Answer ... The Cayman Islands has seen wide adoption of the fintech industry across various crypto funds, investment funds investing in blockchain projects, protocols and technologies, issuers of cryptocurrencies, cryptographic coins or tokens (collectively, ‘digital assets’) undertaking security token offerings (STOs), initial exchange offerings (IEOs) or initial coin offerings (ICOs), joint venture vehicles developing blockchain projects, protocols or technologies, companies involved in broader fintech research and development and various specialist fintech service providers catering to these new market participants (eg, with certain know your client and other anti-money laundering-focused compliance applications). A common Cayman Islands structure could include several of these features – such as a funding entity in the Cayman Islands (eg, an STO, IEO or ICO issuer entity), one or more operating companies in various jurisdictions and a Cayman Islands holding company over the structure which is owned by the relevant founders or is decentralised (see further question 2.3).
In the purely domestic economy, mobile payment systems are also in use and, for example, in 2017 various participating banks in the Cayman Islands implemented the Cayman Islands Automated Clearing House, which is an electronic payment and cheque imaging system that is shared by various banks in the Cayman Islands.
Answer ... The Cayman Islands has a number of banks, fund administrators, general administrators, trustees, auditors, legal firms and specialist fintech service providers to help support these businesses.
In terms of products and services offered by existing fintech participants, they include such matters as:
- crypto funds and investment funds investing in blockchain projects offering investors opportunities to invest in various fintech-related projects; and
- entities undertaking an STO, IEO or ICO offering investment opportunities to persons taking part in those projects and, depending on the nature of the underlying business, access to information, software, services or other utilities related to their project.
Answer ... Depending on the nature of the business in question they are generally structured using one or more of the following:
- an exempted company which is a limited liability company with a board of directors and shareholders with the ability to pay dividends and is generally the default form of entity through which to run the fintech business. An exempted company is directed at doing business outside of the Cayman Islands and is restricted from taking part in most domestic business. Exempted companies are required to have a minimum of one shareholder and one director (although there is no requirement to have a director resident in the Cayman Islands);
- a special economic zone (SEZ) company, which is a type of exempted company that is authorised to carry on business in an SEZ;
- a foundation company, which is often used where the promoters are looking to build a decentralised and ownerless entity that will be governed by a community of beneficiaries. It is a body corporate with limited liability and separate legal personality from its members, directors and officers. Foundation companies have restrictions on payments of dividends and distributions which can give participants comfort that contributions to the foundation company will be used for the stated purpose objectives of the foundation company; or
- a Cayman Islands limited liability company, which is often used where the parties are creating a joint venture to develop a blockchain project, protocol or technology, given the ease of combining shareholder obligations (which might otherwise reside in a separate shareholder or joint venture agreement) within the limited liability company agreement itself, while also having the benefit of the corporate form and separate legal personality.
As noted at question 2.1, it is not uncommon to see several of these elements incorporated into a single structure for tax planning, regulatory or risk mitigation reasons which is then headquartered in the Cayman Islands.
areAnswer ... financed. For example, depending on the nature of the fintech’s operations, it may be:
- self-funded by the founders (and their friends and family);
- financed through various forms of debt (eg, bank debt or promissory notes issued by the fintech company);
- financed by venture capital backers;
- financed through an STO, IEO or ICO, all of which have become popular means of fundraising for new projects (particularly those that utilise blockchain technology); or
- some combination of the above.
Answer ... From a legal and regulatory standpoint, neither the Cayman Islands Monetary Authority (CIMA) nor Cayman Islands law differentiates between fintech participants and those within the broader financial services landscape. A fintech participant will fall within CIMA’s regulatory scope if it conducts a licensed or registrable activity, although this is generally unlikely if proper steps are taken at the outset to structure the business.
With the rise (and fall) and rise again of the crypto markets generally, we have seen increasing interest from investors seeking to invest in crypto funds and various traditional service providers (eg, fund administrators and auditors) competing for their business. We are seeing also a broader integration of fintech across more conventional industries (eg, insurance) and also the growth of a specialist industry (eg, advisers, blockchain developers and KYC/AML providers) catering to the specific requirements of the fintech industry.
Answer ... As a result of the existing infrastructure in the Cayman Islands that has developed from the jurisdiction’s longstanding position as the leading offshore jurisdiction, a number of qualified service providers across a range of industries can assist with back office functions.
Notwithstanding the above, a start-up operating through a Cayman Islands structure is generally not required to have a physical presence in the Cayman Islands and can outsource back office functions to service providers within the Cayman Islands or in any other jurisdiction. This flexibility allows such start-ups to source services from a broad range of qualified service providers and ensures healthy competition for business among such service providers.
Those start-ups that opt to have a physical presence in the Cayman Islands and that operate within the SEZ can draw upon support from Cayman Tech City, part of the Cayman Enterprise City SEZ, which offers various support services, or can otherwise make referrals to other service providers in the Cayman Islands for such support.
In certain limited circumstances, a start-up may be conducting a relevant activity for the purposes of the International Tax Co-operation Economic Substance Law, in which case additional care should be taken with respect to the nature and scope of certain limited types of outsourcing.