General innovation climate
What is the general state of fintech innovation in your jurisdiction, including any notable trends, innovations, innovators and future prospects?
As a mature, sophisticated international financial services centre which provides an effective and cost-efficient tax-neutral platform for international capital flows, the Cayman Islands has long been a one-stop shop for clients in all industries.
Supported by an excellent professional infrastructure in an environment of economic and political stability, fintech companies from across the globe which domicile in the Cayman Islands enjoy a safe, secure and appropriately regulated environment in which to develop and grow their businesses.
The government is pro-business and proportionate in implementing regulations for growth-oriented businesses. For example, Cayman Enterprise City is a special economic zone that provides a cost-effective and time-efficient solution for establishing fintech businesses. Within this special economic zone, media and technology development businesses can establish a physical presence in the Cayman Islands with added benefits, such as a tax exempt environment and expedited work permit applications. Both within and outside Cayman Enterprise City, there are a number of Cayman companies that are developing fintech solutions built on blockchain networks.
The industry body Cayman Finance has also placed specific focus on smart fintech regulation, which will allow new technology to be successfully utilised within the financial services industry.
Overall, the Cayman Islands is host to a significant number of:
investment funds investing in cryptocurrency and related technologies;
companies conducting successful initial coin offerings (ICOs) and token generation events; and
companies developing sophisticated technology-based products.
Financial services providers in the Cayman Islands are also deploying various technologies in their day-to-day operations in order to stay at the forefront of the market and ensure that the Cayman Islands continues to do the same. In short, fintech in and from the Cayman Islands is thriving.
Have there been any particular developments – regulatory or commercial – in any of the following fintech sectors?
Distributed ledger technology and digital currencies (eg, blockchain, smart contracts and Bitcoin)?
The Cayman Islands’ fintech sector is still relatively new, but several legal steps have recently been taken to make it a viable jurisdiction for fintech innovation businesses. For example, updated copyright, trademark and patent laws were passed in 2016. Over 130 fintech businesses are operating from within Cayman Enterprise City and more than 30% are involved in blockchain-based fintech development activities. There are also many Cayman companies outside Cayman Enterprise City which are developing fintech services based on distributed ledger technologies.
The latter half of 2017 and the early part of 2018 saw the growth of the Cayman Islands as a jurisdiction of choice for companies conducting token generation events or ICOs. During this time, the Cayman Islands attracted several companies that are engaging in such transactions to bootstrap the development of fintech solutions which will hopefully disrupt several industries.
The Cayman Islands has become the jurisdiction of choice for token generation events for a number of reasons, including tax and securities law neutrality for companies conducting such events in the Cayman Islands. Although a Cayman company selling digital tokens can be used on a platform or network must consider the tax and securities law implications in every jurisdiction in which they are marketing, having a neutral jurisdiction as a base is a real selling feature for the Cayman Islands in this regard.
There has been no specific Cayman regulatory development with respect to companies conducting token generation events or ICOs; however, members from the legal industry expect the Cayman Islands Monetary Authority (CIMA) to release guidance in 2018. The Cayman Islands has a strict existing regulatory framework designed to combat money laundering and terrorism financing. This existing anti-money laundering and terrorist financing regime applies to many companies in the fintech space. Members of the industry expect CIMA to provide further guidance on this topic also. As always, continued robust commitment to international standards, alongside awareness of the commercial and technical particularities of the emergent technology, is expected.
The Cayman Islands has also seen a proliferation of cryptocurrency-based private equity and open-ended funds. These funds employ a wide variety of strategies, including:
early stage ICO investing;
alt coin long and hold; and
Alternative lending platforms?
Not applicable at this stage.
Digital payments, remittances and foreign exchange?
Such businesses are, in theory, permissible and possible, but would be subject to applicable money services legislation and likely regulatory oversight.
Alternative financing (including crowdfunding)?
The Cayman Islands’ favourable regulatory regime has seen it become a jurisdiction of choice for ICOs and cryptocurrency funds.
This is because the regulatory environment – which has been successful for traditional tax neutrality financial products supported by a sophisticated and developed financial services sector and an internationally recognised court system and body of law – also applies to these new digital products. The regulators tend to take a risk-based and pragmatic approach, which has enabled investment funds and the international banking and trust sectors to flourish, and the same is true for the fintech sector. In terms of ICOs, a large number of businesses have obtained investment via token generation events that sit firmly in the utility token and securities token brackets.
Investment, asset and wealth management?
