With the right balance, we can enjoy the benefits of innovation and the protections of an appropriate regulatory structure. Cayman’s approach to smart FinTech regulation can strike that balance.
Regulation of any market is a balancing act. Too little regulation and there are no rules to maintain a fair playing field and offer investors the confidence they need to fund further innovation and growth. Too much regulation and entrepreneurs don’t have the freedom they require to create and innovate. Advances in financial technology (FinTech) have added to this balancing dilemma, as financial services globally try to negotiate, manage and keep pace with newer technologies that, on the one hand, may improve business, but which have, on the other not yet been regulated in many cases.
Because of the global technology network and the international nature of financial services, this may be one of the few emerging services sectors to have the development of a regulatory regime play out simultaneously across legal jurisdictions around the world. As jurisdictions with different regulatory philosophies, legal systems and roles in global financial services attempt to define the regulatory needs and implement them there is an enormous risk that a patchwork of varying and conflicting rules will arise.
The Cayman Islands has a unique leading role to play in this process and one that can help mitigate the risk of a global medley or regulations that, either diminishes innovation, or forces some element of this market underground. Cayman leadership in the global financial services market, as well as international standard-setting forums and debates, gives its regulatory approaches significant influence.
The Cayman Islands is a premier global financial hub, efficiently connecting law-abiding users and providers of investment capital and financing around the world. Approximately two-thirds of the world’s hedge funds, with a total of US$2.3 trillion in assets under management are domiciled in Cayman. Cayman is also home to a growing private equity sector as well, with more than 20,000 vehicles in the jurisdiction. With this kind of dominance in the marketplace, Cayman’s law and regulations have significant influence in global financial services.
Cayman is also very active in setting standards for global financial services. Cayman is a member of the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes. As a jurisdiction, it also meets or exceeds the full range of globally accepted standards for transparency and cross-border cooperation with law enforcement and tax authorities and is considered a transparent jurisdiction. In fact, Cayman was rated by the OECD’s Global Forum as “largely compliant” with the international standard for transparency and exchange of information, the same rating the OCED gave to other G20 Plus countries such as Germany, Canada and Australia.
Finally, Cayman operates as a neutral jurisdiction for financial services. Cayman enables parties from around the world who are domiciled in countries with differing laws, regulations, tax rules and customs to do business together in one transparent, stable, appropriately regulated location. Global investment capital is pooled in Cayman and is then invested into opportunities around the world, putting Cayman at the centre of the global financial system.
The FinTech industry and specific aspects of FinTech regulation fit synergistically with the overall Cayman business model. That’s why Cayman Finance, which represents the Cayman financial services industry, the Cayman Islands’ government, and the regulatory agency (the Cayman Islands Monetary Authority), are working closely together to evolve a legislative and regulatory approach to leverage the benefits of various new emerging technologies such as blockchain and manage risks associated with activities such as initial coin and token offerings through trusted elements of sound regulation most suited to these new technologies. The approach Cayman sets can lead the way for regulation around the world.
Reaching the appropriate degree of transparency to allow people to know who they are doing business with and to enable law enforcement and tax authorities to prevent crime and collect revenue is one of the biggest challenges that developments in FinTech poses. The pseudo-anonymous nature of FinTech broadly, and cryptocurrencies more specifically, do give rise to an increased risk of money laundering, and even terrorist financing. Many tokens used in FinTech processes today are similar to bearer shares of past decades – anonymous and portable. These developments represent a potentially systematic threat to global financial services.
This is a challenge that Cayman is focused on trying to address. In the Cayman Finance Innovation Lab we have harnessed the best minds in our jurisdiction, which already include some of the leading financial services professionals in the world. Their mission is to design an identity ecosystem through smart FinTech regulations that will enable the issuance of globally certified digital IDs which will be certified for anti-money laundering (AML) and ‘know your customer’ (KYC) compliance.
The creation of globally certified digital IDs would not only reduce costs and increase quality, but it would also improve the customer experience. Users of FinTech would have the ability to know who they were transacting with, even if the counterparty’s specific confidentiality was maintained through the use of the globally certified digital ID in place of an individual name, corporate name or in place of an individual corporate of DBA name.
Law enforcement authorities can have confidence that those transacting through FinTech systems will have been evaluated for AML/KYC compliance by an approved entity. They will also have the ability to track the use of each globally certified digital ID for use in investigations or legal proceedings.
Achieving this kind of balance between confidentiality and transparency will be a game changer for the use of FinTech around the world, and especially within the funds industry and among larger institutional investors. For example, high quality digital tokens could be issued by funds and could be listed on digital exchanges and traded by investors with globally certified digital ID’s, thereby creating liquidity for investors and stickier capital for fund managers.
With the right balance, we can enjoy the benefits of innovation and the protections of an appropriate regulatory structure. Cayman’s approach to smart FinTech regulation can strike that balance and influence further FinTech regulatory development around the world.
Jude is well respected locally and globally having spoken internationally on financial services topics and featured on a number of occasions in international media. He retired as an Audit Partner in 2008 after spending over 23 years with Ernst & Young. As the Global CEO of Maples and Calder, he took an active role in the strategic growth and development of the firm. Jude has extensive experience within the Cayman Islands financial services industry, having served on various Cayman Islands Government and private sector committees. He has served as the CEO of Cayman Finance since 2014.