With a long history of embracing financial innovation and providing a home for entrepreneurial technology companies, the Cayman Islands has experienced organic development as a financial technology hub. The Islands' regulator, the Cayman Islands Monetary Authority (CIMA), has allowed the sector to flourish alongside the country's existing legislative framework. CIMA, along with the Cayman Islands government, has pledged to introduce new legislation to encourage further development including the implementation of legislation which will address the need to provide additional regulatory measures for certain virtual asset activities in the Cayman Islands, a regulatory sandbox regime for digital assets and other innovative financial technologies (the virtual assets laws).
i Licensing and marketing
Financial services business
CIMA oversees the regulation of financial services on the island. CIMA was formed by statute and is operated pursuant to the Monetary Authority Law (the 2020 Revision). Its mission is to protect and enhance the reputation of the Cayman Islands as an international financial centre by (1) utilising a team of highly skilled professionals and current technology; (2) carrying out appropriate, effective and efficient supervision and regulation in accordance with relevant international standards; and (3) maintaining a stable currency, including the prudent management of the currency reserve.
Anyone wishing to conduct banking, investment fund, securities, trust, money services, insurance or companies management business in or from the Cayman Islands will need to register with, be licensed by or seek an exemption from CIMA. CIMA prepares and issues a framework of conduct policies, statements of guidance and rules and forms that set out both broad principles and detailed requirements to which relevant entities must adhere.
While there is not yet any specific regulation relating to fintech, the most likely of CIMA-regulated business areas to be relevant to financial technology businesses are securities investment business, money services business and investment funds business. We have set out the basic definitions below. Depending on the specific facts, there are various exemptions available that may allow a person to be exempt from the requirement to obtain licensing from CIMA or to approach regulation in a different manner (e.g., registration rather than licensing).
Securities investment business
A person carries on securities investment business if that person is:
- dealing in securities:
- buying, selling, subscribing for or underwriting securities as an agent; or
- buying, selling, subscribing for or underwriting securities as principal where the person entering into that transaction (1) holds themselves out as willing, as principal, to buy, sell or subscribe for securities of the kind to which the transaction relates at prices determined by that person generally and continuously rather than in respect of each particular transaction; (2) holds themselves out as engaging in the business of underwriting securities of the kind to which the transaction relates; or (3) regularly solicits members of the public with the purpose of inducing them, as principals or agents, to buy, sell, subscribe for or underwrite securities and such transaction is entered into as a result of such person having solicited members of the public in that manner;
- arranging deals in securities. Making arrangements with a view to:
- another person (whether as a principal or an agent) buying, selling, subscribing for or underwriting securities; or
- a person who participates in the arrangements buying, selling, subscribing for or underwriting securities;
- managing securities. Managing securities belonging to another person in circumstances involving the exercise of discretion;
- advising on securities. Advising a person on securities if the advice is:
- given to the person in that person's capacity as an investor or potential investor or in that person's capacity as agent for an investor or a potential investor; and
- advice on the merits of that person's doing any of the following (whether as principal or agent): (1) buying, selling, subscribing for or underwriting a particular security; or (2) exercising any right conferred by a security to buy, sell, subscribe for or underwrite a security;
- managing an EU connected fund;
- marketing an EU connected fund; and
- acting as depositary of an EU connected fund.
The definition of 'securities' is set out in Schedule 1 to the Securities Investment Business Law (2020 Revision) (SIBL), and includes shares, instruments creating or acknowledging indebtedness, instruments giving entitlement to securities, certificates representing securities, options, futures and contracts for differences. As part of Cayman's initiative to introduce additional regulatory measures for virtual assets activities, the definition of 'securities' may be amended in the future to include 'virtual assets'. For a discussion of coins and tokens as securities, see Section V.
A person carrying on securities investment business may operate without applying for a licence and may simply register with CIMA in certain circumstances – typically where the company's clients are limited strictly to high net worth and sophisticated persons.
The SIBL offers an exclusion for entities that are carrying on securities investment business (e.g., arranging deals in primary issue of securities) on their own behalf. That said, a Cayman Islands company that is the promoter, arranger or broker of securities of a separate issuer is likely to be caught by the definition and subject to the licensing requirement.