Large investment management institutions and banks are increasingly focusing on the fintech sector. The adoption of further blockchain-based and distributed ledger technology-based businesses and products are expected to be adopted by blue-chip companies alongside individual currencies and tokenised products, leading eventually to a significant increase in M&A activity. This is driving investment managers to invest in or set up new funds or separate portfolios dedicated to fintech and encouraging new managers to develop their own strategies to invest in and benefit from the sector.
Robo-advice and artificial intelligence?
A number of Cayman funds employing investment strategies based on artificial intelligence (AI) and are also investing in companies that are developing AI technology. Algorithmic and other AI-based trading has featured in fund strategies for a number of years and continues to develop and grow as AI becomes increasingly sophisticated.
Any other technologies?
Fibre optic installation is ongoing throughout the Cayman Islands, providing businesses with an improved communications infrastructure.
How would you describe the regulatory policy for fintech products and services in your jurisdiction?
Fintech is a key focus area for the government, which recognises that fintech will disrupt the full range of financial services – including the institutional investor sector, in which the Cayman Islands plays a leading role – and the existing global regulatory regime. The government is therefore seeking to adjust the Cayman Islands’ business, legal and regulatory practices to match the changes that fintech will ultimately produce in order to position the Cayman Islands as a leader in the new marketplace. In line with this, the specific focus is on smart fintech regulation. This approach will allow new technology to be successfully utilised within the financial services industry, including for alternative investment funds. In particular, the Cayman Islands is focused on the development of a certified digital identity platform which can:
improve business efficiency and quality;
streamline costs; and
support effective regulation.
Perhaps in this sector more than others, a detailed understanding of the underlying business is required to navigate the regulatory environment and ensure that a business complies with both existing relevant legislation and evolving regulatory policy. With the sector evolving so rapidly, deep experience in advising fintech businesses is proving to be of paramount importance and this is well-recognised by both service providers and the government.
Have any fintech-specific laws or regulations been enacted in your jurisdiction? Are any envisaged?
While financial services legislation is well established, the Cayman Islands legal framework was recently expanded to enable IP protection. IP rights are now protected to international standards under Cayman Islands law in the same way in which they are in the United Kingdom. The Cayman Legislative Assembly also passed the Data Protection Law. The new framework will help the fintech space to take hold in the Cayman Islands, as the new law is based on a set of EU-style privacy principles and protects the processing of all personal data in the Cayman Islands.
Otherwise, no specific fintech legislation has been introduced, but it may be as such businesses and products evolve. The Cayman Islands’ agile legislative system will allow it to adapt appropriately to developments.
Which government authorities regulate the provision of fintech products and services?
The Cayman Islands Monetary Authority (CIMA) is the primary regulator of financial services, including fintech (to the extent that it is regulated). CIMA regulates financial services in accordance with:
laws and regulations;
guidance and polices developed by the authority; and
To date, CIMA has taken a more risk-based approach rather than being rules driven, recognising that the nature, scale and complexity of businesses affects the amount and type of risk faced. This means that it can readily adapt to fintech’s changing regulatory landscape.
Other government bodies, such as Cayman Finance, also assist with developing related policies. Cayman Finance represents the Cayman Islands’ financial services sector and has been a key advocate for developing the growth of fintech. Over the past 12 months, the body has established a fintech working group to engage with the financial services industry, regulators, the government and the media to promote the development of fintech innovation. Discussions have also commenced concerning a potential legal framework, developed under Cayman Finance and CIMA, which could direct the fintech sector towards the institutional market.
Financial regulatory framework
Which laws and regulations governing the provision of financial services apply to fintech businesses?
The legislation and codes of practice that potentially apply to fintech services are:
the Banks and Trust Companies Law (Revised);
the Securities Investment Business Law (Revised);
the Money Services Law (Revised);
the Proceeds of Crime Law (Revised) and the Anti-Money Laundering Regulations (Revised);
the Companies Law (Revised);
the Cayman Islands automatic exchange of information regime, which implements the international tax information disclosure regimes of the Foreign Account Tax Compliance Act and the Common Reporting Standards; and
the Mutual Funds Law (Revised).
Under what conditions are fintech businesses subject to licensing requirements? Are there any exemptions?
The extent to which fintech businesses are subject to licensing requirements depends on the nature of the business and the way in which any particular fintech product or service is structured and delivered.
Are any fintech products or services prohibited in your jurisdiction?
Any fintech product or service that falls within the ambit of the existing legislation is prohibited if it does not comply with the applicable regulatory framework.
Data protection and cybersecurity
What rules and regulations govern the processing and transfer (domestic and cross-border) of data relating to fintech products and services?
The Data Protection Law 2017, expected to come into force in January 2019, will introduce a legislative framework on data protection that applies to almost all entities (including investment funds) that are established or process personal data in the Cayman Islands.
