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ABSTRACT
This article will seek to firstly, outline the reasons why virtual asset service providers have embraced trading offshore. Secondly, it will evaluate the Cayman Islands legislative regime under the Virtual Asset Service Providers Act and its associated regulations to test compliance with international regulatory standards. Thirdly, it will consider the international focus that the Cayman Islands attracts on issues of global taxation and the prevention of money laundering, and will evaluate how Cayman has approached the new challenges presented by cryptocurrencies whilst demonstrating compliance with international standards. This article will reach conclusions as to how offshore regulators and their legal frameworks are going to need to adapt and keep pace with the evolution of cryptocurrencies so that they can protect the integrity of their valuable financial services industries. Offshore jurisdictions should not be seen as selling the crypto industry the shovels with which to mine, if that would involve undermining compliance with regulatory, anti-money laundering and tax transparency standards.
Acknowledgement
Andrew wishes to thank Professors Amy Wallace and Colin King and Tommy Hoogaars for their kind comments on this work. Any errors are naturally my own.
Disclosure statement
No potential conflict of interest was reported by the author.
Notes
1 S Nakamoto, ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ <https:/bitcoin.org/bitcoin.pdf>.
2 <https://coinmarketcap.com/> (visited 23 February 2023).
3 Blockchain – The Next Big Thing (The Economist, 9 May 2015) <https://www.economist.com/news/special-report/21650295-or-it-next-big-thing>.
4 S Mbiyavanga, ‘Cyrptolaundering: Anti Money Laundering Regulation of Virtual Currency Exchanges’ (2023) 3(1) Journal of Anti-Corruption Law 1–15.
5 R Barone and D Masciandaro, ‘Cryptocurrency or Usury? Crime and Alternative Money Laundering Techniques’ (2019) 47 European Journal of Law and Economics 223–54.
6 U.S. Department Of Justice ‘Report Of the Attorney General’s Cyber Digital Task Force: Cryptocurrency enforcement framework’ (2020) <https://www.jusice.gov/cryptoreport>.
7 S Foley, JR Karlsen, and TJ Putnins, ‘Sex, Drugs and Bitcoin: How much Illegal Activity Is Financed Through Cryptocurrencies?’ (2019) 32(5) The Review of Financial Studies 1798–835.
8 C Albrect and others, ‘The Use of Cryptocurrencies in the Money Laundering Process’ (2019) 22(2) Journal Of Money Laundering Control 210–16.
9 B Molloy, ‘Taxing the Blockchain. How Cryptocurrencies Thwart International Tax Policy’ (2019) 20 Oregon Review of International Law 643–47.
10 PWC, ‘4th Annual Crypto Hedge Fund Report’ (2022) <https://www.pwc.com/gx/en/financial-services/pdf/4th-annual-global-crypto-hedge-fund-report-june-2022.pdf>.
11 Technology City Cayman Islands | Cayman Enterprise City < https://www.caymanenterprisecity.com/cayman–tech>.
12 B Hemenway and S Hammer ‘A Comprehensive Approach to Crypto Regulation’ (2023) 25 University of Pennsylvania Journal of Business Law, 415.
13 For reviews of types of regulation see R Baldwin, M Cave and M Lodge (eds), Oxford Handbook On Regulation (OUP 2012).
M Field, ‘Bitcoin Companies For First UK Body As Regulators Circle’ (Telegraph, 13 February 2018).
15 MJ Casey and P Vigna, ‘Bitcoin and the Digital Currency Revolution’ (The Wall Street Journal, 23 January 2015) <http://www.wsj.com/articles/the-revolutionary-power-of-digital-currency-1422035061>.
16 D Keopsell, ‘Rise of the Cryptocurrencies Like Bitcoin Begs Question: What is Money?’ (The Conversation, 25 September 2015) <https://theconversation.com/rise-of-cryptocurrencies-like-bitcoin-begs-question-what-is-money-46713>.
17 R Wainwright, ‘Crypto Money-Laundering Will Crypto Help the Money Launderers of the Future?’ (The Economist, 26 April 2018) <https://www.economist.com/finance-and-economics-2018/04/26/crypto-money-laundering>.
