Structuring an ICO through the Cayman Islands


Monday, November 06, 2017   07.54PM / Contributed by Harney Westwood & Riegels LLP 

It seems that 2017 will be remembered as the year of the initial coin offering (ICO). Although still not mainstream, the pool of people in the financial services sector who have never heard of Bitcoin, cryptocurrencies, the blockchain or an ICO is quickly diminishing. For lawyers, this has meant first trying to understand a rapidly evolving technology and second establishing how this technology fits within laws and regulations that were drafted without thought or reference to it.

This update outlines the primary legal and regulatory considerations for structuring an ICO through the Cayman Islands. An 'ICO' is defined as an alternative method of fund raising for a project on a blockchain network through the acceptance of fiat or cryptocurrency in exchange for tokens associated with the project. These tokens may themselves be tradable. 

Structuring an ICO
As alluded to, there is an element of legal and regulatory drag in the Cayman Islands. ICO-related guidance is yet to be issued by the government or the regulator. This is not due to complacency or a lack of will. Rather, in seeking to retain the reputation of the Cayman Islands as a leading international finance centre, the government and the regulator – in consultation with the private sector – wish to ensure that any initiatives aimed at blockchain technology and the associated industry are well thought out, effective and business friendly, while safeguarding the reputation of the jurisdiction by meeting international standards. As such, clarification of existing legal and regulatory uncertainties is expected imminently. 

Where an ICO is structured through the Cayman Islands, the choice of vehicle is presently a Cayman-exempted company. However, the Cayman Islands will soon bring into force the foundation company regime, introducing foundation companies which will be orphan vehicles. Ownership and autonomy concerns can be addressed by having a Cayman Islands charitable trust or Special Trusts (Alternative Regime) (STAR) trust hold all of the relevant shares in the ICO company. A STAR trust is a non-charitable purpose trust that can hold assets for a specific purpose. 

Legal and regulatory considerations
The following statutory and regulatory regimes must be considered when structuring an ICO through the Cayman Islands:

  • The Money Services Law;

  • The Securities Investment Business Law;

  • The Proceeds of Crime Law, Anti-money Laundering Regulations and existing guidance notes;

  • The Mutual Funds Law;

  • The Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standards;

  • The Beneficial Ownership Regime; and

  • The Electronic Transactions Law.

The correct analysis will be fact specific for each ICO. 

Money Services Law
The Money Services Law regulates money services businesses in the Cayman Islands. These include businesses providing (as a principal business) money transmission and currency exchange. The applicability of the law will depend on the specifics of the ICO. While any ICO may, by its nature, fall within the remit of the Money Services Law, it is unlikely to apply to most ICOs. 

Securities Investment Business Law
Under the Securities Investment Business Law, a person cannot carry on or purport to carry on securities investment business unless he or she holds – or is exempt from holding – a licence granted under the law. The Securities Investment Business Law defines 'securities' through a list of instruments that are common in financial markets, with no specific mention of digital tokens or cryptocurrencies. It defines 'securities investment business' through a list of activities, including dealing in, arranging deals in, managing and advising on securities. 

The Securities Investment Business Law contains a list of 'excluded persons' who are exempt from the requirement to hold a licence and a list of activities that do not constitute securities investment business for the purposes of the law. Taking these into consideration, an ICO can be classified as a security without the ICO company falling within the scope of the Securities Investment Business Law. 

Each ICO should be evaluated on its merits and for many (eg, ICOs involving so-called 'usage' or 'utility' tokens), the Securities Investment Business Law will not be applicable. 

Proceeds of Crime Law, Anti-money Laundering Regulations and existing guidance notes
The anti-money laundering laws need careful consideration with respect to all Cayman-domiciled ICOs. The Proceeds of Crime Law generally applies to all Cayman-domiciled entities. The Anti-money Laundering Regulations 2017 and existing guidance notes focus primarily on the regulated sector in the Cayman Islands and prescribe the policies and procedures to be put in place by Cayman-regulated entities (ie, those undertaking relevant financial business, the definition of which is fairly broad) with respect to money laundering. 

Given the general application of the Proceeds of Crime Law, ICO companies should not assume that if their intended ICO falls outside the ambit of the Anti-money Laundering Regulations, they need not concern themselves with anti-money laundering issues. Irrespective of the final determination, solutions are available in the market to mitigate against ICO companies falling foul of the anti-money laundering laws. 

Mutual Funds Law
The Mutual Funds Law should be of no concern where an ICO is not intended to be an investment fund or engage in investment fund activity. If the ICO relates to an investment fund or investment fund activity, the proposed structure should be considered in the context of the Mutual Funds Law. Given the law's definition of equity interests (a key determining factor as to whether an entity qualifies as a mutual fund), most ICO companies – distinct from any blockchain or cryptocurrency asset class-focused fund – should be unaffected by the Mutual Funds Law. 

FATCA and Common Reporting Standards
The FATCA and Common Reporting Standards relate to the automatic exchange of information between jurisdictions to combat tax evasion, which should not be an issue for usage or utility tokens (for further information please see "Introduction to automatic exchange of information for investment funds"). 

Beneficial Ownership Regime
Considerations around share ownership, voting rights, the right to remove a majority of the board of directors and the exercise of significant influence and control over an ICO company will play a part in determining who should be recorded on the beneficial ownership register (for further information please see "Beneficial ownership regime – an overview"). It is therefore relatively straight forward to ensure that the identities of ICO token holders are not maintained on the beneficial ownership register of an ICO company. 

Electronic Transactions Law
The Electronic Transactions Law should be considered when preparing and accepting the terms and conditions or purchase agreement relating to an ICO. 

The Cayman Islands is witnessing an upsurge in ICO-related business and structuring an ICO through the territory should remain an attractive proposition, particularly where the ICO is well thought out and the ICO team is properly advised. 

For further information on this topic please contact Patrick Colegrave at Harneys by telephone (+44 20 7842 6080) or email ( The Harneys website can be accessed at  

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