The Cayman Islands remains 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. Cayman vehicles regularly invest in virtual assets, blockchain projects, and issue tokens. Foundation companies oversee the development of blockchain companies and gaming companies, and give flexibility.
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. The Cayman Islands Monetary Authority (CIMA) has not specifically regulated the ESG space, nor are they requiring ESG reporting at this time.
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 continues to nurture this duality.
Cayman Enterprise City (CEC)
Under a special economic zone (SEZ) designation by the Cayman Government, CEC has encouraged technology companies to set up within the Cayman Islands. More than 80 blockchain/FinTech companies have been established in the SEZ, having taken advantage of the incentives provided by the enabling regulations to encourage the development of this industry.
Encouraged by the success of CEC, TechCayman has been established to relocate new or existing tech companies to the Cayman Islands. The companies can establish fully in Cayman without having to be a part of the SEZ.
Cayman enacted the Virtual Asset (Service Providers) Act, 2020 (the VASP Act) in October 2020. This created 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).
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). CIMA and the Utility Regulation and Competition Office (OfReg) - the independent regulator established to regulate information, and communications technology - have both encouraged, whilst overseeing, the development of FinTech and blockchain companies by establishing a special unit to oversee the VASP Act, and proposing changes to the Electronic Transactions Act with respect to blockchain and smart contracts, respectively.
At the start of 2023 there were 18 virtual asset service providers registered with CIMA with other applications pending. That number is expected to grow in future, with applications being processed within 10 weeks of submission.
AML And CFT
The VASP Act focuses on anti-money laundering (AML), 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.
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’.
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
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:
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.
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.