Structuring For The Digital Asset Industry In Cayman, Bermuda, and BVI

It is a trend that does not appear to have abated with the recent downturn in cryptocurrency markets, as the seemingly unlimited potential applications of blockchain technology continue to drive innovative projects offshore in search of bespoke structuring solutions. This article provides an overview of the digital asset landscape in these key jurisdictions.

The Cayman Islands, Bermuda, and BVI have long been popular jurisdictions for a range of commercial and investment structures. Each of these jurisdictions offers a number of key benefits that have aligned with the needs of the digital asset industry, particularly given that many businesses and projects in this sector are far more global and decentralised than traditional corporate structures. These benefits include:

• a tax-neutral platform
• sound legislative and judicial systems based on English common law principles
• stable, commercially minded governments
• flexible corporate structures
• experienced and responsive professional advisory and support services

While these jurisdictions share many of their strengths and can often provide a one-stop shop, they have also carved out their own particular niches, which means that the best structure sometimes involves a combination of entities across these jurisdictions. For example, the Cayman Islands has become a leading jurisdiction for the structuring of Decentralised Autonomous Organisations (DAOs), whereas the BVI has proven popular for Initial Coin Offerings (ICOs), and Bermuda has become a premier jurisdiction for digital asset businesses setting up a physical presence.

Cayman Islands

Foundation Companies

The Cayman Islands has proven popular for establishing a range of digital asset structures (including crypto investment funds, ICOs, and exchanges). One of the jurisdiction’s key advantages is its Foundation Company offering, which was introduced as a new structuring vehicle by legislation enacted in 2017. The Foundation Company structure is relatively unique amongst offshore jurisdictions. While a Cayman Foundation is a company, a key feature that distinguishes it from an ordinary company is that it can cease to have members and ownership. This feature is particularly attractive for DAOs, which are not designed with “ownership” and profit in mind. Foundation Companies are often used as legal wrappers for DAOs and similar organisational structures that may be needed to provide support to a blockchain protocol or DAO but are not designed for the benefit of beneficial owners.

A Cayman Foundation is a legal person, which means, for example, that it can be a contracting entity and may:

• interact and form contracts with third parties
• file and pay taxes
• open bank accounts and make cash transactions
• hold and protect off-chain assets
• protect intellectual property
• serve as a vehicle for airdrops and grants
• act as a parent or holding entity with subsidiaries to carry out functions for a project

DAOs operate differently from many of today’s traditional legal entities and business structures. The objective of a DAO is to achieve a more democratic form of governance, whereby decisions are made by a defined community (for example, token-holders of a particular cryptocurrency). The legal status of DAOs is typically unclear because they are often not incorporated and may seek to avoid legal formalities. However, as blockchain technology and its varied uses become increasingly mainstream, there is a growing need for many DAOs to take on legal form so that they can act as a legal person in order to contract with stakeholders and perform more traditional functions that require legal personality.

Cayman Foundations are often viewed as a hybrid between a trust and a company. They have therefore emerged as an attractive structuring option for non-profit organisations. Similar to non-profit organisations, DAOs have unique objectives that differ from commercial profit-maximising companies. As a result, questions pertaining to a DAO’s legal structure and governing documents are often more complex than ordinary companies.

The flexible nature of Cayman Foundations allows governing rules and constitutional documents to be drafted in a highly bespoke manner with the organisation’s objectives at the forefront. The organisation’s rules and decision-making process can be drafted to mirror that of a DAO, with such provisions either contained in the Cayman Foundation’s constitutional documents or bylaws.

Virtual Asset Service Provider

Another development that has contributed to the overall attractiveness of the Cayman Islands is its clear commitment to facilitating innovative virtual asset business. This is evident with the implementation of the Virtual Asset (Service Providers) Act 2020 (VASPA), which provides a regulatory framework based on internationally recognised standards for the regulation of virtual asset service providers (VASPs). Broadly, VASPA defines “virtual assets” as digital representations of value that can be digitally traded or transferred and can be used for payment or investment purposes. VASPA requires the licensing and/or registration of various entities engaging in “virtual asset services” with the Cayman Islands Monetary Authority (CIMA). These “virtual asset services” include:

1. offering an exchange between virtual assets and fiat currencies, or between one or more forms of convertible virtual assets
2. the transfer of virtual assets
3. virtual asset custody services
4. the participation in, and provision of, financial services related to a virtual asset issuance or the sale of a virtual asset

VASPA also introduces a regulatory sandbox regime whereby CIMA may grant a sandbox licence based on the innovative technology or innovative methods of delivery or on the supervisory needs of the sandbox licensed entity. The sandbox regime is expected to come into effect in 2022.

