Security Token Offerings in the Cayman Islands

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Security Token Offerings (“STOs”) are an extremely popular means of fundraising
for new projects and utilise blockchain technology to do so. Whilst no specific
legislation has been passed by the Cayman Islands Government in
connection with STOs and cryptocurrencies, it would be incorrect to say that
STOs are “unregulated”.

Security Token Offerings (“STOs”) are an extremely popular means of fundraising
for new projects and utilise blockchain technology to do so. Whilst no specific
legislation has been passed by the Cayman Islands Government in
connection with STOs and cryptocurrencies, it would be incorrect to say that
STOs are “unregulated”. The fact is that some of the existing legislation in the
Cayman Islands can, and in certain circumstances will, be applicable. We have listed
the most relevant legal considerations when structuring an STO in the Cayman
Islands below.

The Securities Investment Business Law (2019 Revision) (“SIBL”)
SIBL is the Cayman Islands’ primary legislation relating to the regulation of
investments in ‘securities’ and associated businesses. Essentially, no person shall
carry on (or purport to carry on) securities investments business unless that
person is the holder of an appropriate licence or is excluded from the requirement
to hold a licence. The term ‘securities’ is defined in SIBL by reference to a list of particular types of security (including shares, stock, units of partici-
pation, partnership interests, instruments acknowledging indebted-ness, options, futures, contracts for differences, etc.) and does not specifically refer to a cryptocurrency or token. As the definitions of ‘securities’ and ‘securities investment business’ are linked (i.e. securities investment business includes dealing in, managing, advising, marketing or acting as a depository on securities), it is generally accepted that an STO should fall outside of SIBL. As always,this depends on the particular circumstances of the STO and so specialist advice should be taken on this point at the outset.

Mutual Funds Law (2019 Revision) (“MFL”)

In circumstances where the STO is related to an investment fund (tokenized or
otherwise) or some other form of investment vehicle, the possible application of
the MFL should be considered. The MFL should not therefore be a concern where
the STO is not intended to be an investment fund or engage in investment fund
activity. However, where the STO is related to an investment fund or investment
fund activity, specific legal advice should be taken in connection with their structure
and, crucially, the rights attaching to the tokens.

Anti-Money Laundering (“AML”) Laws and Regulations

The Cayman Islands has established a comprehensive and robust AML regime
which is comprised of the following specific laws and regulations:

  • The Proceeds of Crime Law (2018 Revision) (the “PCL”);
  • The Anti-Money Laundering Regulations (2018 Revision) (the “AML
    Regulations”); and
  • The Guidance Notes on the Prevention and Detection of Money Laundering
    and Terrorist Financing in the Cayman Islands (the “Guidance Notes”).

The AML Regulations are perhaps of potentially the greatest practical significance
to an STO by virtue of their wide application and the requirements for compliance.
The AML Regulations require an STO issuer to establish written AML procedures,
conduct identification verification checks and also appoint specific officers
(Compliance Officer, Money Laundering Reporting Officer and Deputy Money
Laundering Reporting Officer) among other things. It is therefore imperative that
legal advice be sought as to how compliance with the AML Regulations is achieved.

Money Services Law (2010 Revision) (the “MSL”)

The MSL regulates all ‘money services business’ in the Cayman Islands, including
businesses which provide currency exchange and money transmission
services. In order for an entity to conduct money services business, it would need
to be appropriately licensed by the Cayman Islands Monetary Authority. It is our
view that the Money Services Law does not generally apply to STOs, but again, this
will depend entirely on the specific circumstances involved in your STO, including
the particular rights attached to the tokens. Of course whether a cryptocurrency
exchange is considered to be conducting money services business will need to be
determined on a case-by-case basis depending on the services being offered on the
exchange. However generally cryptocurrencies are not legal tender in any country,
and therefore a cryptocurrency exchange is not likely to be considered a currency
exchange, and therefore would not require a licence.

Automatic Exchange of Information (“AEOI”)

The Cayman Islands has entered into a Model 1B (i.e. non-reciprocal)
intergovernmental agreement with the United States in connection with the
implementation of the Foreign Account Tax Compliance Act (“FATCA”) and has
also entered into a Multilateral Competent Authority Agreement to implement the
Organization for Economic Cooperation and Development’s Global Standard for
Automatic Exchange of Financial Account Information – Common Reporting
Standard (the “CRS”). A detailed summary of the implications of FATCA and CRS
is beyond the scope of this note but let it suffice to say that an entity which is
considered a ‘financial institution’ under these regimes would be under an
obligation to identify and report on its account holders. Prospective STO issuers
should seek specific legal advice as to their status under FATCA and CRS to ensure
that they are operating in compliance with such laws.

Electronic Transactions Law (2003 Revision) (the “ET Law”)

The ET Law is the Cayman Islands’ primary legislation relating to the conclusion
of transactions/contracts electronically. Given the nature of STOs, the ET Law
is therefore of potentially critical significance when establishing the terms and
conditions of the STO (whether in the form of purchase agreements or otherwise)
and how contracts are concluded. All terms and conditions governing the STO, as
well as the STO mechanics generally, should be considered in the context of the ET
Law to ensure compliance.

How can we help?

We have worked on close to 100 ICOs & STOs and are well placed to provide advice
on a prospective ICO, STO, Exchange, Fund investing in crypto or other blockchain entities.

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