Cayman structures for Web 3.0 entities

Despite most legislation relevant to the financial services in the Cayman Islands being written before the blockchain revolution began, the Cayman Islands has made a number of legal and regulatory advancements that make it a jurisdiction where such innovation thrives. The following article outlines the most common structures used for Web 3.0 entities in the current marketplace under the local regulatory regimes – the Virtual Asset Service Providers Act (as revised) (“VASPA”) and the Economic Substance Act (as revised) (the “ES Act”).

Token offerings

A token issuer can be set up as a standalone entity to issue tokens or NFTs (the “Token Issuer”) or more commonly as a subsidiary of a second entity that develops the platform or protocol (the “Developer”). Many Web 3.0 businesses choose an exempted limited company as the tax neutral vehicle to be the Token Issuer, but for the Developer there are a number of choices:

• exempted limited company;
• Special Economic Zone (SEZ) Company (“SEZC”);
• foundation company; or
• pre-existing foreign company.

Platform controlling entities

An entity that controls a platform that only provides a forum where sellers and buyers may post bids and offers, or a forum where the parties trade in a separate platform or in a peer-to-peer manner will be exempted from the requirement to obtain a license from the Cayman Islands Monetary Authority (“CIMA”) under VASPA. This kind of entity can be formed using any of the above legal structures, but most commonly would use an exempted limited company.

Decentralised autonomous organisations (DAOs)

Combining the limited liability protections of a corporate entity with the flexibility of a trust, a Cayman foundation company provides DAO projects with a very user-friendly option. Foundation companies, unlike trusts or partnerships, have separate legal personalities, can hold assets, assume obligations, sue and be sued. However, a key distinction of a foundation company is that it can be structured without shareholders, and so does not have a clear “owner”. With no shareholders, all the officers of a foundation company simply have the objectives of the DAO as their priority.

Special Economic Zone (SEZ)

The creation of Cayman Tech City, also known as Cayman Enterprise City, in the SEZ allows a tax-neutral environment for technology companies looking to expand in the Cayman Islands. Using Cayman Tech City and the benefits of the SEZ, companies can quickly and cost-effectively establish a genuine physical presence offshore with staffed offices within the SEZ area. See here for more information.

Decentralised finance (DeFi)

For DeFi projects, the foundation company is often used as a legal “wrapper” with corporate personality. In this role the foundation company may undertake many of the real-world activities required by the DeFi project.

Intellectual property holding companies

In addition to either the token and coin offering structures, and sometimes as a complementary entity to a DAO, some clients may wish to incorporate a separate entity to separate IP holding companies or separate software operators in addition to the above. This choice is often driven by the preferences of each business, its risk appetite, and its tax considerations. The preferred vehicle for an entity established to hold Web 3.0 intellectual property is an exempted limited company.

Exchanges

An exchange, in whatever legal form it is created, will inevitably and eventually become subject to Phase Two of VASPA. This will require it to register with the Cayman Islands Monetary Authority (CIMA), and to obtain a virtual asset service license from CIMA for the operation of the exchange. 

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Photo: Eric Laudonien - stock.adobe.com