“What is a coin?” Lawyers who work in the digital assets space have become very familiar with multiple variations of that question over the last few years. “It depends” is the answer with which issuers have become equally familiar.  

There is much legal confusion about the exact nature of a coin or token. This is largely driven by the number of variables that affect how a token can be categorized and whether it is, or is not, a security.

These include: 

  • the jurisdictions in which a token is offered, 
  • the identity of the issuer, 
  • the rights attached to the token, 
  • and even to who the token is offered can impact on the above, not to mention the criteria such as those set out in the US Howey test. 

Add to this the fact that the laws and approaches of regulators in relation to digital assets are constantly changing and developing, and a certain level of uncertainty can be excused.

However, the market is catching up. The complexity of the regulatory environment is now being matched with a growing level of sophistication of market participants. Not that long ago, most players issuing coins were anxious to ensure that such coins were not securities, and could be issued in what the issuer hoped was an unregulated environment. Flash forward to the present day, and most clients will be asking to ensure that their token is classified as a security, and get a boost from the legitimacy that comes with being able to demonstrate that you are a regulated issuer, with strong corporate governance, and a culture of compliance.

The question that then arises is “what kind of entity should issue the token, and from where?”  In an effort to be the country of choice for the digital assets sector, many jurisdictions have jumped in and introduced specialized laws and regulations which deal specifically with this emerging space as a way of attracting investment, but also in the hope of demonstrating certainty of treatment.

This is not the approach that has been adopted in the Cayman Islands (although rules have been proposed to make provision of virtual asset services subject to Cayman’s anti-money laundering laws). On the contrary, rather than being a first mover, Asia’s favorite domicile for investment funds has not yet enacted specific regulation.

This is largely because the existing laws of the Cayman Islands are drafted in a manner that is modern, and flexible enough to be able to facilitate the use of Cayman vehicles for the issue of coins while still giving clarity and certainty. The result has been that token issuances from Cayman vehicles, and investing into such assets through Cayman structures (whether they are companies, partnerships or LLCs) has been very common in Asia, and relatively simple.

Rather than coming to terms with new and complex rules around regulation of tokens, issuers using a Cayman vehicle can reference the longstanding and familiar rules under Securities Investment Business Law, Mutual Funds Law, Companies Law, and various anti-money laundering rules. These can then be applied to ensure that the token demonstrates the characteristics necessary to achieve the desired outcome. The flip side of that coin is that investors should also be familiar with the structure, and therefore have confidence in Cayman’s robust legal framework, court system and service providers resident both on-Island in Cayman and operating in local offices throughout the globe, whether they be lawyers, administrators, auditors or custodians, many of which have developed specialized expertise in Fintech and digital assets.

That is not to say that the Cayman Islands will refrain from enacting rules tailored to dealing with the regulation of digital assets. On the contrary, watch this space. It is expected that the Cayman Islands will release rules which specifically contemplate crypto in the not-too-distant future. However, if the typical Cayman approach to legislative drafting is deployed (as many expect), any new rules should be practical, clear and reinforce Cayman’s position as a favorite global financial center, both among issuers and investors.

Previous articleEthereum (ETHUSD) Testing Daily Chart Upchannel Support
Next articleUS Government’s Massive Archive Explores Blockchain
James Gaden
James has been providing legal advice in relation to financial services for over 15 years and has experience across a broad spectrum of legal issues affecting the investment funds industry. He specializes in advising managers of private equity and hedge funds across the region including in Hong Kong, China, Japan, Korea, Singapore and Australia, and works extensively with asset managers, as well as their onshore counsel, advising not only on formation and structuring, but also in acquisition and disposal transactions, restructures, fund financing and fund related disputes. James has developed strong expertise in venture capital and the legal aspects of cryptocurrencies.