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4. Results: Answers
FinTech
4.
Activities
4.1
How are the following key activities in the fintech space regulated and what specific legal issues are associated with each? (a) Crowdfunding, peer-to-peer lending; (b) Online lending and other forms of alternative finance; (c) Payment services (including marketplaces that route payments from customers to suppliers (eg, Uber and AirBnb); (d) Forex; (e) Trading; (f) Investment and asset management; (g) Risk management; (h) Roboadvice; and (i) Insurtech.
Cayman Islands
Answer ...

(a) Crowdfunding, peer-to-peer lending

Neither crowdfunding nor peer-to-peer lending is specifically regulated under existing legislation, although the existing legislative regime relating to capital raising and lending activities in the Cayman Islands could apply depending on the nature of the specific business. For example:

  • capital raising is generally not regulated in the Cayman Islands, although it is subject to general disclosure requirements as a matter of Cayman Islands common law, which is based largely on longstanding principles of English and Commonwealth law; and
  • lending activities could, for example, be subject to the International Tax Co-operation Economic Substance Law where the business in question amounts to a financing business.

In addition, lending is caught within the definition of ‘relevant financial business’ and could therefore impose the Cayman anti-money laundering regime (see question 6.1) on such activities, to the extent that they are undertaken in the course of business.

(b) Online lending and other forms of alternative finance

Lending activities (see question 4.1) of any kind may be subject to the existing legislative regime in the Cayman Islands.

Lending and other forms of alternative finance must also take note of the general prohibition against undertaking banking business within the Cayman Islands without a licence. ‘Banking business’ is defined in the Banks and Trust Companies Law as the business of receiving (other than from a bank or trust company) and holding on current, savings, deposit or other similar account money that is repayable by cheque or order and may be invested by way of advances to customers or otherwise.

Accordingly, depending on the manner in which the online lending or other forms of alternative finance are undertaken, they may fall within the scope of the Banks and Trust Companies Law and may also be subject to the Cayman anti-money laundering regime.

(c) Payment services (including marketplaces that route payments from customers to suppliers (eg, Uber and Airbnb)

The Money Services Law regulates money services business, which is defined as the business of providing (as a principal business) any or all of the following services:

  • money transmission;
  • cheque cashing;
  • currency exchange;
  • the issuance, sale or redemption of money orders or traveller’s cheques; and
  • such other services as the governor in cabinet may specify by notice published in the Gazette.

Depending on the manner in which the payment services are undertaken, they may fall within the scope of the Money Services Law; although, as noted at question 4.4, most forms of digital assets will fall outside the definition of ‘currency’ for the purposes of this law and so this law may have limited application for fintech operators dealing in most forms of digital assets.

(d) Forex

There are no exchange control restrictions or regulations in the Cayman Islands. Funds can be freely transferred in and out of the Cayman Islands in unlimited amounts. The Cayman Islands dollar is tied to the US dollar, and both Cayman dollars and US dollars are readily accepted and used within the local Cayman Islands economy.

The Money Services Law regulates money services business, which includes, as noted above, currency exchange. The Securities Investment Business Law may also regulate certain types of forex broker-dealers and market makers. Such activities would necessarily impose the Cayman anti-money laundering regime on the relevant business. If, however, the forex in question is being done by an entity on its own account, then the Money Services Law and the Securities Investment Business Law will not apply to such activities.

Notwithstanding the above, it is likely that many forms of digital assets will not be a currency for the purposes of the Money Services Law or a security for the purposes of the Securities Investment Business Law. Accordingly, while a careful analysis of those laws is required, it may be that in most circumstances the Money Services Law and the Securities Investment Business Law have little or no application to many fintech businesses that issue or otherwise deal in digital assets.

(e) Trading

A Cayman Islands entity can trade in its own securities or the securities of other entities that it trades for its own account and there are specific safe harbour provisions for such activities under the Securities Investment Business Law. In contrast, people dealing in securities, arranging deals in securities, managing securities or advising on securities for other persons as well as broker-dealers and market makers, are regulated pursuant to the Securities Investment Business Law detailed at question 4.1(f), unless one of the various other exemptions apply.

