Strategic Legal Frameworks for Web3 Businesses in the Cayman Islands
The Cayman Islands offer various legal structures that are advantageous for crypto, Web3, and blockchain entities. These structures help manage regulatory requirements, protect assets, and ensure efficient operations. Here's a detailed overview of the key options available.
Token Issuance Structures
Web3 companies can set up a separate entity specifically for token issuance (Token Issuer). Often, this is a subsidiary of a primary entity (Developer) that develops the platform or protocol. This separation helps isolate regulatory liabilities associated with the Token Issuer from the value developed by the main company.
Commonly, an exempted limited company is used for both the Token Issuer and the Developer. Alternatively, a Developer could utilize a Cayman Islands Special Economic Zone Company (SEZC), which benefits from special regulatory and tax advantages, or a Cayman Islands foundation company, which is particularly useful for DAOs.
“What is the economic zone in Grand Cayman?
Otherwise known as SEZ, Cayman’s SEZ allows foreign companies to operate free from corporate, capital gains, sales and income tax plus import duties”
When employing a dual-entity structure, it is crucial to clearly document the commercial relationships between the entities through licensing agreements, development agreements, and service agreements. This clarity helps satisfy investors and regulators regarding the roles and responsibilities of each entity.
Under the Virtual Asset Service Providers (VASP) Act, a virtual asset is defined as a digital representation of value that can be traded or used for payment or investment but does not include digital representations of fiat currency. The Token Issuer must register with the Cayman Islands Monetary Authority (CIMA). However, the requirement for a Phase 2 license depends on the specific activities conducted by the Token Issuer.
Virtual asset service providers (VASPs) are a fairly newly established sector in many jurisdictions. To put it simply, VASPs include exchanges, P2P platforms, crypto ATMs, custodians, and OTC desks, among others. A virtual asset (VA) is a digital form of value that can be traded or transferred online.
Platform Controlling Entities
In the Cayman Islands, entities that manage platforms facilitating peer-to-peer trading or bidding are generally required to register and possibly obtain a license under the VASP Act, as they are considered to be providing virtual asset services. These entities are usually structured as exempted limited companies, but other forms like foundation companies can also be used.
Platform Controlling Entities and Licensing Requirements
Entities that manage platforms facilitating peer-to-peer trading or bidding typically fall under the definition of providing a "Virtual Asset Service" under the VASP Act. This means they are likely required to be registered and possibly licensed under the VASP Act, especially if they are actively facilitating the exchange, transfer, or trading of virtual assets.
Structure of Entities: It is true that these entities can be structured as exempted limited companies or foundation companies. The structure chosen can depend on various factors including tax considerations, governance, and regulatory compliance.
Avoiding Licensing Requirements: While entities might attempt to structure their operations in ways that minimize regulatory burdens, it is generally challenging to completely avoid licensing requirements if they are indeed providing services as defined under the VASP Act. Regulatory authorities, such as the Cayman Islands Monetary Authority (CIMA), closely monitor such activities to ensure compliance.
Decentralized Autonomous Organizations (DAOs)
A Cayman Islands foundation company is particularly suitable for DAOs. Unlike traditional companies, foundation companies do not have shareholders but are overseen by supervisors who ensure the foundation meets its objectives. This structure combines the limited liability of a corporate entity with the operational flexibility of a trust, making it ideal for managing DAOs.
Foundation companies can represent DAOs in private virtual asset sales, but such activities must still be considered in light of the VASP Act to ensure compliance. For activities that require adherence to VASP regulations, a subsidiary in a virtual asset-friendly jurisdiction can be established.
Special Economic Zone (SEZ)
The Cayman Islands' Special Economic Zone (SEZ), known as Cayman Tech City, offers a tax-neutral environment for tech companies, including those in the crypto and blockchain sectors. Companies in the SEZ benefit from streamlined setup processes and regulatory advantages, allowing them to establish a physical presence quickly and cost-effectively.
Decentralized Finance (DeFi) Structures
The Cayman Islands is also favorable for DeFi projects due to its flexible regulatory framework. Foundation companies can act as service providers for DeFi projects, handling many real-world activities while providing a legal 'wrapper' with corporate personality.
Understanding the right legal structures and regulatory requirements is crucial for success. Whether you're considering a DAO, an exempted limited company, or leveraging the Special Economic Zone benefits, each option offers unique advantages to safeguard and optimize your blockchain venture. Ready to take the next step? Dive deeper into the possibilities and make informed decisions for your Web3 future with How Do I Business.
