Establishment of a Blockchain Fund in the Cayman Islands
Background
The Cayman Islands, located in the western Caribbean, is a British Overseas Territory comprised of three (3) islands. Aside from the sandy beaches and luxury resorts, the Cayman Islands have become a leading global financial center that has developed a reputation of innovation in a business-friendly paradise to operate an offshore company.
As part of the British crown, the Cayman Island offers a stable society and political system, judicial and legislative centrality, tax neutrality and sophisticated service providers with a robust structure to maintain a financial platform in the island. The Government established the “Cayman Island Monetary Authority (“CIMA”), the Cayman Island Blockchain Foundation, and the Cayman Finance to continue to attract the fintech and digital business to the jurisdiction.
In addition, in May 2020 the island launched an international standard (set by the Financial Action Task Force) to supervise the virtual assets services business known as the Virtual Asset (Service Provider) Act, better known as the (“VASP ACT”). The VASP ACT has two (2) phases: the first phase deals with anti-money laundering (“AML”) regulations and registration of the service providers; and the second phase deals with the license and further matters. Under the VASP ACT virtual assets are defined as a digital representation of value that can be digitally traded or transferred and can be used for payment or investment purposes.
Funds in Cayman Island
The Cayman Islands have gained popularity as an offshore jurisdiction in the fintech industry with the flexibility of establishment of a fund as a vehicle of investment used for blockchain funds or cryptocurrency.
Open-Ended Cayman Islands Exempted Company
The open-ended funds are regulated under the Mutual Funds Act in the Cayman Island. A fund is said to be “open-ended” when it issues participating equity interest redeemable by investors on a specified period of notice. In the fintech world, the vehicle is used for those investors focused on trade in cryptocurrency since the investments are open and can be redeemed at the investor’s own initiative. The structure is similar to a hedge fund; nevertheless, under the regulations of the Cayman Islands, they are required to comply with the following:
- The open-ended fund must be registered in the Cayman Island under the Cayman Island Monetary Authority (“CIMA”).
- It must have two individuals as directors who must also be registered with the CIMA.
- A description of the equity interest being offered in all material aspects.
- It must have a registered agent in the Cayman Islands.
- The application must be submitted according to CIMA regulations.
The open-ended funds offer the following advantages:
- Minimal annual and reporting requirements
- No requirement of a Cayman resident to act as a director or shareholder
- The register of shareholders does not have to be kept at the registered office and is not open to public scrutiny or inspection
- Shareholders to not have to hold annual meetings.
- Cayman Island Exempted Limited Partnership as a closed-ended investment vehicle
Funds that do not grant investors a right or an entitlement to withdraw or redeem their shares or interest from the fund with CIMA. The close ended fund does not allow an investor to redeem or exit from it until it is wound up. In addition, the closed ended fund only accepts investors for a set period of time, and thus the fund usually has a finite timeframe.
The Exempted Limited Partnership does not have a legal personality separate from its partners. All general partners have unlimited liability for all the debts and obligations of such partnership by virtue of the Cayman Island Exempted Limited Partnership Act. Fund investors subscribe for a limited partnership interest on which their liability is generally limited to the contributed capital and outstanding capital commitment of each. Nevertheless, there are circumstances whereby if an investor takes part in the conduct of the business of the partnership and holds itself out as a general partner towards third parties, such investor may assume unlimited liability for the debts and obligations of the partnership.
Advantages of the Exempted Limited Partnership.
- It may conduct business without obtaining a license.
- It does not require a licensed mutual fund administrator.
- It can opt to be treated as a regulated mutual fund.
- It can conduct business in venture capital and private equity.
- It may have no more than 15 investors with the capability to appoint and remove directors of the fund.
In regard to a blockchain activity, the close-ended fund allows for managers wishing to pursue an investment strategy focusing on long term investment in such start-ups or projects. These strategies tend to be illiquid in nature and allow for investors to redeem their investment without the managers consent.
