The New Crypto-Asset Reporting Framework – Relevance for Cayman Investment Funds

Application of the CARF Regulations

The CARF Regulations reporting and due diligence requirements apply to Cayman “Reporting Crypto-Asset Service Providers” (RCASP) being any individual or entity that, as a business* (see further below) provide services effectuating “Exchange Transactions” for or on behalf of customers, including by acting as a counterparty, or as an intermediary, to such Exchange Transactions, or by making available a trading platform.  A RCASP will be subject to the reporting and due diligence requirements of the CARF Regulations if it is:

•  resident in Cayman;
• has a regular place of business or a place of effective management in Cayman; is subject to financial supervision in Cayman;
•  is incorporated or organized under Cayman law and has legal personality in Cayman or an obligation to file tax or tax information returns in Cayman with respect to its income; or
•   is managed from Cayman.

Non-Cayman RCASPs have reporting and due diligence requirements with respect to any Relevant Transactions effected through their branches based in Cayman.

The Crypto-Asset Reporting Framework Commentary published by the OECD provides that “as a business” excludes individuals or entities who carry out a service on a very infrequent basis for non-commercial reasons.

A Cayman RCASP that is incorporated or registered in Cayman will, in addition to its obligations under the CARF Regulations, also be required to be registered or licensed as a virtual asset service provider under the Virtual Asset (Service Providers) Act (Revised) (VASP).

Reporting Obligations

Cayman RCASPs are required to report on Relevant Transactions being the following types of Exchange Transactions and/or Transfers of Relevant Crypto-Assets:

•  Exchanges between Relevant Crypto-Assets and Fiat Currencies;
•  Exchanges between one or more forms of Relevant Crypto-Assets; and
• Transfers of Relevant Crypto-Assets, including Reportable Retail Payment Transactions.

For the purposes of the CARF Regulations, the term “Crypto-Asset” means a digital representation of value that relies on a cryptographically secured distributed ledger or a similar technology to validate and secure transactions.  “Relevant Crypto-Asset” means any Crypto-Asset that is not a Central Bank Digital Currency (CBDC), a Specified Electronic Money Product (including prepaid cards and prepaid accounts in a single fiat currency used for third party payments) (SEMP) or any Crypto-Asset for which the RCASP has adequately determined that it cannot be used for payment or investment purposes.

“Fiat Currency” is the official currency of a jurisdiction, issued by a jurisdiction or by a jurisdiction’s designated Central Bank or monetary authority as represented by physical banknotes, coins, money in digital forms including CBDCs and electronic money products including SEMPs.

“Reportable Retail Payment Transactions” are transfers of Relevant Crypto-Assets in consideration of goods or services for a value exceeding US$50,000.

Do the CARF Regulations Apply to Investment Funds?

Investment funds are not subject to the CARF Regulations unless they undertake activities that would render them a RCASP – effectuating exchange transactions or making a trading platform available.

Typical fund investment activities are covered by the existing CRS framework, which was recently amended to bring Relevant Crypto Assets within its scope and to require investment funds holding any interest in Relevant Crypto Assets to report on the account balances of their relevant investors.  The introduction of the CARF Regulations alongside these amendments to CRS was, by design, to create a comprehensive information exchange framework in respect of Crypto-Assets while avoiding duplicative reporting under the two regimes.

Common crypto-related features of investment funds are considered below:

• Tokenized funds: the issuance of tokenized interests would not classify a fund as a RCASP.
•  Investing in Crypto-Assets: buying, selling or managing Crypto-Assets for the fund’s own account would fall outside the CARF Regulations reporting obligations.
•  Accepting subscriptions or making redemptions in Crypto-Assets: the acceptance of subscriptions or the processing of redemptions of equity interests in exchange for one or more types of Crypto-Asset or Fiat Currency would not classify the fund as a RCASP.

It is important to note that the CARF Regulations include an anti-avoidance provision whereby any arrangement with a main purpose of avoiding any reporting obligation(s) set out under the CARF Regulations is deemed to be void. Any investment fund with a main purpose of exchanging Relevant Crypto Assets should therefore carefully consider its position (and report as appropriate) under the CARF Regulations; and be registered or licensed under VASP.

How We Can Help

Our Regulatory and Technology & Innovation teams are assisting clients across the financial services, investment management, fiduciary and crypto-asset sector in transaction structuring, classification advice and regulatory compliance.  For further information, please contact you usual Appleby attorney.