The Travel Rule on the Cayman Islands

The Travel Rule on the Cayman Islands establishes rigid standards of transparency for the sector of virtual assets, transforming once confidential transfers into fully controlled procedures. The Cayman Islands Monetary Authority (CIMA) applies these rules for the prevention of the legalisation of illegal proceeds and the integration of the crypto industry into the legal international financial field. For the founders of b2b projects, technological investors and international corporations, the observance of these prescriptions is a mandatory condition for the preservation of the registration and the protection of the business from administrative fines.

The analysis of the regulatory base makes it possible to clearly determine the circle of subjects on whom the obligation on the transfer of information on the carried-out transactions on the Cayman Islands is placed. In the present material, the criteria indicating who must observe the Travel Rule on the Cayman Islands are described in detail, and moreover the step-by-step mechanism of the fixing of data upon the interaction with non-custodial wallets is disclosed. The analysis of the operational procedures includes an overview of technological solutions for the automation of compliance, the rules of the five-year storage of records and the procedure of the sending of the mandatory quarterly reporting before the regulator.

The Travel Rule on the Cayman Islands: the Regulatory and Legal Base and the Regulatory Status

The global standards of financial transparency are formed under the influence of intergovernmental organisations. The Financial Action Task Force on Money Laundering (FATF) fixed the basic requirements for the transfer of capital in Recommendation 16. Later these principles spread to the blockchain industry, which obliged providers to ensure the transparency of transactions. The regulation of virtual assets on the Cayman Islands relies precisely on these supranational standards, adapted to the local financial system.

The jurisdiction promptly implemented the international fiat rules into the sector of digital currencies. The regulatory base was formed by the addition of new sections into the current laws. The special regulation of the Travel Rule on the Cayman Islands officially entered into force on 1 July 2022. On that day, the norms of Part 10A of the Anti-Money Laundering Regulations began to act. The changes affected all the registered participants of the market.

The main controlling body in this sphere is the local central bank. The Cayman Islands Monetary Authority (CIMA) obtained extended powers on the supervision of the observance of the standards. Structurally, the new rules are fully integrated into the general state system of the countering of financial machinations and the financing of criminal activity. The official regulatory base of the Travel Rule on the Cayman Islands excludes anonymity upon the carrying out of cryptocurrency transactions.

The legislation places strict obligations on the licensees. The specialised regulation of crypto companies on the Cayman Islands requires of business the fixing of the personal data of clients. Any licensed subject must identify the participants of the transfer. The implemented Travel Rule on the Cayman Islands obliges companies to transfer the collected files to the receiving side. Without the fulfilment of this condition, the sending of the digital units is blocked.

Full-fledged integration into the world financial system requires the observance of rigid rules of reporting. Every registered person bears responsibility for the maintenance of transparent activity. The legislatively secured obligations of a VASP on the Cayman Islands include the regular confirmation of compliance. The breach of the established regulations leads to the launch of an administrative process on the part of the regulator.

The formation of the regulatory base of the transparency of transactions

The current norms exclude the possibility of working outside the legal field. Any obligation on the transfer of information on the carried-out transactions on the Cayman Islands must be fulfilled automatically. Financial institutions are obliged to rebuild the internal algorithms to the standards of the Monetary Authority.

The Travel Rule on the Cayman Islands: the Sphere of Application and the Subjects of Regulation

The action of the new rules extends to a clearly determined circle of commercial organisations. The local crypto regulation on the Cayman Islands covers all the professional participants of the market interacting with digital assets. Under control fall structures carrying out the exchange, storage or transfer of tokens. The Monetary Authority attributes such enterprises to the category of providers of services in the sphere of virtual assets.

The regulatory acts divide the counterparties by their legal status. The internal requirements for a VASP on the Cayman Islands extend to local licensees. Simultaneously, the law uses the concept of obliged persons, to whom foreign regulated companies belong. The rule of the exchange of data is activated when a transaction affects the interests of at least one accountable structure. There exist specific triggers launching the mechanism of control.

The organisational and legal model of a business determines the volume of its obligations.  The subjects of the regulation of a VASP on the Cayman Islands are divided into three main groups:

1. cryptocurrency trading platforms and brokerage services;

2. custodial providers and operators of secure storages;

3. issuers of settlement tokens and operators of payment gateways.

