Register a Tokenised Investment Fund in the Cayman Islands

To register a tokenised investment fund in the Cayman Islands means to create a regulated or exempted investment structure in one of the most flexible offshore jurisdictions, in which the assets and the participation interests of investors are expressed in the form of digital tokens functioning on the basis of distributed ledgers (DLT). The registration of a tokenised investment fund in the Cayman Islands makes it possible to digitise investment products with an increase of their liquidity and the efficiency of their circulation.

The supervision of a tokenised fund is carried out by the Cayman Islands Monetary Authority (CIMA), and its activity may be regulated by the Mutual Funds Act, the Private Funds Act and the Virtual Asset Service Providers Act (VASP Act). The fund must correspond to the prescriptions of investment law, compliance, AML/CFT procedures and the specific requirements for providers of virtual asset services.

In Which Form to Register a Tokenised Investment Fund in the Cayman Islands

A tokenised investment fund in the Cayman Islands can be opened in the form of an exempted company (Exempted Company) or a segregated portfolio company (Segregated Portfolio Company, SPC), which makes it possible to legally and economically separate the assets and obligations of various investment strategies within one legal entity. The most in-demand form for the creation of tokenised investment funds in the Cayman Islands is the segregated portfolio company, within which separate portfolios are created, legally separated from one another. Each portfolio may correspond to a separate investment direction, a class of assets or even an issuance of tokens, which makes it possible to reduce the cross risks between investment strategies.

The Regulatory Requirements of CIMA and the Licensing of VASP Activity

The registration of a tokenised fund in the Cayman Islands is impossible without an analysis of the regulatory status of virtual assets. If a fund carries out the issuance, storage, transfer or management of tokens, it may fall under the regime of a Virtual Asset Service Provider (VASP), which requires separate registration or licensing with CIMA. If an investment fund is qualified as private or mutual, it is obliged to observe the requirements for audit, the appointment of a licensed administrator and a custodian, as well as ensuring the transparency of the NAV (net asset value).

Due attention is paid to AML/KYC procedures, the identification of investors and the monitoring of transactions, especially in the case of the circulation of tokenised interests on the secondary market. The obligation is placed on the managers of the fund to confirm the proper storage of tokens and to disclose the risks connected with the technological infrastructure in the offering documents to investors (Offering Documents).

The Creation of a Tokenised Investment Fund in the Cayman Islands: the Qualification of Tokens

The main element of the structure is the tokenisation of investment rights, in which the economic interests of the participants of the fund are expressed in digital tokens recorded in a blockchain system. Tokens may have a different legal nature — from utility instruments to security tokens, which directly influences the applicable regulation and the requirements for the emission. Each of the types requires a thorough legal qualification in order to avoid the unintentional classification of tokens as securities within the framework of the applicable legislation.

If tokens are recognised as an analogue of securities, the fund is obliged to observe the corresponding requirements for the disclosure of information, the restriction of the circle of investors (for example, only professional investors), as well as possible restrictions on public placement. This requires the comprehensive legal structuring of the White Paper (the informational document of the project) and the internal rules of the fund, which must be agreed with the regulatory practice of the Cayman Islands.

The Procedure of the Registration of a Tokenised Fund in the Cayman Islands

The process of registration begins with the choice of the legal form and the preparation of a complete package of constituent documents, which must record the corporate rights and obligations of the participants, describe in detail the investment policy of the fund, the mechanisms of the emission and circulation of tokens, as well as the rules of the distribution of income. At this stage, the investment mandate of the fund is formed, which determines the admissible classes of assets, the strategy of risk management, the restrictions on liquidity and the procedure of the valuation of assets (NAV).

The next stage is the development of the structure of tokenisation, including:

• the legal qualification of tokens;

• the determination of their economic function;

• the determination of the technical model of the issuance. 

Depending on the structure, tokens may represent a participation interest in the fund, the right to income or a digital equivalent of an investment certificate. Simultaneously, documentation is formed describing the mechanism of their circulation, including the White Paper or the Offering Memorandum (the memorandum on the offering to investors), which must be agreed with the requirements of CIMA and correspond to the international standards of the disclosure of information.