Money services business
Under the Money Services Law (the 2020 Revision) (MSBL), a person carries on money services business if the person carries on the principal business of any or all of the following:
- money transmission;
- cheque cashing;
- currency exchange;
- the issuance, sale or redemption of money orders or traveller's cheques; and
- such other services as the Cabinet may specify by notice published in the Gazette.
The third category of money services business, 'currency exchange', is generally taken to mean the business of exchanging one currency for another. There is ongoing debate as to whether virtual currencies and digital assets comprise currency, a commodity, goods or services. The provisions of the MSBL may need to be contemplated when exchange services in respect of a virtual currency or digital asset are going to be provided in or from within the Cayman Islands. Similarly, for a business that will offer a platform for exchange across digital currency pairs, or exchange from fiat-to-digital currency or vice versa, the MSBL will be important to consider.
To the extent that a financial technology business plans to engage in money service business, they would first need to apply for and receive a money services business licence from CIMA.
Investment fund business
While atypical for traditional fintech business, if an issuer offers coins or tokens with certain attributes, the operators would need to consider whether there is a need to comply with the provisions of the Mutual Funds Law (2020 Revision) (MFL) or the Private Funds Law 2020 (PFL).
The MFL applies to Cayman Islands entities, formed as collective investment schemes, that issue equities that are redeemable at the option of the holder (open-ended). The PFL, enacted in February 2020, applies to Cayman Islands entities formed as collective investment schemes that issue equities which are not redeemable at the option of the holder (closed-ended). In our experience, it is not unusual for a fintech company to issue a redeemable or non-redeemable token or coin. Such a company ought to take specific advice as to whether they will be regarded as a mutual fund or private fund, and as such will be required to comply with the MFL or the PFL.
The Companies Law and offering of securities to the public in the Cayman Islands
While not a CIMA-related issue, Section 175 of the Companies Law (the 2020 Revision) (the Companies Law) prohibits an exempted company incorporated in the Cayman Islands that is not listed on the Cayman Islands Stock Exchange from making any invitation to the public in the Cayman Islands to subscribe for any of its securities. A similar provision relating to limited liability companies is contained in the Limited Liability Companies Law. The definition of 'the public' does not include an offering to other exempted companies and exempted limited partnerships. If a fintech issuer is doing a focused offering into the Cayman Islands and to its general population, this obligation might be triggered.
ii Cross-border issues
The Cayman Islands does not currently have a passporting regime specifically designated for regulated or licensed fintech entities to carry on business in the Cayman Islands.
Typically, in order to carry on business in the Cayman Islands on a domestic basis, a company will need to comply with a suite of domestic laws including the Local Companies (Control) Law (the 2019 Revision) (LCCL), the Trade and Business Licensing Law (the 2019 Revision) and, to the extent any foreign workers are employed, the Immigration (Transition) Law 2018.
In an attempt to make Cayman more 'open for business' at a local level and to ease barriers to entry with respect to businesses intending to have a presence in Cayman, Cayman Enterprise City has been set up in the Cayman Islands and benefits from generous concessions granted by the Cayman Islands government (including fast-tracked immigration processing and reduced annual fees), designed to incentivise businesses to set up and operate physical staffed offices in the Cayman Islands, provided that such business do not carry on activities which require licensing under certain laws and regulations of the Cayman Islands.
III DIGITAL IDENTITY AND ONBOARDING
The Electronic Transactions Law 2003 (ETL) should be considered when preparing and accepting the terms and conditions or purchase agreement relating to an SCO, STO or any other electronic transaction where offer and acceptance is entirely electronic. The ETL provides that information, documents and contracts (or any provision thereof) shall not be denied legal effect or validity solely because they are in electronic form. Evidence of a contract (or provision thereof) shall not be denied admissibility solely because it is in electronic form. Electronic signatures are also expressly permitted. The ETL provides flexibility for transactional technologies without the requirement for further statute to be adopted.
IV DIGITAL MARKETS, FUNDING and PAYMENT SERVICES
CIMA has not adopted a formal position on crowdfunding. That said, to the extent a proposed crowdfunding project overlapped with any of the conventional business areas that require licensing, a proprietor ought to seek advice. In particular, the operator of a crowdfunding business would seek clarification of whether the SIBL, MFL or PFL would apply.
ii Collective investment schemes
As noted above, investment funds are regulated by CIMA under the MFL and PFL. All regulated funds must be audited by a firm of auditors approved by CIMA and located in the Cayman Islands (although there is no objection to the field work being done elsewhere). Prior to February 2020, closed-ended funds and open-ended funds with no more than 15 investors who, by majority, could appoint or remove the operators of the fund (Section 4(4) funds) were not required to be registered, although other regulations such as anti-money laundering/combating the financing of terrorism (AML/CFT) still applied. As a result of certain EU and other international recommendations the Cayman Islands investment fund regime is now aligned with other jurisdictions. Closed-ended funds are regulated by the PFL and Section 4(4) funds are regulated by the MFL.
