A guide to the latest legal information for the Cayman Islands on decentralised finance (DeFi), updates to tax systems to consider blockchain and cryptocurrencies, non-fungible tokens (NFTs), initial coin offerings (ICOs), smart contracts, data privacy and protection, and mining and staking.
This guide to Blockchain in the Cayman Islands covers the following topics:
BLOCKCHAIN MARKET AND BUSINESS MODEL OVERVIEW
CRYPTOCURRENCIES AND OTHER DIGITAL ASSETS
EXCHANGES, MARKETS AND WALLET PROVIDERS
CAPITAL MARKETS AND FUNDRAISING
LENDING, CUSTODY AND SECURED TRANSACTIONS
DECENTRALISED AUTONOMOUS ORGANISATIONS (DAOS)
BLOCKCHAIN MARKET AND BUSINESS MODEL OVERVIEW
1.1 EVOLUTION OF THE BLOCKCHAIN MARKET
As one of the foremost offshore financial centres, home to approximately 70% of the world’s offshore investment funds and with an absence of any direct taxation on companies or individuals, the Cayman Islands has become an attractive destination for technology entrepreneurs. While much of Cayman’s financial services legislation was written before the recent blockchain revolution began, the last few years have seen the Cayman Islands take a number of legal and regulatory steps to make the Islands a jurisdiction that will allow such innovation to thrive. Cayman’s ambition to become a global technology hub is also supported by a sound legal framework, a wealth of experienced professional service providers, a modern infrastructure, state-of-the-art communication systems and a stable political climate.
Cayman’s flexible business-orientated legislation, multitude of potential issuer vehicle types, and internationally recognised securities regulatory regime enabled the Islands to pivot away from retail crowdfunded models towards security tokens and stablecoins, which provided greater value stability and more predictable investment returns. This same flexibility means that Cayman remains well placed to take advantage of the latest shift towards securitising common assets and decentralised finance (DeFi) products with Cayman already being the offshore centre of choice for other securitisation issuers.
Framework legislation regulating virtual asset service providers came into force on 31 October 2020 (see 2.1 Regulatory Overview) and has already attracted a number of new entrants to the Cayman market. A technology-neutral regulatory sandbox is still awaited but when introduced it is hoped this will further attract companies operating in this fast-moving sector to establish themselves in Cayman.
Recent years have also seen Cayman’s foundation company becoming a popular choice for projects looking for a flexible governance entity for their decentralised autonomous organisation (DAO) or other community-led projects.
First amongst the leading offshore jurisdictions, Cayman established a technology park within its existing special economic zone (SEZ) to allow technology companies to benefit from specific advantages, including zero-taxes and fast-tracked work permit applications for relocating employees.
The pressures created by the COVID-19 outbreak on global trade systems highlighted the urgent need to maintain and strengthen the resilience of international supply chains. This resilience depends on trust, transparency and integrity, which can be improved through the responsible deployment of blockchain technologies. With applications to join the technology park within the SEZ at an all-time high, it is anticipated that Cayman will continue to benefit from technology companies looking to respond to this shift and establish themselves in a tax neutral jurisdiction.
Increased pressure from proposed EU tax and regulatory reforms could impact Cayman’s current flexibility in this space going forward. In particular, further changes to the economic substance requirements introduced in Cayman in 2019 could have an impact. However, Cayman is already benefiting from the regulatory uncertainty in the virtual assets sector in the USA which has seen a number of US projects relocate offshore. Cayman is geographically advantaged being in the same time zone as the USA.
1.2 BUSINESS MODELS
New technologies have not yet displaced traditional financial service providers in Cayman. Cayman Finance, a group that represents Cayman’s financial services sector, has established an innovation lab to engage with the financial services industry, regulators, the government and the media to promote the development and use of new technologies in the Islands.
Given Cayman’s stringent know-your-customer (KYC) requirements, a number of service providers have adopted technologies to enable the onboarding of clients and the collection of KYC information digitally.
Informal conversations have also started concerning a potential framework of laws, developed under Cayman Finance and the Cayman Islands Monetary Authority (CIMA) that might direct new technologies towards the institutional market.
Tokenised funds have proved increasingly popular in recent years. In a tokenised fund, an investor’s interest is represented by a cryptographic token, as opposed to shares or other interests or units offered to investors in a more traditional fund structure.
1.3 DECENTRALISED FINANCE ENVIRONMENT
Cayman is proving a popular destination for decentralised finance (DeFi) protocols, and has seen a sharp increase in awareness and understanding among corporate service providers who cater for entities registered in Cayman and who use DeFi protocols.
To date, the use of DeFi protocols is not regulated, except where they can be established to fall within existing regulation (see 2.1 Regulatory Overview) but by the very nature of decentralisation, regulators would find it difficult to regulate truly decentralised products.
1.4 NON-FUNGIBLE TOKENS
Interest around non-fungible tokens (NFTs), which peaked in mid-2022, is now showing signs of waning. The introduction of the Virtual Asset (Service Providers) Act (VASP Act), which is discussed in further detail in 2.1 Regulatory Overview, did not lead to a corresponding rise in offerings from the Cayman Islands as market participants and CIMA sought to determine whether NFTs are virtual assets and therefore whether activities related to NFTs require separate registration under the VASP Act.
It is clear that NFTs are opening new revenue streams and are a source of earning potential for brands and many others in the “creator” economy. We expect interest in using Cayman as a launch pad for such opportunities will continue to grow as the regulatory landscape becomes clearer.
For further information, please contact:
Peter Colegate, Partner, Appleby
pcolegate@applebyglobal.com