The Cayman Islands is taking a bold step toward regulating tokenized investment funds through proposed amendments to its Mutual Funds Act and Private Funds Act (2025 Revisions). These proposals introduce formal definitions and compliance obligations for tokenized fund interests, defined as digital investment and equity tokens, including requirements for custody, cybersecurity, and IT audits.
For investors, the amendments provide greater legal certainty and enforceable rights when participating in tokenized funds.
For fund managers, the new rules offer clarity and credibility when launching tokenized funds, enhancing investor confidence and regulatory alignment. But they also introduce added compliance burdens, particularly around cybersecurity audits and operational infrastructure, which may prove costly for smaller firms.
Let’s take a look at the proposals in a bit more detail.
The Cayman Islands’ proposed amendments to legislation would (if passed) introduce regulatory requirements for tokenized mutual funds and tokenized private funds. This recognizes the growing role of blockchain in investment structures and the need to protect investors.
At their core, the proposed amendments create legal definitions for digital investment tokens (private funds) and digital equity tokens (mutual funds), together with requirements for token custodians and segregation of assets, cybersecurity safeguards, audited verification of token issuance, and detailed record-keeping.
Importantly, they impose parity: the rights of a token holder must mirror the rights attached to the underlying equity or partnership interest. In doing so, Cayman ensures tokenization is a change in form, not in substance, preserving investor protections that already apply to traditional funds.
These measures go beyond Cayman’s current fund laws by recognizing the operational realities of tokenized structures. For example, tokenized funds must:
- Maintain robust cybersecurity and IT audit frameworks;
- Appoint regulated administrators as principal offices;
- Provide for segregation of assets and custodial safeguards;
- Submit annual confirmations with auditors’ opinions covering both financials and technological resilience.
So how do the Cayman proposals compare with other jurisdictions?
Cayman’s proposals are ambitious.
Luxembourg and Ireland, for example, allow tokenized fund interests but regulate them under existing UCITS/AIFMD frameworks without bespoke digital asset rules.
The SEC in the U.S., meanwhile, has been cautious, often treating tokenized interests as securities subject to existing registration requirements but without adapting fund-specific legislation.
Cayman’s approach sits in the middle ground. It acknowledges the risks of tokenization, particularly around custody, cybersecurity, and misrepresentation, and builds these directly into fund statutes.
What’s the impact of the proposed tokenization regulations on fund managers?
Critically, however, one could argue that the framework risks layering additional burdens onto tokenized structures without offering proportional streamlining benefits.
For smaller managers, the cost of independent IT audits, enhanced record-keeping, and cybersecurity reviews could outweigh the efficiencies promised by tokenization.
There is also the question of how these rules would interact with existing AML/KYC obligations, particularly where on-chain transfers create unique transparency challenges.
Our view
Overall, the amendments reflect Cayman’s proactive, rather than reactive, stance.
By setting clear standards now, the jurisdiction sends a message of readiness to institutional investors and regulators worldwide. The challenge will be ensuring these rules remain commercially viable and do not inadvertently stifle innovation through over-regulation.
In short, Cayman is not just allowing tokenized funds, it is regulating them with a degree of foresight that may well set a benchmark for other fund domiciles. And we think that’s a positive development for the market in general.
NB This consultation is ongoing so the final form may differ from what has been outlined.
At wb.group, we help funds, managers, and investors navigate Cayman regulations and compliance with transparency. Our team can advise you on the latest developments to keep you fully informed and fully compliant. If you’d like assistance with any Cayman regulatory change, we’d be happy to set up a call.