There are five main categories of regulated fund, given below.
Registered mutual funds (MFL Section 4(3)) – open-ended
Funds that require a minimum initial investment of at least US$100,000 (i.e., those targeted at institutional or sophisticated high net worth investors) or which are listed on an approved stock exchange may be registered on filing the following documentation with CIMA:
- a prospectus that properly describes the equity interest (i.e., shares) and contains the information necessary to enable a prospective investor to make an informed decision as to whether or not to subscribe;
- an application form;
- a letter of consent from the auditors and administrator (if applicable);
- an affidavit from the directors of the fund;
- evidence of incorporation or registration; and
- the prescribed registration fee and the initial administrative filing fee.
These funds are required to have their accounts audited annually and at least two natural persons, both registered with CIMA under the Directors Registration and Licensing Law 2014 (DRLL), as directors.
The majority of regulated funds in the Cayman Islands fall into this category. We have advised on the launch of regulated funds that invest in whole or in part in digital assets. There is no requirement that the administrator of a registered fund is resident in the Cayman Islands and the emphasis is on self-regulation. The fund must, however, have locally approved auditors.
Administered mutual funds (MFL Section 4(1)(b)) – open-ended
Funds, including those that permit a minimum initial investment of less than US$100,000, may be established by appointing a licensed mutual fund administrator to provide the principal office of the fund in the Cayman Islands. The administrator has primary regulatory responsibility for the administered fund and has a statutory duty to ensure that the fund is properly administered and that the promoters are of sound reputation. The administrator has a statutory obligation to notify CIMA if it knows or has reason to believe that a fund for which it provides the principal office is or is likely to become insolvent or is carrying on business in a manner that is or is likely to be prejudicial to its investors or creditors. The auditors have a similar statutory obligation as described above for registered funds. Similar documentation to that required for a registered fund must be filed with CIMA by the licensed administrator in respect of an administered fund and the prescribed fee paid.
Licensed mutual funds (MFL Section 4(1)(a)) – open-ended
Funds (typically retail funds) that are established and operated by large, well-known and reputable institutions may apply for a mutual fund licence. CIMA must be satisfied that the promoting institution is of sound reputation and that the fund will be properly administered by fit and proper persons with sufficient expertise before a licence will be granted. Such funds do not require a minimum initial investment by investors.
Registered mutual funds (MFL Section 4(4)) – open-ended
Funds carrying on business in or from the Cayman Islands that were previously exempt from CIMA regulation under Section 4(4) of the Mutual Funds Law by virtue of having no more than 15 investors who, by majority, can appoint or remove the operators of the fund must now register by doing the following:
- submitting an application form to CIMA;
- filing a prospectus or marketing materials or a summary of terms which comply with all applicable CIMA policies and rules;
- filing a letter of consent from the auditors (if available) and administrator (if applicable);
- filing evidence of incorporation or registration;
- filing a certified copy of their constitutive documents which specify that a majority of investors in number are capable of appointing or removing the operator of the fund; and
- payment of the prescribed registration fee.
A Section 4(4) fund will not be required to have a prescribed minimum initial investment amount. The Mutual Funds (Amendment) Law 2020 (the Amendment Law) provides that a Section4(4) fund will be required to have its accounts audited annually and at least two natural persons, both registered under the DRLL as directors. The Amendment Law provides Section 4(4) funds (in existence at the time of its enactment or having been formed thereafter) with a transition period ending 7 August 2020 in which to comply. CIMA is expected to provide further guidance imminently.