18 FATF, ‘Virtual Assets, Red Flag Indicators of Money Laundering and Terrorist Financing’ (September 2020), FATF ‘Updated Guidance for a Risk Based Approach to Virtual Assets and Virtual Asset Service Providers’ (October 2021) and FATF ‘Virtual Assets: Targeted Update of the FATF Standards on Virtual Assets and Virtual Asset Service Providers’ (June 2023).
19 The Australian Government the Treasury. Initial Coin Offerings. Issues Paper. The Commonwealth of Australia: TSY/AU [2019]. https://static.treasury.gov.au/uploads/sites/1/2019/02/c2019-t353604-Issues_Paper.pdf, p. 7; see: /https://www.fsma.be/en/warnings/cryptocurrency-fraud-dont-be-taken.
20 ESAs warn consumers of risks in buying virtual currencies (europa.eu) https://www.esma.europa.eu/press-news/esma-news/esas-warn-consumers-risks-in-buying-virtual-currencies.
21 J Simser, ‘Bitcoin and Modern Alchemy: In Code We Trust' (2015) 22(2) Journal of Financial Crime 156–69.
22 TA Anderson, ‘Bitcoin – It is Just a Fad? History, Current Status and the Future of the Cyber-Currency Revolution’ (2014) 29 Journal of International Banking Law and Regulation 428–35.
23 JJ Oerlemans and others, ‘Cybercrime en witwassen: bitcoins, online dienstverleners en andere witwasmethoden bij banking malware en ransomware.Onderzoek en beleid WODC’ (2016) (319) Meppel: Boom Criminologie 62.
24 C Chambers-Jones, ‘The Financial Crisis and Digital Currencies’ in M Ryder (ed), White Collar Crime and Risk. Palgrave Studies in Risk, Crime and Society (Palgrave Macmillan 2018) 203–30.
25 B Custers and L Overwater ‘Regulating Initial Coin Offerings and Cryptocurrencies: A Comparison of Different Approaches in Nine Jurisdictions Worldwide' (2019) 10(3) European Journal of Law and Technology 29.
26 Financial Conduct Authority, ‘Financial Promotion Rules For Crypto Assets’, PS23/6 (June 2023).
27 L Beslie, ‘El Salvador’s Experiment with Bitcoin as Legal Tender’ (July 2022) National Bureau Of Economic Research.
29 AJ Perkins, ‘Offshore Jurisdictions, Sunny Places for Shady Business No More’ [2022] World Financial Review (September–October) 4.
30 T Freyer and AP Morriss, ‘Creating Cayman as an Offshore Financial Centre: Structure & Strategy since 1960’ (2013) 45 Arizona State Law Journal 1297.
31 <https://www.cima.ky/banking-statistics> accessed 26 September 2022.
32 <https://www.ciregistry.ky/companies-register/company-statistics/> accessed 26 September 2022.
33 <https://www.cima.ky/investment-statistics> accessed 26 September 2022.
34 D Gunter and IH Giddy, The International Money Market (Prentice-Hall, Englewood Cliffs 1978); IS McCarthy ‘Hosting Offshore Banks: Benefits and Costs’ (May 1979) IMF Working Paper No 32 and OECD, Harmful Tax Competition: An Emerging Global Issue (OECD Publishing 1998), https://doi.org/10.1787/9789264162945-en
35 AJ Perkins, ‘Does Holding Offshore Jurisdictions to Higher AML Standards Really Assist in Preventing Money Laundering?’ (2022) 25(4) Journal of Money Laundering Control 742–56.
36 D Nedelcu, ‘Money Laundering By Means Of Offshore Companies’, Titu Maiorescu University Annals, Law Series, Year XVIII.
37 For example in the UK see Check if you need to pay tax when you sell cryptoassets – GOV.UK (www.gov.uk).
38 B Harrington, ‘Trusts and financialization’ (2017) 15(1) Socio-Economic Review 31–63.
39 Section 18(1) Special Economic Zones Act (2017 Revision).
40 Section 1(e) Schedule 3 Special Economic Zones Act (2017 Revision).
41 Section 2 Schedule 3 Special Economic Zones Act (2017 Revision).
42 Section 3(1) Schedule 3 Special Economic Zones Act (2017 Revision).
43 Section 20 Special Economic Zones Act (2017 Revision).
44 M Egan, ‘A Bit(Coin)of a Problem for the EU AML Framework’ in CKing, C Walker and J Gurulé (eds), The Palgrave Handbook Of Criminal and Terrorism Financing Law (Palgrave Macmillan 2018) 183–208.
