself in line with global best practices, safeguarding its reputation as a secure and transparent jurisdiction for virtual asset services.

Overall, these amendments signify the Cayman Islands' commitment to fostering a robust and well-regulated virtual asset market, which could contribute positively to the growth and diversification of its financial services industry.

Through a combination of our advisory, legal, tax, audit and accounting services, KPMG is well placed to provide a suite of services to VASPs, not only from a Cayman Islands perspective, but globally. This enables our firm to take into account multi-jurisdictional considerations of all relevant stakeholders including owners/founders, investors or capital providers, c-suite, IT platform developers and board directors.

Audit: At KPMG, our experience and global credentials position us as a leading firm in audit services for VASPs. Leveraging insights from multiple jurisdictions, our dedicated audit team helps VASPs navigate regulatory complexities and enhance operational transparency.

SOC Reports: KPMG’s expertise in audit services extends to the provision of SOC (Service Organization Control) reports for VASPs in the Cayman Islands. We can help VASPs develop an integrated assurance strategy and high-quality reporting to demonstrate the strengths of your system and control processes, address the needs of multiple stakeholders, and build trust with customers and business partners. Our services include consultation, readiness assistance and attestation on internal control over financial reporting, security, availability, data processing, system reliability and privacy for service organizations, manufacturers, distributors, and others in both traditional and cloud environments.

Legal and Advisory: Our legal and regulatory specialists are able to assist and advise on the new regulatory requirements, including the license application process and developing the application pack, waiver status and the operational structuring. 

Our regulatory specialists provide comprehensive advice on regulatory business plans, structuring and AML obligations. These legal and advisory services straddle various practices, including banking, finance, corporate, investment funds and regulatory.

Our team can also provide relevant policies and procedures that are tailored to your nature, scale and complexity ensuring you adopt risk appropriate frameworks that meet regulatory standards and expectations.     

Tax: Our tax advisory and U.S. tax compliance team can help you manage complex reporting, withholding, and due diligence rules; assist you with filing and compliance matters related to CRS, FATCA, Economic Substance and other local and multi-jurisdictional tax related matters.

For any assistance with VASPs, please do not hesitate to contact our experts – Gautam Ganeshan for Audit, Mila Martsun for Tax or Tony De Quintal for Legal.

The views and opinions expressed herein are those of the respondents/authors and do not necessarily represent the views and opinions of KPMG LLP, Cayman Islands.