In addition to incentivising tech companies with lower fees or expedited and streamlined set up and immigration processes, there are several areas in which new laws and regulations could help underpin the growth of tech subsectors on island.
A Strategic Economic Advisory Council, set up by the last government during the lockdown to help develop a plan to address the challenges of the pandemic and uncover potential new revenue streams, highlighted a number of economic growth areas in the technology sector.
Data centres, development and distribution of content, digital identity, digital payments, and digital assets are all niches that Cayman could tap to expand and diversify its economy.
As one of the top offshore financial centres, Cayman has become an attractive destination for technology entrepreneurs, particularly in the crypto space.
During the boom years in 2017 and 2018, Cayman was a popular location for initial coin offerings. The islands were home to some of the most successful ICOs. However, many other token issues subsequently either fell flat or afoul of US authorities amid much regulatory uncertainty and, in certain cases, allegations of fraud.
For instance, in the past 12 months alone a dozen Cayman-based token issues, carried out years ago, were subject to enforcement actions by the US Securities and Exchange Commission.
The ICO experience put a temporary chill on the industry and led local service providers to shift their focus on enabling security tokens, stable coins, the securitisation of common assets and decentralised finance (De-Fi) products.
Appleby partner Peter Colegate notes that in recent years Cayman has taken legal and regulatory steps to make the Islands a jurisdiction that will allow such innovation to thrive.
The new legislative framework for regulating virtual asset businesses, the Virtual Asset (Service Providers) Act 2020 was introduced in May 2020.
It ensures that Cayman continues to adhere to the highest international standards of anti-money laundering and counter-terrorist financing set by the Financial Action Task Force (FATF).
CEC’s Kirkconnell says with the development of Cayman’s Virtual Asset Legislation has carved out an excellent niche in the tech space.
“We find that business interested in setting up in Cayman value ‘right-sized’ yet robust legislative and regulatory regimes,” he says. “Developments in the virtual asset space, and the further emergence of expertise in the virtual asset space, will make the jurisdiction even more attractive to the types of businesses that like what Cayman is all about – and the feedback we have received so far has confirmed this.”
Phase one of the VASP Act came into force on 31 October 2020.
But crucially, phase two, which was expected to be introduced during spring 2021, still has not been implemented.
While the introduction of the VASP Act provides some degree of certainty to those operating in this area, says Colegate, the implementation has not been smooth.
“Feedback from applicants is that the application process is complicated and the applications themselves are taking much longer than anticipated to be processed. The first VASP applications were submitted in late 2020 but we are not aware that any have yet been registered. This has led to many virtual asset businesses choosing to bypass Cayman and establish in other offshore jurisdictions instead.”
He says those businesses have no objections to being regulated, and most are actively seeking regulatory oversight, but in a fast-moving sector such as this, applicants require greater clarity on the process and timing.
The VASP Act also contains provisions for a regulatory sandbox.
This sandbox would allow businesses that do not fit within an existing regulatory regime within Cayman – but which have the potential to benefit the local financial services industry – to establish themselves with regulatory oversight, Colegate explains.
But the sandbox provisions within the VASP Act have yet to be brought into force, which puts Cayman at a disadvantage when other offshore jurisdictions already have their regulatory sandboxes in place.
Ongoing regulatory uncertainty has also somewhat cooled the media frenzy around blockchain and cryptocurrencies.
Paul Byles, organiser of the annual Cayman Islands Digital Economy Conference (CYDEC), agrees the hype has died down a bit but he says, “The technology behind crypto is blockchain and that technology is likely to last far beyond any other innovations that may utilise it.”
He argues that blockchain is already used for regulatory, compliance and many other purposes.
Cartan’s Caruana explains the future of blockchain technology will be more akin to Linux, the open-source operating system. “Every year it was asked: Will this be the year of Linux?”
He says people never realised that it had already happened with Linux powering all Android phones and most webservers.
Caruana believes that blockchain-based systems will be very similar in that consumers may not even know they are using them.
Certified digital ID
For EY parter Mike Mannisto the immediate opportunity that comes to mind in the tech space is around a certified digital ID.
This idea emanates from the financial services world, where forms of identity are frequently needed to verify the authenticity of parties, for example in online transactions, and to carry out know-your-customer (KYC) and anti-money laundering checks.
“Imagine a future world where you have a certified customer due diligence ID that you can use to open any bank account, invest in any fund or do any other type of financial transaction,” says Mannisto, who chaired the tech working group of the Strategic Economic Advisory Council.
Some countries already have their own digital identification. What would make Cayman’s digital ID unique is that it would be certified from a KYC- and anti-money laundering perspective.
Mannisto says it would increase the quality of the financial services that exist in Cayman, significantly reduce costs and enhance the customer experience.
Yet its use does not have to be confined to financial services.
Tourists could come across the border seamlessly with this type of ID, pick up their rental car and check into their hotel under an electronic check-in process.
In healthcare, an electronic ecosystem could be created that ties medical records and access to medical services to an electronic identification. It would again eliminate manual processing, reduce costs and make services easier to use.
“A certified digital ID would be a game changer for Cayman and a great example of innovation that puts us on the global stage,” Mannisto says.
To have digital identity companies operating from Cayman, one would have to create a trusted, legal and regulatory framework, supervised by an autonomous regulator.
Cayman’s leadership and established, legal and regulatory environment in the funds industry and other financial sectors, combined with the ability to attract top talent, means the abilities and credibility required to also be a leader in a certified digital ID sector are, for the most part, there.
“I think it’s a great idea” says Bob Taylor, head of corporate business development at Global Risk and Data Authority Ltd., a compliance solutions provider. That identity could be shared with banks and merchants.
And attaching it to Cayman’s financial services clients could turn it into a huge industry.
“If you made everybody, who’s in the financial services industry, every director, every hedge fund investor get a $10-Cayman ID, you’re talking about 100,000s of people.”
A digital ID could turn into automated borders and easier travel. This could make Cayman an even more attractive location for consulting firms servicing clients in the US.
A local digital register and ID cards with a digital identity certificate are already in the works locally and capable of improving access to government services for residents.