45 FATF, ‘Guidance for a Risk-based Approach Prepaid Cards, Mobile Payments and Internet Based Payment Systems’ (June 2013) at para. 37.
46 ibid at para. 29.
47 FATF, ‘Virtual Currencies: Key Definitions and Potential AML/CTF Risks’ (June 2014).
48 ibid 4.
49 ibid 9 and 10.
50 Chambers-Jones (n 24).
51 FATF, ‘Guidance for a Risk-Based Approach to Virtual Currencies’ (June 2015).
52 B Scott, ‘How Can Cryptocurrency and Blockchain Technology Play a Role in Building Social and Solidarity Finance?’ UNRISD Working Paper No. 2016-1.
53 E Helleiner ‘The Politics of Global Financial Regulation: Lessons from the Fight Against Money Laundering’ in J Eatwell and L Taylor (eds), International capital markets: Systems in transition (OUP 2002) 177–204.
54 ibid paras. 23–32.
55 ibid para. 38.
56 ibid paras 35 and 36.
57 FATF, ‘Guidance for a Risk-based Approach Virtual Assets and Virtual Asset Service Providers’ (June 2019).
58 ibid para. 33(b).
59 ibid para. 33(c).
60 ibid paras. 67, 77–85.
61 ibid paras. 90–107.
62 ibid para. 109.
63 ibid paras. 63, 70, 71 and 73.
64 ibid 5.
65 T Altankhuyag, ‘The AML ‘Travel Rule’: A New Challenge for VASPs and GDPR’ (2020)GRC World Forums <https://www.grcworldforums.com/financial-crime/the-aml-travel-rule-a-new-challenge-for-vasps-and-gdpr/236.article> accessed 10 September 2023.
66 Transfer of data to the US requires additional guarantees according to Article 44 GDPR.
67 FATF ‘Updated Guidance for a Risk Based Approach for Virtual Assets and Virtual Asset Service Providers’ (October 2021).
68 ibid paras. 47–54.
69 ibid paras. 55–94.
70 ibid paras. 182 and 183.
71 ibid para. 105.
72 FATF ‘Targeted Updated on Implementation of the FATF Standards on Virtual Assets and Virtual Asset Service Providers’ (June 2023).
73 ibid 2.
74 ibid.
75 ibid.
76 L De Koker, 'FATF's New Virtual Asset Service Provider Standards: An Important First Step' (2020) 27 Journal of Financial Crime 309.
77 K Byttebier and K Adamos, ‘Cryptoassets – a New Frontier for Money Laundering and Terrorist Financing: Legal Changes to Address the Increasing AML Risk’ [2022] ahead-of-print Journal of Financial Crime. https://doi.org/10.1108/JFC-10-2022-0262.
78 Guernsey Financial Services Commission <https://www.gfsc.gg/faqs-0> accessed 26 September 2022.
79 Isle of Man Financial Services Authority, ‘Guidance: Crypto Asset/ Token Activity Regulation’ <https://www.iomfsa.im/media/2720/regulatory-perimeter-for-tokens.pdf>.
80 Section 4(4) Proceeds Of Crime Law (Jersey).
81 Section 9(2)(B) Proceeds Of Crime Law (Jersey).
82 See n 30.
83 CFATF, 'Anti-money laundering and counter-terrorist financing measures: Cayman Islands Mutual Evaluation Report' (2019).
84 Legislation that a virtual currency business will need to comply with includes the Securities Investment Business Act (2020 Revision), The Mutual Funds Act (2021 Revision), The Private Fund Act (2021 Revision), The Money Services Act (2020 Revision), The Bank and Companies Trust Act (2021 Revision), The Proceeds of Crime Act (2020 Revision), The Proliferation (Prohibition) Financing Act (2017), Anti Money Laundering Regulations (2023 Revision), The Stock Exchange Companies Act (2014 Revision), and the International Tax Co-operation (Economic Subsistence) Act (2021 Revision).
85 Section 2(1) Virtual Asset (Service Providers) Act (2022 Revision).
86 Section 2(1) Virtual Asset (Service Providers) Act (2022 Revision).
87 Whether registered as a Company incorporated under the Companies Act (2023 Revision), a general partnership registered under the Partnership Act (2013 Revision), a limited partnership registered under the Partnership Act (2013 Revision), an exempted partnership registered under the Partnership Act (2013 Revision), a foreign company registered under Part IX Companies Act (2023 Revision), a limited liability company registered under the Limited Liability Companies Act (2012 Revision), a limited liability partnership registered under the Limited Liability Partnership Act (2021 Revision).
