The evolution of the cryptocurrency landscape has led to the development and rapid adoption of stablecoins globally.
A stablecoin, as the name suggests, is essentially a virtual asset that is designed to maintain a stable value and typically tracks the value of, or is ‘pegged’ to, another asset or commodity. While stablecoins are more commonly pegged to a fiat currency such as the US dollar, they can be designed to track the value of any asset including commodities such as gold, silver and even shares.
As a general note, the legal and regulatory treatment of a stablecoin in the Cayman Islands will be largely predicated on the structure of the stablecoin and nature of the underlying asset. Specific legal advice should always be sought when considering launching or dealing with stablecoins in or from the Cayman Islands.
This article briefly explores the current treatment of stablecoins in the Cayman Islands from a legal and regulatory perspective.
The Cayman Islands VASP regime
As global regulatory frameworks continue to adapt, the Cayman Islands has emerged as a leading offshore jurisdiction for virtual asset service providers (VASPs) seeking a clear legislative framework and favourable environment for innovation. The VASP regime in the Cayman Islands is governed by the Virtual Asset (Service Providers) Act and supplemented by the Virtual Asset (Service Providers) Regulations.
Broadly speaking, the VASP Act defines “virtual assets” as digital representations of value that can be digitally traded or transferred and can be used for payment or investment purposes. The VASP Act requires the licensing and/or registration of various entities engaging in “virtual asset services” with the Cayman Islands Monetary Authority (CIMA). These services include the issuance, transfer, exchange, custody and participation in financial services relating to the issuance or sale of virtual assets. In this regard, entities carrying out any one or more of these services, for or on behalf of customers, in or from the Cayman Islands, must seek regulatory approval from CIMA.
The Cayman Islands introduced the VASP Act in 2020 to establish a robust regulatory framework for virtual assets and related services. The VASP Act aims to provide a clear and predictable legal regime for VASPs while addressing risks related to anti-money laundering (AML), counter-terrorist financing (CTF), and consumer protection.
Stablecoins: Are they any different to other virtual assets?
In the Cayman Islands, the regulatory treatment of stablecoins is not explicitly distinguished from that of other virtual assets and the VASP Act does not directly address the issue of stablecoins. As such, despite their unique design to reduce price volatility, stablecoins are subject to the same requirements and obligations as any other virtual asset under the VASP Act. This regulatory consistency is based on the principle that all virtual assets, regardless of their specific characteristics, pose similar risks and require the same minimum level of oversight.
The legislative instrument regulating securities and investment business in the Cayman Islands is the Securities Investment Business Act (as revised) (SIBA). “Securities” are defined under Schedule 1 of SIBA (the Schedule) as broadly including shares (or equivalent), instruments creating or acknowledging indebtedness, instruments giving entitlements to securities, certificates representing certain securities or instruments (i.e. conferring contractual or proprietary rights), options, futures, or contracts for difference (e.g. derivatives). SIBA was also amended in 2020 to include “virtual assets” within the Schedule. While there are certain exemptions, any virtual asset that can be sold, traded or exchanged and that represents, can be converted into or is a derivative of any of the existing securities set out in the Schedule will constitute a security although certain exemptions may still apply.
Virtual assets are therefore not “securities” as defined in the Schedule in their own right. Virtual assets such as bitcoin, etherium and other typical centralised or decentralised virtual assets are generally considered as not representing securities for the purposes of SIBA.
In light of the above, any stablecoin merely pegged to fiat currency would not be expected to constitute a security and would therefore be treated the same as other virtual assets (and therefore solely regulated under the VASP regime).
On the other hand, if a Cayman Islands company were to issue, sell or otherwise provide VASP services in respect of a stablecoin which passed on specific rights to the customer, such as redemption rights or rights of conversion, this may potentially impact the regulatory classification of the stablecoin. Additionally, any stablecoin pegged to the value of a security, such as for example the share value of a company with attaching conversion rights or an options contract, this would almost certainly require both a VASP and SIBA authorisation from CIMA.
In a recent outreach session, CIMA confirmed that where a VASP also undertakes regulatory activity falling within another regime, such as SIBA, an applicant will be required to seek authorisation under both applicable regimes.
Conclusion
While all virtual assets including stablecoins will be regulated by CIMA pursuant to the VASP Act, whether such a particular asset would fall within the current definition of “securities” under SIBA (and therefore require dual-regulation under VASP and SIBA) is fact-dependant and will be subject to the terms of the particular stablecoin being considered.
Róisín Liddy-Murphy is a Partner and Head of Regulatory & Risk Advisory (Cayman) at Conyers.
