The Cayman Islands is at the forefront of both the FinTech and Environmental, Social and Governance (ESG) spaces, both as an originator and as a facilitator. The utilisation of Cayman Islands vehicles is well established, particularly in structured finance and bond issues in the capital markets. As distributed ledger technology (DLT) has the potential to deliver significant benefits to this sector, Cayman has taken meaningful steps to further enhance its legal and regulatory framework to accommodate this. At the same time, the Cayman Islands Monetary Authority (CIMA) is maintaining a watching brief in the ESG space.
FinTech and ESG are not mutually exclusive missions. ESG-focused FinTechs have a unique ability to achieve rapid growth, deliver ESG-focused innovation and attract investment capital to support their efforts to improve the environment and society while generating returns. As FinTechs evolve in the ESG era, new stakeholder responsibilities also emerge. Shifts in investor expectations which demand that financing products incorporate investors’ personal values on social and environmental issues will continue to increase. Climate change, geo-political issues and awareness of inequality means that FinTechs will have to respond to the shift in expectations. The Cayman Islands is positioning itself to nurture this duality.
Cayman has enacted the Virtual Asset (Service Providers) Act, 2020 (the VASP Act). This creates a flexible operating framework for the regulation of the provision of virtual asset services.
The VASP Act applies to all entities that intend to or currently provide virtual asset services in or from within the Cayman Islands. It provides for a registration and licensing regime for any person carrying on a “virtual asset service” in the course of a business using a Cayman Islands entity or otherwise from within the Cayman Islands. Such persons are called “virtual asset service providers” (VASPs). Virtual asset services, as defined under the VASP Act, means:
The issuance of virtual assets or the business of providing one or more of the following services or operations for or on behalf of a natural or legal person or legal arrangement —
(a) exchange between virtual assets and fiat currencies;
(b) exchange between one or more other forms of convertible virtual assets;
(c) transfer of virtual assets;
(d) virtual asset custody service; or
(e) participation in, and provision of, financial services related to a virtual asset issuance or the sale of a virtual asset. This includes issuers of virtual assets, virtual asset custodians, virtual asset trading platforms, as well as entities providing financial services related to the sale of a virtual asset such as virtual asset dealers.
All Entities wishing to perform virtual asset services for the first time (New Market Entrants), Entities providing virtual asset services prior to the commencement of the VASP Act (Pre-Existing Service Providers); and Existing Authority licensees that provide or propose to provide virtual asset services (Other Authorised Entities) are required to register with CIMA (or notify where applicable).
AML And CFT
The VASP Act focuses on anti-money laundering (AML) and countering the financing of terrorism (CFT) and other key areas of risk. Far from being viewed by external investors as another layer of bureaucracy, it is a welcome protection for them in a market that is still finding its feet. After all, DLT has been identified as an area where there is risk of financial crime, including opportunities for cryptoassets to be used for illicit activity and cyber threats.
Part XA of the Cayman Islands Anti-Money Laundering Regulations contains definitions and provisions pertaining to the identification, verification, production, record-keeping and other relevant obligations relating to virtual assets including the “Travel Rule” requirements for VASPs. This will apply from 1 July 2022.
Financial Action Task Force (FATF) Recommendation 16 prescribes that originating VASPs must obtain and hold required and accurate originator information and required beneficiary information on virtual asset transfers. These requirements apply to VASPs whenever their transactions (in fiat currency or virtual assets) involve a traditional wire transfer, a virtual asset transfer between a VASP and another obliged entity, or a virtual asset transfer between a VASP and a non-obliged entity. The application of the FATF’s wire transfer requirements in the virtual asset context is known as the “Travel Rule”.
The VASP Act provides that after the issuer is registered, the issuer has to submit a “virtual asset issuance request” to CIMA for prior approval of the virtual asset issuance. As yet, such virtual asset issuance approval regime is not in place. However, this should be planned for.
Trading And Custody
A virtual asset trading platform (VATP) is defined under the VASP Act to mean a centralised or decentralised digital platform that facilitates the exchange of virtual assets for fiat or other virtual assets on behalf of third parties for some form of reward and that (i) holds custody of or controls the virtual asset on behalf of its clients to facilitate an exchange; or (ii) purchases virtual assets from a seller when transactions or bids and offers are matched in order to sell them to a buyer. VATPs do not include a platform that only provides a forum where sellers and buyers may post bids and offers and a forum where the parties trade in a separate platform or in a peer-to-peer manner.
Generally, a provider of virtual asset custody services or a VATP operator must be licensed under the VASP Act.
Under the VASP Act, a sandbox licence is a temporary licence of up to one year that CIMA may direct a VASP to apply for, where: (i) the service being provided represents an innovative use of technology or uses an innovative method of delivery such that additional supervision and oversight is required; (ii) it is in the best interests of the public, regulated persons or financial markets that the service be temporarily restricted or subject to specific requirements; (iii) the service promotes technology or a method of delivery that may create a systemic risk to financial markets or the jurisdiction; or (iv) the service poses a money laundering, terrorist financing or proliferation financing risk that existing AML rules don’t properly mitigate. The sandbox regime is not yet in place.
The existing legal framework in Cayman is ESG friendly. CIMA has given itself a watching brief on ESG to allow it to observe how this space develops.
Cayman’s banks and financial institutions will also have to make climate pledges aligning themselves with global efforts to combat climate change and avoid greenwashing and social washing.
On the subject of greenwashing or social-washing, Cayman Islands legislation already requires fund offering materials to contain such other information as is necessary to enable a prospective investor to make an “informed decision”. This may well be broad enough to capture many strains of greenwashing and social-washing of funds.
As investors transition to ESG and investment managers adopt ESG policies, it is worth noting that the existing legal framework affords Cayman Islands investment vehicles flexibility to adopt a comprehensive toolkit in terms of financial instruments and strategies to allow them to adopt an effective ESG policy. This contrasts with many restrictions faced by funds registered in other jurisdictions.
ESG-focused FinTechs have a unique ability to achieve rapid growth, deliver ESG-focused innovation and attract investment capital to support their efforts to improve the environment and society while generating substantial returns.
As FinTechs evolve in the ESG era, new stakeholder responsibilities also emerge. Shifts in investor expectations which demand that financing products incorporate investors’ personal values on social and environmental issues will continue to increase.
Climate change, geo-political issues and awareness of inequality means that FinTechs will have to respond to the shift in expectations. Cayman’s banks and financial institutions will also have to make climate pledges aligning themselves with global efforts to combat climate change and avoid greenwashing and social washing comes when ESG is not linked to the core strategy of FinTechs.
Winston Connolly is the Managing Partner of Chancery ESG Ltd, Cayman (CEL). CEL focuses on three pillars of the future economy: Environmental, Social and Governance (ESG), digital asset transactions and sanctions. Chancery ESG provides training to investment management teams and oversight boards who are incorporating ESG considerations in their existing business. With the support of Chancery Advisors UK, CEL can provide advice on Cayman Islands laws, related EU regulation, compliance and litigation. CEL provides tailored legal advice on legal and regulatory matters related to ESG and sustainable investing and can assist asset managers in defining their strategy and ESG policies.