The Cayman Islands’ proposed amendments to the Mutual Funds Act and the Private Funds Act directly addresses the rise of tokenized fund structures. The proposals are among the first in any major fund domicile to set statutory requirements for funds issuing digital tokens to investors. And, if enacted, they would set Cayman apart in terms of investor protection.

While still at the consultation stage, the amendments reveal where Cayman intends to position itself in global digital finance and fund regulation.

The proposals rest on four central pillars:

1. Robust cybersecurity and IT audits

Tokenized funds will need enterprise-level cybersecurity measures and annual independent IT audits. These reviews must cover token design, smart contract functionality, reconciliation of token balances with underlying assets and privileged access controls.

No other leading fund domicile has yet mandated IT audits in law. In Luxembourg and Ireland, tokenized shares are permitted under existing AIFMD and UCITS rules, but oversight remains financial rather than technological. Cayman’s approach recognises that investor protection depends on both systems integrity and financial accuracy.

2. Appointment of regulated administrators as principal offices

Tokenized funds must appoint a Cayman-licensed fund administrator as their principal office. This goes beyond the standard registered office requirement. The administrator will oversee daily NAV calculation, investor onboarding and compliance.

The intent is to anchor accountability in Cayman, ensuring there is a regulated entity answerable to CIMA. By contrast, the U.S. SEC treats tokenized funds under existing securities law but does not require a domestic administrator. Cayman’s rules strengthen the link between the fund and local regulatory oversight.

3. Segregation of assets and custodial safeguards

The amendments require segregation of assets and tokens from the assets of the manager or custodian. Custodians must maintain secure wallets with strong key management and cannot lend client assets without express approval and disclosure.

This directly responds to past failures in digital asset markets where commingling led to investor losses. Cayman’s digital asset framework gives statutory force to best practice custody standards that other jurisdictions often treat as guidance only.

4. Annual confirmations covering financials and technology

Funds will be required to file audited financial statements and an auditor’s opinion on the token system itself. This dual-audit approach ensures both the financials and the technology receive scrutiny.

It goes further than European frameworks, which focus mainly on financial reporting, and anticipates demands from institutional investors seeking full assurance across the lifecycle of digital products.

Control of on-chain transfers

The proposals also restrict token transferability. Digital tokens issued by a Cayman fund may only be transferred between existing holders with prior manager approval and in accordance with the offering document.

This prevents uncontrolled secondary trading and helps funds remain compliant with AML, KYC and investor eligibility rules. Cayman’s framework embeds transfer controls into law, ensuring on-chain assets remain subject to the same standards as traditional securities.

Conclusion

Cayman’s proposed tokenized fund legislation is ambitious. It goes further than Luxembourg, Ireland or the United States by explicitly regulating the technological dimension of digital funds.

Critics may argue that annual IT audits and enhanced oversight will raise costs, particularly for smaller managers. But Cayman’s position is clear: tokenization should not weaken investor protection.

If adopted, these amendments would make the Cayman Islands a global benchmark for integrating digital asset structures into mainstream fund law.

If you would like to understand more about tokenisation and Cayman funds, please contact paul.muspratt@wb.group to discuss all things web 3.