(CNS): The Cayman Islands Government is working on a framework of governance for cryptocurrencies and digital coin projects taking place in the jurisdiction while it considers how to implement a legislative framework for the sector, which has grown to over $400 billion in a few short years. Responding to questions from CNS, the Ministry of Financial Services said it was “working to ensure that Cayman’s framework is in place as soon as possible, in order to maintain and enhance our reputation as a jurisdiction that attracts sound business. We want to make sure that any new business meets global regulatory standards, including AML/CFT standards, as does business that already exists here.”
The statement from the ministry comes just under a week after the Cayman Islands Monetary Authority (CIMA) moved to warn the public of the potential risks in investing in cryptocurrencies like Bitcoin or initial coin offering (ICO) projects, representing its first meaningful comments on the industry, which has grown dramatically in the Cayman Islands in the past six months.
CIMA said in its statement that investors should thoroughly research any investment in virtual currencies, digital coins or tokens and the companies behind them to “separate fact from fiction”.
First quarter ICO funding globally has already reached $6.3 billion, surpassing the total for 2017, according to figures from industry publication Coin Desk. A great number of these ICOs are taking place in Cayman as digital entrepreneurs take advantage of Cayman’s flexible corporate framework and zero tax model.
The concern in the financial sector is that while this new type of business has presented a new revenue stream for financial services providers in Cayman, it can be extremely difficult for investors to understand if they are putting their funds into a legitimate project. Furthermore, many ICOs have not yet launched products and investors are essentially betting on a future outcome which may or may not materialise, which has created a grey area of the law amidst the rapid industry growth.
“In most cases, including outside of financial services, new products are created before the regulatory structure,” the Ministry of Financial Services told CNS. “In relation to fintech, government is analysing available data and perspectives, both commercial and regulatory, and subsequently determining the best legislative framework for our jurisdiction.
“The Ministry of Financial Services is therefore now considering the recommendations of a CIMA-convened working group regarding standards for the governance of the operations of digital assets that are marketed, traded, sold or otherwise transferred in or from the Cayman Islands.”
The price of Bitcoin returned some 1,500% in 2017 alone, a performance which has spawned a whole new industry of virtual coins and digital tokens, tempting investors with an era of new found riches, but CIMA is urging that investors should look beyond the hype and think carefully about the risks of investing in this nascent technology.
“High reward investment scenarios have high potential for financial loss and fraud,” CIMA’s statement said “Potential investors can be easily lured with the promise of high returns in a new investment and may be less skeptical when assessing the risks. The blockchain technology associated with ICOs and virtual currencies may create a false sense of security for the investor and obscure the true risks associated with the individual instruments.”
Joss Morris, a partner with law firm Collas Crill’s Cryptocurrency and Fintech Team, based in Cayman, commented, “The public advisory represents a welcome initial measured statement on cryptocurrencies and ICOs from CIMA, focusing on investor awareness and we would anticipate a development in CIMA’s increasing engagement with the cryptocurrency space.”
While Bitcoin and a select number of cryptocurrencies, like Ethereum and Ripple, dominated the headlines last year with meteoric price rises, experts in the sector believe that the Blockchain technology, which records information transparently on an immutable network of computers and underpins the digital asset world, is the real future growth story.
Projects aiming to disrupt traditional industries have conducted major fundraisings in such diverse activities as insurance, instant messaging, genomics, leasing and artificial intelligence by issuing tokens through an ICO, which operates like an online crowdsale and can sell out in a matter of hours.
In its statement, CIMA said that investors should be aware that the typical ICOs do not give any ownership rights in the company, nor is it an investor loan to the issuer. Additionally, ICOs are often unregulated and involve new technologies and products that are highly technical and complex.
Of particular note was the comment that if a regulatory body in the country where the ICO is based deems the token to be issued in breach of securities laws, it could have a significant negative impact on the company and the token’s value or usability. “As a result, investors can lose some or all of the money they invest,” CIMA said.
While US regulators have effectively put ICO issuers on notice that the tokens issued through these projects will be treated as securities and therefore subject to securities regulations, ICOs in Cayman are generally accepted as not being captured by Securities Law because they are not frequently traded instruments under Cayman’s narrower legal definition.
Industry participants will now be keenly awaiting the detail of the proposed governance standards and any new regulatory framework from the Cayman government to see if that will change. Bermuda recently said it intends to establish itself as a centre of excellence for ICOs and cryptocurrency projects, with a detailed legislative framework for these products.
For now, reputable companies operating in the crypto sector will continue to rely on advice from local legal and tax advisors to bring their projects to market and ensure they are in full compliance with Cayman’s Anti Money Laundering Regulators and other relevant legislation.
The danger for many market participants is that an ICO or cryptocurrency exchange registered in Cayman will either be uncovered as a fraud and the founders disappear with the proceeds or it is linked to money laundering, inflicting significant damage on Cayman’s reputation as a first class international financial centre.
In its advisory note, CIMA outlined various risks and signs for investors to be wary of when considering investing in an ICO or cryptocurrency, including exaggerated investment returns and a high degree of technical knowledge needed to understand the investment.
Other red flags include rapidly changing prices and the potential for not being able to resell the virtual currency. Additionally, CIMA warn of the possibility that investments made could be lost to hackers and an absence of regulatory protection for investors.
In a situation where often little or incomplete information can be ascertained on the people behind such projects, CIMA’s guidance is certainly seen as welcome, where investors have little else to go on than the company’s marketing materials and the promise of a future business outcome. With its focus on investor awareness, CIMA’s statement is not likely to have significant impact on the plans of ICO issuers that are taking legal advice to understand their compliance obligations and now will await further information on the proposed governance standards and impending regulatory framework.