Private funds (PFL Section 5) – closed-ended
The PFL applies to investment vehicles whose principal business is the offering and issuing to investors of its participating, non-redeemable (closed-ended) investment interests, the purpose or effect of which is the pooling of investor funds with the aim of spreading investment risks and enabling investors to receive profits or gains from such a vehicle's investment activity, where (1) the holders of investment interests do not have day-to-day control over the vehicle's investment activities; and (2) the investments are managed as a whole by or on behalf of the fund operator for reward based on the vehicle's assets, profits or gains. A closed-ended fund will be required to register with CIMA by doing the following:
- submitting an application form to CIMA;
- filing a prospectus or marketing materials or a summary of terms which comply with all applicable CIMA policies and rules;
- filing a letter of consent from the auditors and administrator (if applicable);
- filing evidence of incorporation or registration;
- filing a certified copy of their constitutive documents;
- filing a structure chart;
- filing other such information as may be required in the prescribed form; and
- payment of the prescribed registration fee.
A registered private fund is expected to have its accounts audited annually, appoint a custodian (if necessary), appoint someone to monitor its cash flow and carry out frequent valuations of its assets. The PFL provides current and new closed-ended funds with a six-month transition period ending on 7 August 2020 in which to comply with the PFL. CIMA is expected to provide further guidance imminently.
Corporate investment funds are the most common vehicle and are managed by their directors of which there should be a minimum of two natural persons. However, the day-to-day operations of an investment fund will normally be delegated to other specialist professionals.
Directors of CIMA-regulated investment funds (along with companies registered as excluded persons under SIBL (each a 'covered entity') are required to be registered or licensed with CIMA under the Directors Registration and Licensing Law 2014 (DRLL). This requirement does not extend to directors of registered private funds.
The DRLL distinguishes between professional directors (being a natural person appointed as a director of 20 or more covered entities), corporate directors (being a body corporate appointed as a director of a covered entity) and registered directors (being individuals who are not professional directors). An individual acting as a director of an existing covered entity is required to be registered with CIMA.
Directors not already registered with CIMA under the DRLL must first register for a director account with CIMA via the CIMA Connect portal by providing details, including the name of the covered entity for which they are to act as director.
Regulated investment funds are required to file the following with CIMA on an annual basis:
- prescribed fee to be paid by 15 January; and
- audited accounts to be filed within six months of the end of the financial year of the fund.
Promoters and operators of regulated investment funds (i.e., directors, trustees or general partners, as the case may be) also have a statutory obligation to notify CIMA of (1) of any change that materially affects the information submitted to CIMA of which they are aware, and (2) any change in the details of its registered or principal office, within 21 days.
iii Payment services and currency exchange
As noted above, payment services and digital currency exchange are likely to fall under the MSBL. Anyone seeking to operate a payment service or digital currency exchange ought to consider the obligations arising under the MSBL.
V CRYPTOCURRENCIES and INITIAL COIN OFFERINGS (ICOs)
CIMA has not, to date, issued formal guidance on the issuance and distribution of cryptocurrencies and initial coin offerings (ICOs) and token offerings, other than guidance issued to 'virtual assets service providers' on their AML/CFT obligations.
That said, any issuer or arranger of an offering of coins or tokens will need to determine whether the offer constitutes an offering of securities, as this may require a licence from CIMA.
The offering by a token issuer of its own token (notwithstanding the token may represent a security for the purposes of SIBL) is exempt from any licensing requirement. However, if there is (1) any offering of a security to the public in the Cayman Islands; (2) an offering of securities by a Cayman Islands company on behalf of a fintech issuer; or (3) a material carrying on of business in the Cayman Islands, the issuer should seek legal advice with respect to the applicable requirements of the LCCL, the Companies Law, immigration laws and SIBL.
VI INTELLECTUAL PROPERTY AND DATA PROTECTION
The Cayman Islands Intellectual Property Office is a division of the Cayman government's General Registry Division, and allows for registration of trademarks, patents, copyrights and design rights. Since 2015, the Cayman Islands government has steadily introduced legislative measures with the aim of improving the rights and protections of holders of intellectual property developers and holders, and facilitating further IP-related business in the jurisdiction.
The Cayman Islands Data Protection Law 2017 (DPL) came into force on 30 September 2019 and regulates the processing of personal data in the Cayman Islands and by entities established in the Cayman Islands. The DPL, which applies to legal and natural persons, ensures that data controllers and data processors control and process personal data in line with internationally established data protection principles adopted around the world. The DPL provides data subjects with specific rights that protect how personal data is processed and controlled. The Office of the Ombudsman is the supervisory authority. A breach of the DPL can result in hefty fines and imprisonment.