While the legislation is still at an early stage of its implementation, it is expected that in the long run it will mean that the Cayman Islands is well-placed to provide a gold standard regulatory framework to support the establishment of Cayman entities to undertake FinTech-related services and activities.

Bermuda

Bermuda has extended its reputation beyond the offshore world to become a globally recognised leader in the digital asset industry. This is partly due to Bermuda being perceived as a friendlier and less bureaucratic jurisdiction, with one innovative and well-respected regulator, the Bermuda Monetary Authority (BMA).

Bermuda has formulated a relatively simple blockchain and digital asset framework, which comprises two pieces of legislation: the Digital Asset Business Act 2018 (DABA) and the Digital Asset Issuance Act 2000 (DAIA).

Digital Asset Business Act

Bermuda introduced DABA in 2018 to regulate entities carrying on digital asset business in or from within Bermuda. Under DABA, a “digital asset business” provides certain services to the general public, including:

• issuing, selling or redeeming virtual coins, tokens or any other form of digital asset
• operating as a payment service provider business utilising digital assets
• operating as a digital asset exchange
• carrying on digital asset trust services
• providing custodial wallet services
• operating as a digital asset derivative exchange provider
• operating as a digital asset services vendor (which is intentionally broad to bring into scope anyone providing digital asset-related services generally)

DABA has three licence classes:

• Class F is a full licence to operate as a regulated digital asset business in or from within Bermuda. This licence does not have an expiration date; however, Class F licensees are subject to regular supervisory visits by the BMA's FinTech supervisory unit, anti-money laundering unit, and cybersecurity unit.
• Class M is the same as Class F but is a restricted "sandbox" licence to operate for a temporary period, subject to routine regulatory supervision and likely restrictions on its licence.
• Class T is a testing licence aimed at companies looking to pilot or beta test their product and activities for a temporary period.

Companies with a Class M licence can apply to become a Class F–licensed company, and companies with a Class T licence can apply to become either a Class M– or Class F–licensed company.

Digital Asset Issuance Act

Unlike DABA, which is aimed at persons whose activities are to operate as a digital asset business, DAIA is intended to regulate persons looking to conduct a digital asset issuance to fund their own business or project. DAIA requires any person seeking to conduct a digital asset issuance to obtain prior authorisation from the BMA, subject to some exemptions if the issuance:

• is not intended for the digital assets to become available to more than 150 persons
• is made to “qualified acquirers” (generally, high net worth/income acquirers or companies with total assets of not less than US$5,000,000)
• is made to persons whose ordinary business involves the acquisition, disposal or holding of digital assets

The application to the BMA must include a copy of a business plan, the issuance document, the applicant’s arrangements for the management of the offering, and anti-money laundering and terrorist financing policies and procedures. The BMA, of course, can request other information it views as reasonably necessary to assess the application.

Looking forward

The licensed digital asset companies in Bermuda have created a first-of-its-kind collective industry association called NEXT. The group intends to advocate for the digital asset industry, help grow and develop its talent pool and market Bermuda’s reputation in major markets.

The BMA recently issued both full-bank and digital asset business licences to Jewel, which plans to issue a US dollar stablecoin and other single fiat currencies. Digital asset lending, borrowing and repurchasing will soon be embraced as digital asset activities in Bermuda, but a central bank digital currency is not currently contemplated.

It has been repeated many times: Bermuda favours quality over quantity. Bermuda wants to admit those who understand this regime, not those who don’t. The regulatory and legal infrastructure has been carefully assembled and will continue to be monitored by the BMA, the Bermuda Government and NEXT. The tightrope between under-regulating and over-regulating in the digital asset world is challenging to navigate, but Bermuda is confident it has struck the right balance.

British Virgin Islands

In contrast to the Cayman Islands and Bermuda, there is currently no legislation in force in the BVI which is specifically targeted at cryptocurrencies or digital assets (as opposed to securities or other financial instruments more generally). While the BVI government has indicated an intention to establish a legal framework to regulate the digital asset industry, the precise timeline for its imposition and its final form are not yet known. However, it is expected that such a framework (which will likely resemble those in place in Bermuda and the Cayman Islands) will be in place later in 2022.

At this time, whether or not a BVI entity engaging in business or investment activities involving cryptocurrencies or digital assets requires regulation in the BVI will be determined under the existing, more general securities and investment business laws in place in the BVI. These laws are primarily the Securities and Investment Business Act (as supplemented by the Guidance on Regulation of Virtual Assets in the Virgin Islands issued by the BVI Financial Services Commission in July 2020).