With a robust regulatory framework and a deep understanding of digital assets, the Cayman Islands provides an ideal environment for fintech innovation and investment. It stands as the largest jurisdiction for alternative investment funds, making it the leading domicile for crypto funds, blockchain, and Web3 projects.
Cayman Finance, a non-profit membership organisation, has served as the voice of the Cayman Islands’ financial services sector since 2003. With a diverse membership comprising over 100 entities, including 16 industry associations, it safeguards the industry’s reputation and promotes its growth through five strategic pillars: promotion, protection, member engagement, community engagement, and product development.
In this article, Michael Klein, a financial journalist responsible for content and public relations at Cayman Finance, explores the Cayman Islands’ VASP regime, foundation companies, and their appeal to projects aiming to decentralise ownership and management.
Cayman Islands: Deep service provider expertise and a vibrant virtual asset community
Our research shows that the key questions for fintech and virtual asset startups choosing a jurisdiction in which to establish themselves are:
- How well do the country’s regulations serve their business model?
- How well do local service providers and regulators understand, and cater to, fintech and virtual asset startups?
- How can the venture be future proofed from a regulatory, growth and tax perspective?
In the Cayman Islands, startups will find service providers who have both decades-long expertise in cross-border legal structuring and a deep technical understanding of digital assets. This doesn’t just make it easier for fintechs to operate, but also, importantly, to raise investment capital.
As the largest jurisdiction for alternative investment funds (including private equity, VC and crypto) outside of the United States, with a total of $8.5trillion in net assets, it is no surprise that the Cayman Islands has become the leading domicile for funds investing in cryptocurrencies, blockchain and Web3 projects.
Forward-looking digital asset, blockchain or Fintech projects and businesses frequently use Cayman Islands companies, partnerships, and foundation companies.
The long-standing experience in corporate legal structuring means that the islands have been able to attract crypto- and Web3 projects for years, with many establishing operations in Cayman.
Tech Cayman and government-licensed Special Economic Zone Cayman Enterprise City both offer a streamlined, cost-effective, and fast-tracked process for setting up a physical presence on island.
This includes everything from incorporation and obtaining the necessary licences and approvals within a guaranteed short timeframe to finding office space and relocating staff.
The services have been taken up by many startups and entrepreneurs seeking to grow their business in an innovative, tax neutral environment, while enjoying an exceptional lifestyle.
As a result, the islands have produced a vibrant and tight-knit community of like-minded developers and technology firms in the virtual asset space.
Legal, audit and compliance service providers, in turn, have developed deep technical knowledge in fintech and digital assets. This ensures that projects are built on a solid, long-term foundation from a regulatory and compliance point of view.
VASP regime
Cayman’s Virtual Asset (Service Providers) Act, introduced in May 2020, offers certainty to those businesses, such as exchanges and virtual asset trading platforms, that desire the type of dedicated virtual asset regulation that is lacking in most onshore countries, particularly in North America.
The clear and transparent framework is combined with an engaged regulator, the Cayman Islands Monetary Authority, that aims to understand the business of each licensee.
Rather than shoehorn crypto offerings and services into often ill-suited regulation designed for traditional money services or broker-dealers, Cayman offers dedicated legislation for virtual asset service providers.
This may initially entail a hands-on approach and more communication than VASP applicants might be accustomed to from their home regulators. However, existing licensees see this as an investment in stability and predictability. The personalised approach gives comfort to businesses (as well clients and investors), who want to operate, or invest in, a compliant, transparent, and audited venue.
Cayman VASPs for instance include crypto lender Ledn, trading platform RYKI and decentralised exchange Mauve, in addition to centralised exchanges Blockchain.com and Crypto.com.
With an initial emphasis on compliance around know-your-customer and anti-money laundering requirements, forthcoming legislative amendments of the VASP Act will further increase its commercial appeal and demonstrate the general responsiveness of Cayman’s legislative framework to the needs of a fast-changing industry.
DeFi and more
Outside the regulated VASP regime, Cayman’s foundation company has become the preferred and most flexible legal structure for projects that seek to decentralise their ownership and management.
The foundation company was initially conceived for private wealth purposes as a trust alternative.
As a form of company that has no members, it appeals to many virtual asset- and Web3 projects, because it combines the limited liability of a company with the flexibility of a trust.
Specifically, foundation companies have turned out to be an excellent fit for decentralised autonomous organisations (DAOs).
The purposes of these cloud-based, self-governing organisations that rely on community-based decision making, can range from managing decentralised finance (DeFi) protocols for the exchange or staking of digital assets to the creation of social collaborative platforms. Some are used a funding mechanism for a specific asset purchase, while others manage NFT projects or native tokens in computer gaming or virtual worlds.
The Cayman Islands is legal home to five of the world’s top 10 largest DAOs as measured by the size of their treasury. But the islands do more than just offer a trusted legal structure.
There is a burgeoning local industry of dedicated DAO services helping such projects interact with the real world by establishing banking relationships, ensuring KYC and compliance, and providing community and grants management.
Conclusion
The Cayman Islands has a long history of offering practical and compliant solutions for cross-border ventures to issues created by uncoordinated international regulations. Local service providers have proven to be uniquely placed to leverage their expertise in the fast-changing world of digital assets.
Reflecting its position as top offshore funds jurisdiction, Cayman is the leading domicile for crypto funds.
Meanwhile, for crypto businesses that lament regulatory uncertainty in the United States, Cayman’s VASP regime offers a tailored, transparent, and compliant regime to provide virtual asset services for the long term.
And crypto startups and entrepreneurs, seeking a flexible and adaptive environment to grow their businesses in, will find a lively and welcoming tech community and an unrivalled island lifestyle.