VII Economic Substance
The Cayman Islands government in an effort to meet its commitments as a member of the OECD's global Base Erosion and Profit Shifting Inclusive Framework has enacted the International Tax Co-operation (Economic Substance) Law 2020 (ESL), which (albeit in a prior iteration of the law) came into force on 1 January 2019.
The ESL sets out requirements that relevant entities that carry on relevant activities must demonstrate that such entities have 'economic substance' (the ES test) in the Cayman Islands for each relevant activity that is being conducted. An investment fund, exempted limited partnership, domestic companies and entities that are tax resident outside the Cayman Islands are not relevant entities for the purpose of the ESL.
Banking business, distribution and service centre business, financing and leasing business, fund management business, headquarters business, holding company business, insurance business, intellectual property business, and shipping business are relevant activities under the ESL.
The requirements of the ES test are varied and depend on the relevant activity that is being conducted by the relevant entity. A relevant entity conducting a holding company business is subject to a reduced test which may be satisfied by simply engaging the services of its registered office providers. An entity conducting high-risk intellectual property business is subjected to a more stringent test as it must rebut the presumption that it has not satisfied the ES test. Fintech industry participants will want to take a close look at their relevant activities to ensure compliance.
The Cayman Islands Tax Information Authority (TIA) is the supervisory authority that ensures compliance with the ESL. In addition to satisfying the ES test, all entities must notify the TIA as to whether it is conducting a relevant activity and whether it is a relevant entity. Relevant entities conducting a relevant activity must also submit an annual report to the TIA.
VIII YEAR IN REVIEW
The Cayman Islands had a number of developments in 2019, including further industry utilisation of Cayman Islands foundation companies, bolstering of anti-money laundering measures, and introduction of international tax cooperation (economic substance) laws.
Cayman Islands foundation companies have remained a favourite for issuers of SCOs, STOs and other tokens – particularly for the holding of any platform. Civil law foundations have, from time to time, been used by coin and token issues, either for tax or altruistic reasons. Cayman Islands foundation companies are unique in that they bear characteristics of both civil law foundations, in that they emulate some aspects of trusts, and companies, in that they have a separate legal personality and can take advantage of a settled body of company laws. A multitude of issuers and related industry groups have gravitated toward foundation companies as a flexible tool for either the issuer vehicle or a corporate governance vehicle for acting on the e-vote of designated coin and token holders.
As we hear from our clients and generally in the industry, Cayman Islands banks, as with many such financial institutions around the globe, are reluctant to open bank accounts for entities that will be exchanging digital assets for fiat currency (and vice versa). Concerns communicated include concern over AML/CFT aspects, pressure from correspondent banking partners or pressure from shareholders. We are hopeful that greater and broader understanding of the fintech industry and better and thoughtful regulation of the global industry will lead to a more welcoming environment for prospective banking clients.
IX OUTLOOK AND CONCLUSIONS
We believe that CIMA is keen to take a very practical and commercial approach to STOs, SCOs and fintech in general, in order to maintain Cayman's reputation as a leading finance centre. CIMA has not, as yet, issued any formal guidelines but we understand that CIMA will issue guidance in the future, which will be based on consultations with reputable participants in the blockchain industry. Drafts of the virtual assets laws are currently out with industry for consultation. CIMA's goal is to develop an effective and business-friendly fintech landscape, which also aligns with international standards as they continue to develop.
In common with most jurisdictions, increasing compliance with strengthened AML/CFT/KYC has been, and will continue to be, a significant addition to onboarding and operational aspects of doing business in the Cayman Islands. Indeed, CIMA has stated that its primary concern with fintech offerings is the AML/CFT-related aspect.2 Such concerns will most certainly make up a large part of the specific guidance once released, and may serve to give comfort to all fintech players and service providers (including banking institutions).
Because the Cayman Islands has a forward-looking regulator, combined with a legislative assembly that has introduced such helpful innovations as the Foundation Companies Law, Cayman Enterprise City and its successful Special Economic Zone Companies, the many fintech entrepreneurs which seek Cayman Islands as a jurisdiction for business look to be well served in the future.
1 Alan de Saram is managing partner, Natalie Bell is a senior associate, Aoife Madden and Laura Smalley are associates, and Dawn Major is an article clerk at Collas Crill. The authors wish to thank Stephen Nelson, formerly at Collas Crill, for his contributions to previous editions of this chapter.