After the structuring of the fund in the Cayman Islands, the submission of the registration documents to CIMA is carried out. The regulator carries out an assessment of the structure as regards the correspondence to the prescriptions of AML/CFT, the transparency of ownership and the sufficiency of internal control. In order to establish a tokenised fund in the Cayman Islands, it is necessary to appoint service providers:

• an administrator, responsible for the calculation of the net asset value (NAV) and the accounting of investors;

• an auditor, ensuring the annual check of the financial reporting;

• a registration agent, ensuring the legal connection with the jurisdiction;

• a custodian, who is responsible for the safe storage of crypto assets and the management of the infrastructure of private keys.

A significant stage of the procedure is compliance, including a set of measures for the identification of investors (KYC), the check of the sources of the origin of funds (AML), as well as the constant monitoring of transactional activity. Upon the registration of international tokenised funds in the Cayman Islands, procedures of correspondence to the FATCA and CRS regimes are implemented, which requires additional reporting and the structuring of the investment base.

The concluding stage of the registration of a tokenised fund in the Cayman Islands is the implementation of a risk management system, covering both traditional financial risks and the specific risks of the digital infrastructure. Particular attention is paid to cybersecurity, the protection of private keys, the backup of data, as well as the protection of smart contracts from vulnerabilities and external attacks. 

The Investment Attractiveness and the Risks of Tokenised Funds

The absence of direct taxation of profit, dividends and capital gains makes this jurisdiction in demand for global structures of collective investments. The legal system of the islands is based on Anglo-Saxon law, which ensures the predictability of judicial practice and a high level of the protection of investors. The use of blockchain technologies makes it possible to increase the liquidity of assets, to simplify the accounting of participation interests and to ensure the automation of the distribution of income through smart contracts.

Tokenised investment funds in the Cayman Islands are characterised by flexibility and international recognition. One of the main advantages of tokenised funds is the high level of automation of investment processes thanks to the use of blockchain technologies and smart contracts. The programmable infrastructure makes it possible to substantially reduce the participation of intermediaries in the administration of the fund, to automate the subscription of investors, the distribution of income, the carrying out of settlements and the execution of corporate actions. As a result, operations with tokenised interests are carried out faster in comparison with traditional investment structures, and the processing of transactions and the recording of the rights of investors take place in real time.

An additional advantage is the heightened liquidity of investment assets. Tokenisation makes it possible to divide the assets of the fund into digital interests, which may circulate on specialised platforms and secondary markets, simplifying the entry and exit of investors from the structure. The use of distributed ledgers ensures the transparency of the accounting of the rights of ownership, reduces the risk of errors in the maintenance of the registers of participants and makes operations with investment interests more technological and accessible for international investors. Owing to this, tokenised funds are capable of attracting a wider circle of participants in comparison with classic closed investment models.

Nevertheless, the registration of a tokenised fund in the Cayman Islands is connected with a number of legal and operational risks. The main of them are:

• regulatory uncertainty regarding the classification of tokens;

• the requirements for the observance of the international standards of AML/CFT;

• the risks of cybersecurity and the loss of digital assets.

Separate attention is required by the question of cross-border regulation, since tokenised funds, as a rule, attract investors from different jurisdictions, which may cause a conflict of legal regimes and the necessity of observing additional requirements, including FATCA and CRS reporting.

Conclusion

The creation of a tokenised investment fund in the Cayman Islands is an instrument of the international structuring of capital, combining classic fund law and modern blockchain technologies. It makes it possible to lawfully issue digital investment instruments, ensuring the flexibility of asset management, tax neutrality and international recognition. However, successful implementation requires the observance of the prescriptions of CIMA, the correct qualification of tokens, a built-up system of compliance (AML/KYC) and a reliable infrastructure of the management of digital assets. Thereby, specialised support of the registration of a tokenised investment fund in the Cayman Islands will make it possible to ensure the legal stability of the structure, to minimise regulatory and operational risks, as well as to create a transparent and scalable investment model corresponding to the international standards of financial regulation and the requirements of the digital economy.