Tokenisation is increasingly being explored as a means of enhancing the efficiency and accessibility of investment fund structures. By representing fund interests through digital tokens recorded on distributed ledger technology, sponsors seek to streamline processes such as investor onboarding, transfers and settlement, while preserving the underlying economic characteristics of traditional fund interests. In the Cayman Islands, tokenisation has developed within the context of the existing funds regulatory framework, rather than as a standalone regime, with regulatory focus directed towards integrating digital mechanisms into established legal and supervisory principles.

Legislative and regulatory position in Cayman

The regulatory approach to tokenised funds in the Cayman Islands has continued to evolve alongside broader developments in digital assets and financial services regulation. Cayman regulators have consistently emphasised that tokenisation, of itself, does not create a new category of investment fund or alter the legal character of a fund.

Under Cayman law, the regulatory classification of a tokenised fund depends on its underlying characteristics rather than the technology used to issue or record interests. Where a tokenised vehicle falls within the scope of the Mutual Funds Act (as Revised) or the Private Funds Act (as Revised), it will be subject to the same registration, supervision and ongoing obligations as a non-tokenised fund pursuing a comparable investment strategy.

Recent regulatory guidance and industry commentary reinforce the position that tokenisation is best viewed as an alternative method of evidencing or administering fund interests. Established principles relating to investor rights, governance standards and regulatory oversight continue to apply notwithstanding the use of distributed ledger technology. This approach provides continuity and legal certainty for sponsors, investors and service providers.

Regulators remain attentive to the operational and risk considerations associated with digital infrastructure. Where tokenisation involves blockchain-based platforms, smart contracts or third-party technology providers, funds and their service providers are expected to consider how existing regulatory requirements are satisfied in practice. This reflects a broader policy objective of supporting innovation while maintaining the integrity and stability of the Cayman funds regime.

Structuring tokenised funds

Tokenised funds in the Cayman Islands are typically established using familiar fund vehicles, with tokenisation applied as a mechanism for issuing, recording or transferring investor interests rather than as a replacement for traditional fund law concepts. The choice of legal structure continues to be driven by the fund’s investment strategy, investor profile and operational requirements.

Common structures include exempted companies, exempted limited partnerships and, where appropriate, segregated portfolio companies. Regardless of structure, core investor rights are set out in the fund’s constitutional documents and offering materials. Digital tokens function as a representation of fund interests rather than as a separate asset class and do not displace these rights.

The use of tokenisation may introduce additional operational considerations, particularly in relation to the role of fund administrators and technology providers. Administrators remain responsible for maintaining accurate investor records, calculating net asset value and supporting regulatory reporting, even where distributed ledger technology is used as part of the record-keeping or transfer process. Where third-party platforms or smart contracts are engaged, boards and sponsors should ensure that contractual arrangements clearly allocate responsibilities and address matters such as data integrity, system resilience and contingency planning.

Careful alignment between legal documentation and technological implementation is essential. Constitutional documents, subscription agreements and transfer provisions should reflect the functionality of the tokenisation platform to ensure that contractual and regulatory requirements are met in practice, particularly where tokenisation is intended to facilitate secondary transfers or other forms of liquidity.

Regulatory and compliance considerations

Although tokenisation does not alter a fund’s classification under Cayman funds legislation, it may give rise to additional regulatory and compliance considerations depending on how the structure operates in practice.

The Virtual Asset Service Providers Act may be relevant where elements of a tokenised structure involve regulated virtual asset services, such as token issuance platforms, custody arrangements or exchange functionality. A tokenised fund will not automatically fall within the VASP regime; however, sponsors and service providers should assess whether any aspect of the operational model triggers registration or licensing requirements.

Anti-money laundering and counter-terrorist financing obligations continue to apply in full. Tokenisation does not displace existing AML and CFT requirements, and sponsors must ensure that investor due diligence, ongoing monitoring and record-keeping processes meet Cayman regulatory standards. Where digital onboarding tools or automated processes are used, boards and compliance officers should be satisfied that appropriate oversight and controls are in place.

Governance, systems and controls remain a key focus of regulatory supervision. The Cayman Islands Monetary Authority expects regulated funds to maintain oversight arrangements proportionate to their size and complexity. In the context of tokenised funds, this includes effective oversight of technology providers and a clear understanding of how digital infrastructure interacts with core fund functions such as valuation, investor communications and regulatory reporting.

As tokenised fund structures continue to develop, sponsors and service providers may benefit from early consideration of governance, regulatory and compliance issues to ensure that tokenisation is implemented consistently with Cayman’s established funds regime.

For further advice on the structuring and regulation of tokenised investment funds in the Cayman Islands, or on related compliance considerations, please contact our Investment Funds team at [email protected].