The Cayman Islands is a major financial hub which is home to some of the largest decentralised projects and crypto funds in the world. With the dawn of tokenisation, which some believe will make wealth creation more accessible for the general public, digital asset recovery will play an important role in not only preserving and maintaining that wealth, but buttressing investor confidence in the underlying technology and ecosystem which makes it all possible.
Capabilities
Governmental and private sector stakeholders in the Cayman Islands play a critical role in building and maintaining investor confidence, and bolstering the credibility of the jurisdiction in this area. The Cayman Islands are fortunate to have a regulator which appreciates the importance of the Islands' virtual assets sector and its role in proactively safeguarding the public, whilst allowing for innovation by providing regulatory clarity and actively engaging with industry stakeholders. Likewise, the Royal Cayman Islands Police has an established bureau of financial investigation which is well equipped to deal with complex virtual asset domestic and cross-border crime, which bolsters the jurisdiction's digital asset investigative capabilities at a state level.
Additionally, the Cayman Islands is not short of private sector investigative talent. There are several firms specialising in insolvency and forensic accounting which subscribe to well-known blockchain analytic tools and employ highly trained specialists to produce Court evidential grade investigative reports. Many are already building solid representative experience in the digital asset recovery arena by leveraging the jurisdictions' sophisticated legislative and insolvency frameworks which are commonly utilised for the purposes of traditional asset tracing and recovery.
The Cayman Islands Judiciary, which is highly experienced in dealing with complex financial matters, recognises the public interest in protecting the reputation of the Cayman Islands as a well-regulated financial centre. Notably, Baker and Partners represented two retail investors of a defunct crypto trading platform called AAX, in a successful petition to wind up its Cayman Islands domiciled parent company, Atom Holdings Limited (Atom), on a just and equitable basis following the misappropriation of millions of dollars in digital assets.
In this case, the Court confirmed that the Cayman Islands Companies Winding Up Rules (2023 Consolidation) must be construed in a manner to "avoid depriving an entire class of creditors and/or contributories (those of modest means) of access to the Court". Simply put, the Cayman Islands Court acknowledged the importance of access to justice in digital asset recovery cases, and has recognised that not all victims of digital asset frauds and thefts will have sufficient means to pursue recoveries, but that this in and of itself should not prohibit them from perusing a recovery action in the Cayman Islands under our insolvency rules.
Community
The Cayman Islands are home to a thriving blockchain and Web3 community, with an active Blockchain Association, a Cayman Islands chapter of the Crypto Fraud and Asset Recovery Network, a regional ambassador for the Association of Women in Cryptocurrency and last but not least, the Crypto Curry Club. Cayman also hosts a budding community of cross-sector professionals and educational events, panels and webinars to facilitate the exchange of knowledge, experience and insight from industry experts both on island and from overseas.
Civil recovery
With respect to civil digital asset recovery, one particular Cayman Islands' plaintiff enjoyed considerable success in overseas courts in recovering over US $400 million in virtual assets which were misappropriated following the hack of a blockchain bridging service protocol. This type of protocol enables users to transfer their digital assets to different blockchain networks as not all networks support all types of cryptocurrencies and digital assets. In this case, a cross-chain messaging protocol called "Wormhole" operated this service by locking users' native cryptocurrencies and issuing "wrapped" versions of them on a blockchain network which would not otherwise have supported those "locked" virtual assets.
When Wormhole was hacked in early 2022, about 120,000 of these wrapped digital assets (namely wrapped Ether, worth over US $320 million at the time) were issued without any corresponding deposits of native cryptocurrencies being made. This unauthorised issuance came about as a result of the hacker exploiting a vulnerability in the protocol's underlying code. The wrapped tokens were misappropriated by the hacker and as a result, Wormhole faced the prospect of permanently ceasing to operate.
Confronted with a potential collapse of the protocol, Wormhole was rescued by a Cayman Islands company called Tao Mao Shan Limited (Tao) which provided Wormhole with tokenised liquidity in order for the protocol to continue operationally.
Tao then commenced recovery efforts which involved tracing the wrapped Ether to a UK based DeFi application designer called Oazo Apps Limited (Oazo) which operated an application called Oasis. As part of the hacker's crypto laundering methods, Oasis was utilised to store the misappropriated tokens, which were then used by the hacker as collateral to borrow other digital assets. Fortuitously, Oasis had the ability to seize certain digital assets assigned to the wallet address which was used to interact with Oasis, and Tao was able to successfully obtain an Order from the English High Court compelling Oazo to seize those digital assets. The terms of the Order were broad enough to sanction Oazo to commit an ethical hack of the hacker's wallet address, which had the effect of seizing certain digital assets assigned to that wallet address and transferring them to a custodian wallet address controlled by Tao's instructing law firm.
Whilst there do not appear to be any reported decisions related to the case, it is one of the first recorded cases of a Court sanctioned ethical hack, and is a digital asset recovery tool which could also be sought by applicants from the Court in the Cayman Islands, should such an order ever need to be made here in the future.
Tao then commenced proceedings in the Supreme Court of New York against the individuals behind the hack claiming entitlement to the digital assets seized by Oazo. A default judgment was granted in Tao's favour and the relevant parts of that judgment were subsequently recognised and enforced in England. These cross-border recognition and enforcement proceedings had the effect of discharging the English freezing injunction and sanctioning the repatriation of the tokens to Tao.
At the time of recovery, the tokens were worth over US $400 million.
Conclusion
Digital asset recovery invariably presents challenges – such as cost, complexity, and the difficulties in tracing assets depending on how they have been moved or laundered. However, with the ability to harness the underlying technology which powers decentralised applications and protocols, combined with creative recovery strategies and flexible judicial approaches (as has already been seen in the Cayman Islands), the future is bright for digital asset recoveries in the Cayman Islands, if and when required
This article was first published in the Cayman Finance June 2025 newsletter.
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.
