ICO phenomenon demands regulatory attention

| 20/03/2018 | 38 Comments

Cryptocurrency(CNS): After Bitcoin took investors on a rollercoaster ride last year, 2018 is shaping up to be the Cayman Islands’ biggest year for cryptocurrency funded startups — known as initial coin offerings (ICOs) — as companies around the world look to cash in on the digital asset explosion. Against this burst of activity, however, questions are being raised whether current legislation is appropriate for the fast moving ICO phenomenon, with the key risk that a potential fraud or blow-up could significantly damage Cayman’s international reputation. 

By September 2017, ICOs globally had raised over US$2 billion, compared to just $6 million in March 2016, according to industry tracker Token Data. Incredibly, 2018 has started with a record $2 billion plus being raised through ICOs and a fair chunk of that has come through Cayman.

As the cryptocurrency sector grew at an incredible pace in 2017, the Cayman Islands has quickly become a leading domicile for this new type of fundraising, which takes place by issuing so-called digital coins, also known as tokens. Innovators and issuers are launching operations in Cayman, often in the special economic zone, for all the reasons Cayman excels in other international financial business, not least the ability to establish a company not subject to tax.

“With its high quality global reputation, it is not surprising that Cayman has seen a flurry of interest and a pipeline of pending projects in the ICO market,” law firm Ogier said in a recent client briefing.

There is also an important regulatory difference between Cayman and the US. In the third quarter of 2017, the US Securities and Exchange Commission defined Bitcoin and other crypto assets as a security, meaning an ICO would be subject to US financial regulation. The SEC has said this year that it is actively focusing on ICOs and fraud in the cryptocurrency market and there is now significant concern in the US as to how these transactions will be treated and the potential for litigation down the line.

In Cayman, the legal definition of a security is much narrower, defined in the Securities Investment Business Law, in a list of instruments that are common in today’s financial markets, so a large number of cryptocurrency issuers have gravitated towards Cayman as their domicile, resulting in a brand new line of profitable business for local financial services providers.

Although the securities laws are less relevant here than in the US, there are still anti-money laundering regulations and potential issues with Money Service Laws, where a cryptocurrency exchange allows the exchange of digital assets for real ‘fiat’ cash. Therefore any reputable ICO or crypto business in Cayman will need some good advice from local law firms and auditors.

Cayman News Service

Matt Taber

“Cayman Islands laws and regulations have generally been designed to attract sophisticated users of financial instruments such as investment funds and institutional investors in those funds. As a result, there isn’t a large body of ‘local’ securities laws designed to protect Cayman Islands residents in respect of large-scale securities offerings by Cayman entities of the sort you would see onshore (for example the US Securities Act),” said Matt Taber, partner at Harneys law firm, specialising in crypto assets and blockchain technology.

While it may be the case that the majority of the ICOs and crypto exchange projects that are currently going through Cayman undergo rigorous legal analysis, some deals may slip through the net and still be set up by an unsuspecting corporate service provider in Cayman.

“The primary risk to the jurisdiction is there is a high profile fraud or blow-up of an ICO located in Cayman, which didn’t have appropriate legal or tax advice either onshore or offshore,” Taber said, speculating about a hypothetical ICO project with a highly marketed public website, where the terms and conditions of the sale may have simply been stolen from another deal and the guy just runs off with the cash.

Additionally, there is the risk that an ICO set up in Cayman is linked to money laundering or financing terrorism and clearly all these risks have the potential to do significant damage to Cayman’s hard-won reputation. “But there is also the risk that we don’t embrace disruptive innovation in the fintech and regtech space — for example digital IDs and digital ID verification — and sit on our laurels,” Taber said.

An easy win for the Cayman government and CIMA, according to Taber and a number of other professionals in the financial sector keenly watching developments in this space, would be to offer a form of CIMA licence for crypto exchanges and require them to be audited by a local auditor in much the same way that Japan has done.

“This would match what the rest of the world is trying to do in terms of focusing regulatory resources on the entry and exit points for fiat currency/cash in relation to these structures,” Taber said.

Industry insiders expect some kind of statement from the Ministry of Financial Services and Minister Tara Rivers to be forthcoming soon, which, while not likely to be guidance or regulations, would recognise that the issues around ICOs and cryptocurrencies are on their agenda, following the stunning growth in this area over the past six months.

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Category: Business, Financial Services

Comments (38)

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  1. Anonymous says:

    Crypto clowns talking abt their “millions” again




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  2. Anonymous says:

    All this was way better before the lawyers got involved. Hopefully the Blockchain will remove much of their need and democratize the legal world.