A VASP licence on the Cayman Islands obliges a company to check both the cryptographic address and the counterparty. The rule is applied upon the interaction between two regulated intermediaries. Analogous measures act upon the sending of funds to external unregulated wallets. Subject to control are both exclusively blockchain operations and mixed transactions with a fiat component.

The legislation does not make concessions for startups depending on the volume of their capital. The current sphere of application of the Travel Rule on the Cayman Islands covers any cross-border and internal transfers. The Monetary Authority carries out continuous remote supervision of the operational activity. Companies are obliged to confirm the lawfulness of every payment session.

The regulation of cryptocurrency exchanges on the Cayman Islands is aimed at the minimisation of the risks of the use of digital instruments in the shadow sector. Organisations must know the ultimate beneficiary of every transfer. The international obligation on the transfer of information on the carried-out transactions is fulfilled regardless of the geographical location of the recipient. An understanding of who is obliged to observe the Travel Rule on the Cayman Islands makes it possible for investors to correctly build up the corporate structure already at the stage of registration.

The Obligation on the Transfer of Information on the Carried-Out Transactions on the Cayman Islands: the Content and the Structure of the Data

The procedure of control requires the collection of a detailed dossier on every participant of the transaction. The legislatively secured obligation on the transfer of information on the carried-out transactions on the Cayman Islands excludes the use of abridged data. The provider of the sending side collects a package of documents before the carrying out of the transfer. These files are packed into an encrypted container for the subsequent sending.

The law establishes rigid parameters for the verification of counterparties. The official requirements for the identification of a VASP on the Cayman Islands divide the collected information into two categories. To the first belong the data of the initiator of the payment, to the second — the requisites of the recipient. The information must be up-to-date and confirmed by internal procedures of verification.

The basic package of documents includes several mandatory positions:

• the full name of the natural person or the official name of the organisation;

• the unique number of the account or the verified profile in the system;

• the physical address of residence, confirmed documentarily;

• the date and place of birth for citizens, or the registration number for legal entities.

The regulator does not restrict business in the choice of technical means. The established data of the Travel Rule on the Cayman Islands may be transferred through various channels of communication. A single state blockchain standard for this process is absent. It is permitted to use specialised platforms of the exchange of data and closed interfaces of applied programming.

The current Travel Rule on the Cayman Islands requires the continuity of the information flow. If the receiving side does not obtain the verified package, the transaction is considered suspicious. The norms of Part XA of the Anti-Money Laundering Regulations prohibit the processing of transfers with incomplete or unverified information. All the responsibility for the collection of the information lies on the sending intermediary.

The approved format of the transfer of the data of a VASP on the Cayman Islands must ensure confidentiality. The personal information is protected by methods of cryptographic encryption. The intermediaries are obliged to guarantee that third parties will not obtain access to the archives. The protection of the data is controlled by the Monetary Authority upon the carrying out of regular checks.

The Travel Rule on the Cayman Islands: the Scenarios of Application and the Processing of Transactions

The interaction between licensed participants of the market is the simplest operational process. The standard transfer of the data of virtual assets on the Cayman Islands occurs without delays if both sides are connected to one communication network. In this case, the data of the initiator and the recipient are automatically compared by the compliance systems. The operation is approved upon the full coincidence of all the parameters of security.

Difficulties arise upon the sending of funds beyond the limits of the regulated perimeter. The implemented Travel Rule on the Cayman Islands describes a detailed algorithm of work with non-custodial addresses. If a client transfers tokens to their own hardware wallet, the company is obliged to carry out an additional check. The user must confirm the control over the address by available technical methods.

Upon the work with external counterparties, special protocols are activated. The scenarios of the processing of operations:

1. A transfer between two Cayman licensees with the automatic exchange of encrypted logs.

2. A transfer to the address of a foreign obliged person with the preliminary verification of their jurisdiction.

3. The interaction with a private non-custodial wallet through the procedure of the confirmation of the right of signature.

Each scenario requires of the compliance service the application of a risk-oriented approach. The official regulation of crypto transfers on the Cayman Islands prohibits the acceptance of transactions with an incomplete set of data. If the sent file contains errors, the recipient is obliged to stop the process. The legislation gives the right to temporarily block the funds until the clarification of the circumstances.

