Cayman’s offshore rivals target crypto market

(CNS): As the global cryptocurrency sector heats up, job creating international investment is seeking out suitable jurisdictions and Cayman Islands’ offshore rivals are looking to steal a march on this growth by introducing crypto-friendly laws and legislation, with Bermuda in pole position. Bermuda’s government said recently that it wants to become one of the first countries to specifically regulate initial coin offerings (ICOs), which have provided a new way for companies to raise funds in a crowd-sale format, bypassing the middlemen of the traditional world of venture capital and capital markets.

Bermuda said it had an opportunity to become a global leader in the fintech space by introducing this regulatory framework, which Premier and Minister of Finance David Burt said would provide legal certainty to companies looking to conduct ICOs in Bermuda.

Bermuda, which has a larger and more successful offshore insurance industry than Cayman but a significantly smaller investment fund industry, announced in November the formation of a Blockchain Task Force, including a Business Development Working Group and a Legal and Regulatory Working Group. This is all aimed at creating an environment attractive to businesses operating with blockchain technology to bring more businesses, more jobs and economic growth to Bermuda.

This programme is already paying dividends for Bermuda’s domestic economy. Premier Burt recently announced a partnership with Hong Kong’s Binance, the world’s largest cryptocurrency exchange — which trades over 2 billion dollars of crypto transactions every day — investing $15 million in Bermuda to create jobs, train local people and provide expertise in developing a cryptocurrency offering to international market participants.

Under the memorandum of understanding, Binance will develop its global compliance base in Bermuda and launch a new cryptocurrency exchange once the regulatory picture has been agreed. The compliance centre will create at least 40 jobs, with 30 of these to be earmarked for Bermudians, according to reports. The company will also sponsor training in blockchain technology and compliance for local people.

While no specific legislation for ICOs and cryptocurrency businesses, such as exchanges, exists in Cayman, a large number of such projects have established operations in this jurisdiction, attracted by the flexible corporate environment, zero tax regime and special incentives offered in the Cayman Islands’ special economic zone, Cayman Enterprise City (CEC).

The Cayman Ministry of Financial Services has said it is considering the recommendations of a Cayman Islands Monetary Authority (CIMA) working group to establish a framework of governance for operations of digital currency projects taking place in Cayman.

Financial Services Minister Tara Rivers has also commented, including at the GREAT Festival of Innovation in Hong Kong in March, that Cayman is well positioned to serve as the jurisdiction of choice for a new breed of financial services business, whose innovations are changing the traditional face of the financial sector.

“Fintech’s underlying blockchain technology presents opportunities for greater operational efficiency and transparency, both of which would improve the industry’s products and services, as well as government’s public services,” the minister said.

In the meantime, Bermuda is moving swiftly to get its legislation in place to govern ICOs, where regulatory certainty will be welcomed by the companies setting up operations. A recent press release from CIMA, which warned Cayman Islands residents of the dangers involved in investing in ICOs, highlighted the risk that an ICO coin or token sold to the public could at some point be designated a security by the domicile it had been issued from, which would raise new regulatory questions and likely negatively affect its value.

Bermuda’s draft legislation to govern ICOs will treat this new type of fundraising as a restricted business activity that will require consent from the jurisdiction’s finance minister. Applications for consent will be required to include specific details about the people managing the company conducting the ICO and the underlying digital asset offered for sale, as well as how any product related to the ICO will develop, including timelines for the business.

Bermuda’s authorities also want information on the amount of funds to be raised, along with information on the technology being used and mandatory disclosures to investors.

Financial centres large and small around the world are seeking a path towards providing greater regulatory clarity in the fast-growing cryptocurrency market.

The US Securities and Exchange Commission (SEC), the world’s most prominent financial regulator, recently said it is examining numerous US ICOs to see if they breach securities regulations, while a number of would-be issuers of digital coins in the US have either adjusted the terms of their sale to exclude US nationals, other than wealthy accredited investors, to avoid any ambiguity in the law.

The standard investment contract that has developed is a Simple Agreement for Future Tokens (SAFT), which is considered a security and must comply with the relevant laws.

Additionally, the European Parliament recently said it would tighten up regulation on cryptocurrency exchanges and the providers of wallets that enable anonymous online storage of cryptocurrency holdings, as part of its overall effort to quash shell companies, which it said could be used to launder money, hide wealth and avoid paying taxes.

The EU Parliament voted overwhelmingly in favour of the rules, which will force cryptocurrency exchanges to conduct due diligence on its customers as well as identity verification checks.

Another offshore jurisdiction — and typically not the first competitor in Cayman’s traditional offshore business — is the European island group of Malta, which has earned the tag of ‘Crypto Island’ by embracing the new cryptocurrency-related technology.

In addition to working on a blockchain technology framework to encourage development and investment, the Maltese government is in the process of establishing a Virtual Currency Act and plans to set up a Malta Digital Innovation Authority. This will create a unique auditing framework to regulate blockchain investment operations, such as ICOs.

Hong Kong’s Binance is also investing heavily in Malta, selecting the country as the base for its European expansion due to the jurisdiction’s forward thinking leadership, which is making it a centre for blockchain innovation. Binance said it had reviewed several jurisdictions and plans to hire 200 new employees to facilitate this expansion.

Local Cayman Islands fund directors have said that the biggest problems for potential ICO issuers or crypto-related funds is the difficulties involved in AML compliance, in particular demonstrating the source of funds in any fundraising because investors often subscribe with other cryptocurrencies. Other issues include the custody of funds that are held in a digital wallet, compared to the traditional arrangement where a bank holds a share certificate for an investment manager.

Most legitimate corporate service providers in Cayman, meanwhile, would likely not take on business from an ICO that has not had the right legal advice to understand its obligations under relevant Cayman law, including anti-money laundering regulations.

Local legal industry participants have said it would make sense for Cayman to introduce a regulatory regime or class of licence from CIMA to cover this type of business, both to embrace the technological advances taking place at a rapid rate and to ensure Cayman is not left picking up the pieces of an ICO that turns out to be a major fraud or is linked to money laundering.