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    • Anonymous says:

      Not sure how blockchain will democratize Law, as incrementally revolutionary as the technology could be.




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  3. Anonymous says:

    I invested in bitcoin and offloaded at $17,000 and made $170,000+ from what cost me only $20,000 at the time. It is definitely a gamble that can pay off but then again what company stock isn’t. If you do not have the extra funds to invest and sit and wait do not do it. It is risky but some are willing to take the gamble like I did.




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  4. Anonymous says:

    Lawyers are happy to set up the Crypto’s and more than happy to unwind them.




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  5. Anonymous says:

    Crypto is a sinister creation of nefarious powers that are herding the gullible masses into receiving the chip implant whereby those who do not have it will not be able to buy or sell.
    The whole fundamental principle of crypto is smoke and mirrors, throw in blockchain bullshit and fool yourselves that it is unregulated, mix in human greed and bingo, suckers are all lining up for the mark of the beast.
    Have you not read, man cannot serve God and money?
    This was written down for our admonition and we are obviously too smart to heed.
    To anyone else not seduced but this crypto feeding frenzy of pseudo-intellectual claptrap, continue to follow your heart and stay well away.
    Crypto is for the lemmings who are on the broad road to destruction.




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    • Anonymous says:

      what.. are you talking about? Do you know anything about crypto currency?




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      • Anonymous says:

        Do you think that a post such as mine that lays an axe to your gulliblilty is founded in the same ignorance?

        I know a lot about crypto and see people like you every week wanting to know how I can help them acquire quick riches.

        “Satoshi Nakamoto is the name used by the unknown person or people who designed bitcoin and created its original reference implementation. As part of the implementation, they also devised the first blockchain database. In the process they were the first to solve the double-spending problem for digital currency.”

        Nobody even knows Nakamoto. Some people say he is AI. You don’t know and I don’t know, but I would never bet my life on a system whereby the fundamentals of it’s origin are shrouded in mystery.




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    • Anonymous says:

      Whoa buddy!! Get back on your meds!




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  6. Anonymous says:

    Digital money is the now.




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  7. Anonymous says:

    Cayman Islands is a magnet for easy money and get rich quick schemes and everybody that moves here knows it. We like shiney things and are a little lacking in good hearts.




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  8. Anonymous says:

    Yeah cos having them licensed by the regulator and then blow up anyway is much less risky to our reputation.




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  9. Anonymous says:

    Just some law firms tying to influence policy. Nothing new here…




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  10. anonymous says:

    Cryptocurrency is like a Church. If you are getting into it make sure that you are a preacher and not just a member of the congregation. Lots of promises about how great the future will be, but only the preacher reaping the rewards right now.




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  11. Anonymous says:

    All true without regulation it’s only a matter of time before another upset happens to besmirch our hard won image on the global stage. At least someone has pointed out the potential for Cayman to be buried by this now it’s up to the regulators to step into the 21st century with a plan. I wonder if any of our politicians understand any of this.




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  12. Puzzled says:

    Does anyone really understand what this is all about?




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    • Anonymous says:

      Yes and I suggest you do some research before you’re left behind.




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      • Anonymous says:

        I am fine knowing that in the future, currency may be replaced. In the meantime I suggest that YOU do some research and I hope you don’t lose your shirt gambling bitcoin.




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    • StopTheCrime says:

      Yes, and there are many good sites (and youtube videos) which can get you introduced to cryptocurrencies. Just do a google search. Start with bitcoin until you understand the mechanics and philosophy of it better. In the end, you’ll see that there is nothing cash can do that bitcoin can’t do better, faster and cheaper.




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      • Anonymous says:

        Really? How does a nation or currency block prevent a deflationary spiral/depression in a crypto world? If you think governments are going to let cryptos subvert their currencies , financial system kyc, aml and tax base it’s you who needs to give it more thought!




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  13. Anonymous says:

    ICOs are gigantic scams preying on the same type of people that Bernie Madoff conned. There will be a lot of crying in the future. Cayman should stay away from ICOs. The local fees and commissions to be earned are insignificant compared to the potential damage to your reputation. When they blow up it would be great if Cayman was not involved. It’s the kind of thing that could lead the US and UK to crush you.




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    • Anonymous says:

      While I disagree with you on how bad they are you are correct that Cayman needs to decide if the reputational damage (like you I think it is a when not an if) is worth the income.




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  14. Anonymous says:

    Cryptos are here to stay. Get in now before you can’t afford to!




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