As noted in question 4.1(d), many forms of digital assets will not be a security for the purposes of the Securities Investment Business Law and so the provisions of this law (while requiring a careful analysis on a case-by-case basis) may have little or no application to many forms of fintech businesses that issue or otherwise deal in digital assets.

The Cayman Islands Stock Exchange (CSX) has been granted the sole and exclusive right to operate one or more securities market(s) in the Cayman Islands. A ‘securities market’ is broadly defined under the Stock Exchange Company Law, as is the definition of a ‘security’, which has a broader definition than under the Securities Investment Business Law (although neither expressly includes reference to any form of digital assets). In light of the above, there is some question as to whether a crypto exchange could operate from the Cayman Islands or whether this would impinge on the CSX’s monopoly.

(f) Investment and Asset Management

Investment funds: The regulation of an investment fund in the Cayman Islands will depend upon the nature of the fund – in particular, whether the fund is open ended (eg, a traditional hedge fund) or closed ended (eg, a private equity or venture capital fund):

  • If the fund is open ended, it will need to register with the Cayman Islands Monetary Authority (CIMA), unless an exemption applies. Such open-ended funds generally pursue strategies that are more liquid in nature and allow investors to redeem their investment at their own election.
  • If the fund is structured as a closed-ended fund, then registration with CIMA is not required. The closed-ended structure is more common for funds looking to make long-term investments or investments where the assets are illiquid or otherwise difficult to value.

Regardless of the structure of the fund, it will be subject to the Cayman anti-money laundering regime and ongoing Foreign Account Tax Compliance Act and Common Reporting Standard reporting (see further at question 3.1f). While advances are being made by various fintech participants and service providers (both in the Cayman Islands and elsewhere), a number of challenges remain from a technological, commercial, legal and compliance standpoint with respect to investment funds seeking to tokenise their equity. We expect further developments on this front from a number of stakeholders.

Asset management: The Securities Investment Business Law regulates securities and investment business in the Cayman Islands. ‘Securities investment business’ refers to dealing in securities, arranging deals in securities, managing securities and advising on securities. The definition of a ‘security’ is broad (and includes securities, instruments creating or acknowledging indebtedness, instruments giving entitlements to securities, certificates representing certain securities, options, futures and contracts for difference); but it does not specifically include any form of digital assets, although any given digital asset could fall within the existing securities definition depending on its particular features and characteristics.

However:

  • asset management undertaken by an operator of a relevant entity (eg, a board of directors of a company or the general partner of a partnership) is not subject to the Securities Investment Business Law; and
  • Schedule 3 of the Securities Investment Business Law includes broad categories of ‘excluded activities’ that are also outside the scope of the Securities Investment Business Law.

An investment manager that manages securities for an investment fund is likely to be undertaking fund management business for the purposes of the International Tax Co-operation Economic Substance Law and to be subject to the economic substance requirements under that law.

(g) Risk management

With few exceptions, no specific risk management provisions apply to businesses operating in the Cayman Islands.

The key exceptions are that Cayman Islands banks, insurance companies and certain types of regulated asset managers are subject to a certain degree of risk management regulation by CIMA. CIMA has produced, for example, certain prudential standards, statements of guidance and rules that are applicable to those entities, although they do not apply to the broader fintech market in the Cayman Islands.

(h) Roboadvice

The Cayman Islands legislation does not expressly contemplate roboadvisers. To the extent that a Cayman Islands entity is undertaking such a business, it is likely to be caught within the broader investment and asset management regime in the Cayman Islands (see question 4.1(f)).

(i) Insurtech

We are not aware of any insurtech business in the Cayman Islands.

For more information about this answer please contact: Jonathan Turnham from Travers Thorp Alberga
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FinTech