Jan 2025
In the First Edition of our Regulatory Disputes Series, digital assets and fintech topped our list of hot topics to watch for the future of offshore regulatory disputes. In this Fourth Edition, we provide an update on relevant regulatory developments in Cayman and take a deeper dive into global enforcement trends in relation to crypto.
Digital assets, fintech and DeFi are undoubtedly transforming the financial services industry. These technologies and market offerings are evolving at a rapid rate that is challenging regulators and courts globally. Regulators are establishing, growing and training their specialised digital asset teams, exploring new regulatory frameworks, and pursuing novel claims to test the scope of their regulatory reach. At the same time, courts are grappling with how to determine disputes within existing legislative and common law frameworks.
Updates from Cayman
The Cayman Islands Monetary Authority (CIMA) has recently established the Virtual Asset Service Provider (VASP) & Fintech Innovation Unit and is conducting a related education campaign through, for example, industry briefing sessions. In May 2024, CIMA issued a Regulatory Policy outlining the criteria for approving VASP Registrations and Licenses,1 followed in December 2024 by a Rule2 and a Statement of Guidance3 for the Provision of Virtual Asset Services (specifically for Virtual Asset Custodians and Virtual Asset Trading Platforms).
There have also been a number of related legislative developments. The Virtual Asset (Service Providers) (Amendment) Bill, 2024 (Amendment Bill) was gazetted in November 2024 and will introduce key changes, including:
- new and revised definitions relevant to VASPs;
- empowering CIMA to direct that participants apply for registration or licencing under another regulatory regime (i.e. addressing dual licensing);
- requiring VASPs to have at least three directors, including at least one independent director without a vested interest in the VASP; and
- requiring persons who were registered to undertake custody and/or trading platform activities under phase one of the Virtual Asset Service Providers Act (the “VASP Act”) to ‘uplift’ to a licence within 90 days of the commencement of the Amendment Bill.
This Amendment Bill is expected to come into force in the first quarter of 2025, and will have the effect of ‘switching on’ phase two of the VASP Act (i.e. introducing the licensing regime for Virtual Asset Custodians and Virtual Asset Trading Platforms).
This month we have seen further industry consultations on amendments to the VASP Act, which, once enacted, should bring welcome clarity with respect to the tokenisation of investment funds.
Momentum is certainly building in the Cayman Islands VASP landscape, and the digital assets sector is shaping up to have a strong year in 2025.
Global developments
These local developments are consistent with global momentum in relation to regulation and enforcement of the sector.
In our First Article in the Regulatory Disputes Series, we covered some of the key recent steps taken by the US Securities and Exchange Commission (SEC), the UK Financial Conduct Authority (FCA) and the UK Serious Fraud Office that demonstrate their strong commitment to ongoing enforcement activity in the digital assets space. More recently, the FCA released its Crypto Roadmap at the end of 2024, outlining a timeline for the staged consultation and implementation of various policy publications for cryptoasset regulation through to 2026, when all final policy statements are planned to be published and the new regulatory regime is expected to go live. In the press release accompanying the Roadmap, the FCA emphasised its commitment to enforcement in the industry, through statements including the following:
“Despite the FCA’s limited regulatory remit, the FCA continues to take action to make the crypto market safer. This includes taking action against firms illegally promoting cryptoassets to UK consumers.
…
Following a change in legislation, the FCA is responsible for regulating cryptoasset promotions. This regime came into effect on 8 October 2023. In the first year of the regime, the FCA has taken significant action against firms illegally promoting to UK consumers. This includes issuing 1702 alerts, taking down over 900 scam crypto websites and over 50 apps.”
Additionally, case law is rapidly evolving across the globe and recent developments are demonstrating the willingness of courts to apply traditional legal principles and frameworks to novel digital technologies. These developments are removing some of the roadblocks that may have previously confronted regulators when contemplating whether and how to pursue enforcement proceedings against certain legal structures becoming commonplace in the crypto world. For example:
- In the November 2024 decision of Samuels v DAO (2024), the US District Court for the Northern District of California concluded that the decentralised autonomous organisation (DAO) in question could be sued under traditional partnership laws, notwithstanding its lack of formal corporate structure and decentralised nature. This decision was particularly significant in circumstances where the DAO had not established any legal ‘wrapper’ such as a Cayman Foundation Company. Judge Vince Chhabria observed that the case “presents several new and important questions about the ability of people in the crypto world to inoculate themselves from liability by creating novel legal arrangements to profit from exotic financial instruments”.
- There have now been several decisions across the US and UK in which courts have permitted innovative methods of service of proceedings against unidentified owners of crypto wallets. In cases where parties are seeking to recover digital assets that have been fraudulently transferred to anonymous wallet-holders, traditional methods of service are often not available to the plaintiff. In the circumstances, a number of courts have now allowed for service of proceedings by way of airdropping non-fungible tokens (NFTs) into digital wallets used by the defendants to receive the fraudulent transfers. In one such US case, it was proposed that the NFTs were to include a hyperlink with the name of the token that, when clicked, would open up a website containing the complaint and summons, and evidence was adduced to satisfy the Court that the owner of the wallet was unlikely to have changed hands since the fraudulent transfers.
- As we previously reported on, in August 2024 the Hong Kong Court of First Instance issued its reasons for ordering that a DAO provide disclosure of financial documents related to its operations. Similarly, Conyers has obtained injunctive relief and Norwich Pharmacal disclosure (on an urgent and confidential basis) against various digital asset exchanges in order to aid in digital asset tracing and recovery.
- Further, in July 2024, Hector DAO (an entity that managed crypto-asset investments through smart contracts) became the first DAO to be recognised as a debtor under US bankruptcy law.
Global attention has also recently turned to the Web3 gaming industry. Last month, gaming platform CyberKongz reported that it had received a Wells Notice from the SEC, foreshadowing enforcement action based on alleged securities violations. CyberKongz stated: “the SEC’s Division of Enforcement have approached us with very concerning rhetoric that you can not have a token (ERC-20) in tandem with a blockchain game without registering it as a security. This discourse would have major implications for the entire web3 gaming industry, and we will defend against this stance for the wider space.”
The Conyers team are here to help
The Conyers team of Regulatory Disputes specialists have market-leading experience supporting their clients through high value, high profile and challenging regulatory disputes, including those involving multiple regulators and jurisdictions. We are uniquely placed to advise and appear in the most complex matters and work hand in hand with our Regulatory & Risk Advisory practice to deliver a full service offering across the entirety of the regulatory life cycle.
Further, our multi-disciplinary Fintech & Digital Assets practice is highly experienced in advising clients on a broad range blockchain, digital asset and Web3 issues, including non-contentious and contentious regulatory matters, in a rapidly evolving digital landscape. Please reach out to the authors or the broader Conyers team to discuss how we can support your legal and fiduciary needs in fintech, digital assets and beyond.
3https://www.cima.ky/upimages/regulatorymeasures/SOGforVACustodiansandTradingPlatforms_1734445089.pdf