Any scenarios of the application of the Travel Rule on the Cayman Islands require of the management a rapid reaction. A company may reject the crediting of tokens if the sender refuses to provide documents. The return of the assets is carried out to the address of dispatch with the fixing of the incident in the internal journal. Such behaviour reduces the risks of the revocation of the licence.

Law enforcement practice shows that the processing of transfers of virtual assets on the Cayman Islands requires automation. The corporate rules must contain clear instructions for every non-standard situation. The general obligation on the transfer of information on the carried-out transactions on the Cayman Islands is fulfilled continuously, regardless of the load of the blockchain network.

The Obligations of a VASP on Control and Compliance on the Cayman Islands: the AML/CFT Requirements

The security of a financial structure is built on the constant monitoring of internal processes. The modern compliance of crypto services on the Cayman Islands includes the mandatory integration of systems of the check of clients into the general IT architecture. Organisations are obliged to carry out a deep identification of users before the moment of the opening of an account. This procedure prevents the appearance of anonymous accounts.

An important element of the corporate structure is the presence of qualified personnel. The current internal control of a crypto business on the Cayman Islands requires the appointment of a special employee on the countering of the legalisation of illegal money. This specialist must possess confirmed experience and pass certification. He directly interacts with the state controlling bodies.

Compliance control includes the following elements:

• the continuous automated screening of blockchain addresses for the subject of a connection with the darknet,

• the verification of the sources of the origin of the capital and the wealth of large investors,

• the regular updating of black lists and the check of politically significant persons.

The obligations of a VASP on the Cayman Islands imply the maintenance of detailed journals of all the operations. Every suspicious activity is fixed and subject to internal investigation. If the risks are confirmed, the information is immediately directed to the analytical department of the regulator. The independent concealment of such facts is recognised as a serious offence.

The established control of the transactions of a VASP on the Cayman Islands helps to protect the corporate accounts from blockings. Companies are obliged to check the incoming and outgoing flows. The integrated Travel Rule on the Cayman Islands acts as an additional filter of security. It makes it possible to cut off undesirable counterparties before the moment of the carrying out of an irreversible blockchain operation.

The Mandatory Regulatory Reporting before CIMA: the Travel Rule Return and the AML Return

The state control of the activity of the licensees bears a systemic character. The regulatory reporting of a VASP on the Cayman Islands is directed through closed electronic governmental portals. Companies are obliged to observe the timeframes of the submission of documents established by the Monetary Authority. A delay of even one day entails the automatic accrual of a penalty.

The main instrument of the control over the movement of virtual assets is a special declaration. The quarterly Travel Rule Return for a crypto company on the Cayman Islands contains aggregated data on all the cross-border transactions. Into this document, information about the number of approved and rejected transfers is entered. The report is directed through the specialised supervisory system STRIX. The timeframes and formats of the submission of documents are strictly regulated by the central bank. 

The structure of the mandatory reporting of providers

In addition to the quarterly forms, business submits annual reporting. A comprehensive audit confirms that the reporting of a VASP on the Cayman Islands corresponds to the real state of affairs in the company. The check is carried out by independent certified specialists, approved by the Monetary Authority. The results of the check are uploaded into the state system REEFS.

Conclusion

The strict observance of the regulatory requirements of the Cayman Islands Monetary Authority becomes the main factor of the long-term stability of digital projects. The implemented Travel Rule on the Cayman Islands has liquidated the grey zones in the sector of virtual assets, having transformed the transparency of transactions into a mandatory standard of work. For international business, the adaptation to these rules means the necessity of constant investments into the compliance infrastructure. 

FAQ 

1. From which moment did the rules of the end-to-end identification of crypto transfers become mandatory in this jurisdiction?

The Travel Rule on the Cayman Islands has been fully acting and controlled by the state since 1 July 2022. All the registered providers are obliged to apply these norms to all transactions without restrictions on their volume.

1. Which information exactly is it necessary to forward to the receiving side upon the sending of tokens?

The established obligation on the transfer of information on the carried-out transactions on the Cayman Islands includes the sending of the full names of the participants, the numbers of their accounts, the physical addresses or the state identifiers. The data is packed into encrypted files before the moment of the start of the blockchain session.

1. How often must companies direct information about the movement of assets to the address of the Monetary Authority?

The quarterly report of a crypto company on the Cayman Islands in the Travel Rule Return format is submitted every three months through the specialised supervisory system STRIX. Additionally, organisations annually provide a comprehensive annual declaration.