The Cayman Islands has long been recognised as the leading offshore jurisdiction for the establishment of investment funds. With its tax-neutral status, robust legal infrastructure, and innovative virtual asset legislation, the jurisdiction continues to attract investment managers seeking to establish cutting-edge funds with cryptocurrency and digital asset strategies.
Whether you are a first-time fund manager or an experienced sponsor diversifying into crypto for the first time, the Cayman Islands offers a dynamic and forward-thinking environment to structure your fund efficiently and compliantly. At Stuarts, we combine legal precision with commercial pragmatism to help you launch with confidence.
Choosing the Right Structure for your Crypto Fund
In the Cayman Islands, crypto investment funds are typically established as either:
- Mutual Funds: Open-ended structures where investors can redeem their shares at net asset value ("NAV"). These are regulated under the Mutual Funds Act ("MFA").
Key features:
- Cayman Islands Monetary Authority ("CIMA") registration required
- At least two CIMA registered directors for corporate funds
- Appointment of a regulated administrator for NAV calculation
- Anti-money laundering / counter-terrorist financing compliance.
- Appointment of Cayman Islands auditor.
- These are popular for hedge funds, trading strategies, and DeFi projects.
- Private Funds: Closed-ended structures where investors do not have redemption rights. These fall under the Private Funds Act ("PFA").
Key features:
- CIMA registration required (licensing not needed)
- Independent valuation and custody obligations
- Cash flow monitoring
- Appointment of Cayman Islands auditor.
- These are ideal for venture capital-style funds and blockchain infrastructure projects
The appropriate classification depends on the redemption mechanics of your fund. Liquid crypto trading strategies and decentralised finance (DeFi) exposures are commonly set up as mutual funds. Venture capital-style investments in tokens or Web3 projects, where liquidity is event-driven, are often structured as private funds.
Both fund types require registration with CIMA and must adhere to anti-money laundering and counter-terrorist financing regulations.
Legal Vehicles and Popular Crypto Structures
Fund managers can choose from a variety of Cayman Islands legal structures, including exempted companies, limited partnerships, unit trusts, and segregated portfolio companies ("SPCs"). Among these, SPCs have gained particular traction in the crypto space.
An SPC allows the creation of segregated portfolios ("cells") within a single legal entity, each with its own assets, liabilities, and investment strategies. This structure is ideal for managers operating multiple trading strategies or token allocations and seeking risk ring-fencing between portfolios.
Regulatory Landscape: VASP and Fund Distinction
A crypto investment fund is not automatically considered a Virtual Asset Service Provider (VASP) under the Virtual Asset (Service Providers) Act ("VASPA"). However, if the fund offers services such as virtual asset custody or exchange on behalf of third parties, it may fall within VASP regulation and require registration or licensing. Additionally tokenised funds may require registration under VASPA.
Most crypto funds will simply need to comply with the MFA or PFA. If your strategy includes security tokens or crypto derivatives, additional regulation under the Securities Investment Business Act (SIBA) may apply.
Stuarts can advise you on whether your planned activities may trigger additional licensing requirements under Cayman law. For tailored advice, contact our team at info@stuartslaw.com.
Crypto-Specific Considerations for Fund Formation
Subscriptions in Cryptocurrency
Many crypto funds now accept subscriptions in cryptocurrencies or stablecoins. However, this brings unique AML/KYC considerations. Fund administrators must conduct client due diligence, validate source of wealth, and monitor wallets and exchanges used.
Managers should engage administrators early to confirm supported exchanges, whether self-hosted wallets are permissible, and how crypto subscriptions are converted into the fund's base currency (usually USD). Foreign exchange volatility and custody issues must be carefully managed.
Valuation of Digital Assets
Unlike traditional markets, crypto trades 24/7 across multiple exchanges. This creates complexity in NAV calculation. The fund's offering document should clearly outline valuation sources, timing (valuation point), and pricing methodology.
CIMA's NAV Rules mandate fair, consistent and verifiable valuation policies. These must align with IFRS or equivalent accounting standards and be reviewed with the fund's auditor and administrator.
Custody and Asset Safekeeping
Crypto custody remains a key challenge. Cayman Islands rules require segregation of assets and appointment of an independent custodian or, in limited cases, a verifier of title. This applies to both mutual and private funds.
While some managers prefer "self-custody" (holding private keys in-house), this raises compliance questions. Third-party digital asset custodians offering cold storage, multi-signature wallets and institutional-grade security are increasingly used to meet regulatory requirements.
We advise discussing custody arrangements early in your fund formation to ensure alignment with Cayman Islands legal requirements and investor expectations.
Managing Counterparty and Exchange Risk
The collapse of major exchanges like FTX has underscored the need for robust counterparty risk frameworks. Diversifying custody and exchange exposure, performing extensive due diligence, and disclosing risks in offering documents are critical.
We recommend having contingency plans in place and working with service providers who can demonstrate regulatory compliance, cyber resilience, and operational integrity.
Beneficial Ownership, AML & Data Compliance
Crypto funds are required to comply with a comprehensive legal framework in the Cayman Islands, including:
- AML Regulations: Designated compliance officers must be appointed, and AML audits may be required.
- Beneficial Ownership: Under the Beneficial Ownership Transparency Act ("BOTA"), in-scope funds must maintain a beneficial ownership register.
- Data Protection: Funds must adhere to the Data Protection Act when processing investor or counterparty data.
- FATCA/CRS: Funds that qualify as financial institutions must comply with automatic tax reporting requirements.
The Advantage of Cayman's Digital Asset Ecosystem
The Cayman Islands is not only a fund jurisdiction. Through its Special Economic Zone (SEZ), it offers a thriving ecosystem for digital asset businesses, from token issuers and DAOs to DeFi platforms and intellectual property holding vehicles. These entities are often set up as exempted or foundation companies, depending on their function.
For fund managers seeking a physical presence or broader crypto business structure, the SEZ offers fast-tracked licensing, immigration, and tax benefits.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