88 Section 4 Virtual Asset (Service Providers) Act (2022 Revision).
89 Section 35(1) and (2) Virtual Asset (Service Providers) Act (2002 Revision).
90 Section 21 of Schedule 6 Proceeds Of Crime Act (2020 Revision).
91 Confirmed in Section 9(3) (D) and (E) Virtua Asset (Service Providers) Act (2022 Revision).
92 Section 134 Proceeds Of Crime Act (2020 Revision).
93 Section 181 Proceeds Of Crime Act (2020 Revision).
94 Section 3 Anti Money Laundering Regulations (2023 Revision).
95 Section 33 Anti Money Laundering Regulations (2023 Revision).
96 Section 34 Anti Money Laundering Regulations (2023 Revision).
97 Sections 8 and 9 Anti Money Laundering Regulations (2023 Revision).
98 Part III Anti Money Laundering Regulations (2023 Revision).
99 Section 5(v) Anti Money Laundering Regulations (2023 Revision).
100 Section 16 Anti Money Laundering Regulations (2023 Revision).
101 Section 5(vii) Anti Money Laundering Regulations (2023 Revision).
102 Section 5(viia) Anti Money Laundering Regulations (2023 Revision).
103 Section 5 Anti Money Laundering Regulations (2023 Revision).
104 Part IV Proceeds Of Crime Act (2020 Revision).
105 CIMA derives its powers from the Monetary Authority Act (2020 Revision), Monetary Authority (Administrative Fines) Regulations 2019, Proceeds Of Crime Act (2020 Revision) and the Anti Money Laundering Regulations (2023 Revision).
106 Section 27 Anti Money Laundering Regulations (2023 Revision).
107 Section F Guidance Notes (Amendments) on the Prevention and Detection of Money Laundering, Terrorist Financing and Proliferation Financing in the Cayman Islands (February 2021).
108 Section 49(C) Anti Money Laundering Regulations (2023 Revision).
109 A Travers, ‘Super Compliance In The Cayman Islands’ (2004) 19(5) J.I.B.L.R 186–88.
110 FATF (n 57).
111 K Kirkpatrick and others, ‘FinCEN Travel Rule Updates Sets Challenge For Crypto’ <www.law360.com/articles1207330> accessed 23 February 2023.
112 Section K Guidance Notes (Amendments) on the Prevention and Detection of Money Laundering, Terrorist Financing and Proliferation Financing in the Cayman Islands (February 2021).
113 M Gordan and others, ‘Crypto Exchanges have 12 Months to Implement FATF Anti Money Laundering’ <https://www.cliffordchance.com/insights/resources/blogs/regulatory-investigations-financial-crime-insights/2019/07/crypto-exchanges-have-12-months-to-implement-fatf-anti-money-laundering.html> accessed 23 February 2023.
114 Sections 17–21 Virtual Asset (Service Providers) Act (2022 Revision).
115 Section 18 Virtual Asset (Service Providers) Act (2022 Revision).
116 Section 17 Virtual Asset (Service Providers) Act (2022 Revision).
117 Section 20 Virtual Asset (Service Providers) Act (2022 Revision).
118 Section 21 Virtual Asset (Service Providers) Act (2022 Revision).
119 See fn 34.
120 J Fichtner, ‘The Cayman Conundrum: Why is One Tiny Archipelago the Largest Financial Centre in Latin America and the Caribbean?’ <https://blogs.lse.ac.uk/usappblog/2017/11/11/the-cayman-conundrum-why-is-one-tiny-archipelago-the-largest-financial-centre-in-latin-america-and-the-caribbean/> accessed 13 September 2023.
121 At the time of writing, Cayman is still on the list, but is expected to be removed at the October 2023 FATF Plenary.
122 IH-Y Chiu, ‘Regulating Crypto-Finance: A Policy Blueprint’ ECGI Report’ <https://ecgi.global/content/working-papers>.
123 GC Velkes, ‘International Anti Money Laundering Regulation of Virtual Currencies and Assets’ (2020) 52 New York University Journal of International Law and Politics 875.