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Cryptocurrencies, blockchain and similar financial technologies hold enormous potential for the Cayman Islands, and it can take a leadership position in how they are regulated. Jude Scott, chief executive officer of Cayman Finance, explains how the newly launched Cayman Finance Innovation Lab is seeking to set the pace for the rest of the world.
The Cayman Islands’ development into the undisputed leader in the global hedge fund industry didn’t happen by accident or overnight. It was a decades-long effort to build a world-class legal and professional infrastructure, achieve and exceed the highest global standards and constantly innovate to meet client needs.
If getting to the top was hard, staying there will be harder still as the pace of change in the industry accelerates—but the Cayman Islands financial services industry is committed to doing it.
Nothing exemplifies the speed of disruption in the funds industry more clearly than the emergence of financial technology, aka fintech. Fintech has already transformed traditional consumer banking through the development of mobile tools. It is also revolutionising how hedge funds develop and share research, raise capital, trade and administer their funds. However, every revolution carries a risk that change can proceed so fast and depart so far from the existing order that there are serious negative consequences and even a potential backlash.
Make it transparent
The challenge with fintech and the funds industry is how to continue to harness the creativity taking place while at the same time ensuring that certain key safeguards the industry wants and needs remain effective. On behalf of the Cayman Islands financial services industry, Cayman Finance has begun work with the Cayman Islands government and the Cayman Islands Monetary Authority (CIMA) to address one key foundational aspect of this challenge: transparency.
One of the biggest changes fintech is making in financial services is potentially reducing the amount of transparency within transactions. Fintech broadly, and cryptocurrencies specifically, are designed to be pseudo/anonymous. New emerging fintech tools such as digital tokens are almost a throwback to the era of bearer shares, making the capital they represent anonymous and portable. That can sound appealing to some, but experience shows the sort of element it can bring into the market.
The increased anonymity offered by many fintech tools can give rise to an increased risk of fraud, money laundering and terrorist financing. These developments represent a potentially systematic threat to global financial services, one that G20 countries, the OECD and the Cayman Islands will not stand idly by and watch develop.
The industry must act now to carefully balance the benefits of new fintech tools with the need for appropriate transparency to allow law enforcement and tax authorities to detect and prevent crime and collect revenue. Otherwise global regulators will be forced to act and, based on previous global financial regulatory efforts, the results likely will be far less balanced when regulation is forced.
In the lab
Cayman Finance, along with our partners in the government and CIMA, is working to lead that kind of proactive action. We have organised some of the most experienced professionals across our jurisdiction, which already includes some of the leading financial services professionals in the world, into the Cayman Finance Innovation Lab.
The Cayman Finance Innovation Lab is tasked with developing a framework for a legislative and regulatory approach that can leverage the benefits of cryptocurrencies, blockchain and similar financial technologies in an environment that contains smart fintech regulations most suited to these new technologies. With Cayman’s leading role in the global hedge fund industry, these efforts can set the pace for the rest of the world.
The most promising idea being developed by the Lab is the development of an identity ecosystem that will enable the issuance of a globally certified digital ID. To have access to this identity ecosystem, users would need to be evaluated for anti-money laundering/know your customer (AML/KYC) compliance by an approved entity. Once successfully evaluated, each individual user would be provided with a globally certified digital ID to use in their transactions. Others operating in the identity ecosystem could have confidence that those with whom they were transacting using fintech tools has been properly certified even if they used their globally certified digital ID in place of an individual name, corporate name or“doing business as (DBA)”.
This identity ecosystem would also offer confidence to tax and law enforcement authorities that those transacting through fintech systems will have been evaluated for AML/KYC compliance by an approved entity. Because of that evaluation process, the authorities would also have the ability, if necessary for legitimate investigations or legal proceedings, to track the use of each globally certified digital ID as well as determine the beneficial owner.
The development of an identity ecosystem and the creation of globally certified digital IDs would be a game-changer for the use of fintech within the funds industry. It would achieve a balance between privacy and transparency without undermining the creativity of emerging fintech development. For example, high quality digital tokens could be issued by funds, listed on digital exchanges and traded by investors using globally certified digital IDs, thereby creating liquidity and stickier capital for fund managers. It would reduce compliance costs and increase quality while also improve the customer experience.
The Cayman Islands has the opportunity to use its leadership in the global hedge fund market to harness the promise of fintech while incorporating the safeguards needed to fully realise it. The concept of an identify framework paired with a globally certified digital ID offers an excellent example of how we’re approaching the challenge.
Jude Scott is the chief executive officer of Cayman Finance.
Cryptocurrencies, Cayman, fintech, creativity, innovation