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The Cayman Islands has taken a material step forward in balancing responsible digital asset innovation with the introduction of the Virtual Asset (Service Providers) (Amendment) Bill, 2025 (Amendment Bill) which, if passed into law, will make key amendments to the Virtual Asset (Service Providers) Act (2024 Revision) (VASP Act). This targeted update would bring significant clarity to the treatment of tokenised equity and investment interests in Cayman Islands-registered investment funds.

While the Amendment Bill is a short document, its significance should not be understated. Once passed into law, it will affirm the Cayman Islands’ commitment to innovation and legal certainty, and its long-term role as a leading offshore jurisdiction for real-world asset (RWA) tokenisation.

Current position

In recent years, the tokenisation of interests in Cayman Islands investment funds has gathered significant momentum. By representing ownership in digital form on blockchain networks, tokenisation offers more efficient access, reduced administrative costs and the potential for secondary market liquidity (subject to the terms of the offering and compliance with the relevant fund’s obligations under the anti-money laundering regulations in the Cayman Islands).

However, as seen in other jurisdictions, innovation quickly outpaced existing legislation and jurisprudence, and uncertainty began to mount as to the regulatory status of tokenised interests in Cayman Islands investment funds.

The introduction of the VASP Act in 2020 was a proactive move to bring clarity and oversight to virtual asset markets. However, as more traditional financial instruments began to adopt blockchain-based tokenisation, the boundary between tokenised securities and pure crypto assets became increasingly blurred.

The VASP Act contains a broad definition of the “issuance of virtual assets”, which is a regulated activity. This creates ambiguity: Are tokenised fund interests virtual asset issuances under the act? If so, would a Cayman Islands fund that issues tokenised investment interests be subject to regulation under both the VASP Act and the Private Funds Act or, where applicable, the Mutual Funds Act?

The possibility of two layers of regulation has proven a disincentive to the tokenisation of interests in Cayman Islands investment funds. The increased compliance burden, higher initial and recurring costs, and regulatory uncertainty have threatened to stifle innovation and deter high-quality tokenised fund offerings from launching in the jurisdiction. Many tokenised funds have, for example, instead chosen the British Virgin Islands as their situs, where the issuance of virtual assets is not generally regulated.

Amendment Bill brings clarity

The Amendment Bill directly addresses this challenge by materially revising the definition of “issuance of virtual assets” to explicitly exclude certain financial instruments from its scope.

If the Amendment Bill passes into law, under the amended definition, the “issuance of virtual assets” will mean the sale of newly created virtual assets to the public in or from within the Cayman Islands in exchange for fiat currency, other virtual assets or other consideration other than:

(1) The sale of virtual service tokens;

(2) The issuance of equity interests as defined under the Mutual Funds Act (2025 Revision) and the Securities Investment Business Act (2020 Revision); and

(3) The issuance of investment interests under the Private Funds Act (2025 Revision).

Perhaps just as significantly (and unusually), the amendments contemplated by the Amendment Bill will have retrospective effect for the tokenisation of equity or investment interests that occurred before the Amendment Bill’s commencement. This ensures legal certainty for existing structures that may have previously operated in a grey area.

Clear direction

The amendments to the VASP Act proposed by the Amendment Bill mark a significant milestone for the Cayman Islands’ financial and digital sectors and have been widely welcomed by industry participants and legal advisers.

With this clarification in the regulatory landscape, which regulates without over-regulating, the Cayman Islands strengthens its role as a preferred jurisdiction for tokenised RWAs, offering issuers, fund managers and investors regulatory certainty on a key issue.

As fund tokenisation becomes increasingly mainstream, and global interest in tokenised RWA platforms and offerings continues to surge, this update helps future-proof the jurisdiction’s offering and provides a strong signal to the market: The Cayman Islands are open for digital business.

Robert Farrell is a partner at Loeb Smith Attorneys