The Data Protection Law applies in respect of personal data to any data controller of an entity:
established in the Cayman Islands, where the personal data is processed in the context of that establishment; or
not established in the Cayman Islands, where the personal data is processed in the Cayman Islands other than for the purposes of the data’s transit through the Cayman Islands.
The new law highlights a growing expectation from global businesses and their clients and investors that organisations must have in place comprehensive data protection compliance policies that are supported by a framework of data privacy legislation.
What cybersecurity regulations or standards apply to fintech businesses?
Once enacted, the Data Protection Law will provide for a regulatory framework to deal with the privacy of personal data. This framework will include standards that would apply from a cybersecurity perspective.
What anti-fraud, anti-money laundering or other financial crime regulations govern the provision of fintech products and services?
The Proceeds of Crime Law (Revised) and the Anti-Money Laundering Regulations (Revised) issued under the law apply to any fintech business that is a relevant financial business. For example, if a fintech business providing services associated with cryptocurrencies or digital tokens generated and recorded on a blockchain network is a relevant financial business, it will need to determine who its customers or applicants for business are and collect and maintain client identification documentation concerning such parties. Monies contributed to the business will also likely be subject to scrutiny.
What precautions should fintech businesses take to ensure compliance with these provisions?
Fintech businesses are encouraged to discuss their proposals with specialist legal counsel in the Cayman Islands so that the applicable requirements are fully understood and appropriate measures can be implemented to ensure compliance.
What consumer protection laws and regulations apply to the provision of fintech products and services?
CIMA must endeavour to promote and enhance consumer protection and is the appropriate body to which complaints should be made. In addition, any person directly affected by how CIMA has carried out its functions may file a complaint in writing to its managing director.
More generally, the draft Consumer Protection Bill is undergoing consultation in the Cayman Islands. If implemented, this legislation will apply to all Cayman Islands businesses that deal with consumers.
Does the provision of fintech products or services in your jurisdiction raise any particular competition regulatory concerns?
No. The Information and Communications Technology Authority Law (2016 Revision) regulates the telecoms, radio and television industries with respect to anti-competitive practices and is vigilant about ensuring fair competition in these industries.
Are there any particular regulatory issues concerning the cross-border provision of fintech products and services (eg, operating jurisdiction rules and currency controls)?
Forthcoming data protection legislation which has been developed to be consistent with and complementary to EU General Data Protection Regulation standards will regulate cross-border transfers of data and ensure that data processed within the Cayman Islands is subject to the appropriate safeguards. No fintech-specific cross-border rules are contemplated at present.
Financing, investment and government support
Does the government provide any incentives or support programmes to promote fintech innovation in your jurisdiction (eg, tax incentives, grants and regulatory sandboxes)?
The government has established the special economic zone, which enables technology companies from outside the Cayman Islands which operate offshore with a genuine physical presence to be exempt from tax.
Has the government concluded any international cooperation agreements to promote and facilitate the cross-border expansion of fintech businesses?
Financing and investment
What private financing and investment schemes are available and commonly used for fintech start-ups in your jurisdiction?
Private financing or investment may be available from local angel investors or high-net-worth individuals. In addition, the government is supportive of the sector via Cayman Enterprise City and its associated projects.
What forms of IP protection are available for fintech innovations?
IP rights are now protected to international standards under Cayman Islands law in the same way in which they are in the United Kingdom. The Cayman Legislative Assembly has also passed the Data Protection Law. This new framework will help the fintech space to take hold in the Cayman Islands, as the new law is drafted based on a set of EU-style privacy principles and protects the processing of all personal data in the Cayman Islands.
What rules govern the ownership of IP rights to fintech innovations?
What immigration schemes are available for fintech businesses to recruit skilled staff from abroad? Are there any special regimes specific to the tech or financial sector?
The Cayman Islands continues to strike the right balance between ensuring that companies have access to the best employees in their specific service line, which allows for the provision of best-in-class service, while offering opportunities for local training and employment through a flexible programme of work permits and permanent residence. In the special economic zone, entities also benefit from fast-tracked work permit applications for relocating employees.
What immigration schemes are available for foreign investors and entrepreneurs wishing to invest in or establish a fintech business in your jurisdiction?
The Cayman Islands offers a number of immigration-related incentives for persons who invest in a business or real estate. In most cases, this will lead to the grant of a certificate that allows the holder to reside for a renewable 25-year period. In some cases, the holder may also be allowed to work in the Cayman Islands in the business in which they have invested. There is also a category which affords a successful applicant full permanent residence.