Cryptocurrency funds and initial coin offerings (ICOs) are exploding in popularity in the Cayman Islands. The GAIM Ops Cayman conference, which is taking place this week at the Ritz-Carlton in Grand Cayman, devoted a significant amount of time on the agenda to this hot market, but for independent directors looking to get comfortable with these funds, there is still a great deal of work to do and some big questions to answer.
The real challenge today for service providers in the crypto space is that funds coming from the tech side don’t have the structure in place to deal with things like custody or AML compliance.
“The exchanges have added stability to the market but crypto assets are still very volatile,” said Scott Lennon, managing director at Cayman-based 19 Degrees North Fund Services. “A crypto fund NAV can be hard to verify and the audit process is expensive. The fund business needs a protocol on custody and AML/KYC in order to meet legal obligations both in the US and Cayman.”
Lennon, who has been a director on Pantera’s Bitcoin fund since 2014, explained that investors in a typical ICO will sometimes subscribe using another cryptocurrency, but it’s very difficult to prove the original source of funds on crypto subscription payments, because they may have been traded several times since their original issue.
“The possibilities are endless given that transactions are tracked on a blockchain, but you need to have a system to track the providence of subscriptions and where the cash came from,” Lennon said.
Another big issue the industry is currently grappling with is how to follow the SEC’s guidance on the definition of a security. “There are various opinions on whether a SAFT is a security and this is a very grey area that the SEC will hopefully clear up,” Lennon said.
While the US is increasing its focus on the crypto space and has identified a number of ICOs and exchanges that it is actively investigating, there is no specific crypto legislation in the Cayman Islands. The definition of a security in Cayman law is much narrower and refers to instruments that are regularly traded, which seems to take ICOs and crypto assets outside the Securities Law.
GAIMOps Cayman, Cryptocurrency, Hedge Funds, Investment, Cayman Islands