Bradley Kruger is a partner in Ogier's Cayman team, and heads the firm's Caribbean and Asia corporate practice. In this Q&A he explores the offshore perspective on blockchain and crypto-currencies.
What do offshore jurisdictions offer crypto-currency innovators that onshore jurisdictions don't?
The benefits are the same as the offering for traditional financial products, tax neutrality being the key, supported by a sophisticated and developed financial services sector and internationally-recognised court system and body of law. The regulators tend to take a risk-based and pragmatic approach that has enabled the investment funds, international banking and trusts sectors to flourish – there is no reason that crypto-currency innovation would be different. The new applications that we are seeing may be crypto-currency, ICOs or blockchain technologies but fundamentally they rely on the same key principle - facilitating international transactions through a tax neutral jurisdiction.
How does Cayman distinguish itself in this space?
Cayman's financial services sector is internationally recognised as being a gold standard, best-in-class jurisdiction with a stable government and a recognised legal and court system that is based on the British common law system. And for many countries and regions that have seen activity in this area - the United States, Canada and South America – there is of course the proximity, and pre-existing and long-standing commercial links, as well as familiarity with Cayman from businesses in other regions such as Asia and Europe. Unlike some other jurisdictions, Cayman also has the infrastructure to attract businesses who want a physical presence here, and of course, the island provides amenities, great lifestyle, and a very strong professional services infrastructure. There is an immigration system that is friendly to expats and to new businesses, and that supports one of the trends that we are seeing more and more of in this ICO-issuer space – seeking to establish a physical presence offshore in Cayman.
What threat does regulation pose? Is there an international challenge?
Regulators offshore and onshore are keeping a close eye on developments, and many of them are taking a cautious and measured approach. Others are more vocal, and there has been some flip-flopping – moving from a very open position to a more closed one. In a jurisdiction such as Cayman the government and regulator are very keen to attract innovative and disruptive businesses and they have a history of being business-friendly, particularly in the area of financial services. Our expectation is that while Cayman will always follow international regulatory standards, the jurisdiction will continue to lead the way in being business-friendly and taking a pragmatic and measured approach.
The United States may one day unilaterally impose its regulations throughout the world as we saw with global tax transparency standards like FATCA for example, while others may be slower off the mark but will adopt a more internationally co-operative regime, such as the rest of the OECD did with CRS. Cayman complies with both FATCA and CRS, and I think that there will eventually be international standards developed around aspects of crypto-currencies, ICOs and even blockchain technology generally.
Technological change happens quickly and it is likely to be an area that is difficult for governments and regulators to keep up with – the pace of change has been intense in the way that blockchain technology, is already being used. The process of agreeing to international regulatory standards takes time – but I expect that governments will eventually agree that an international approach is necessary given the cross-border nature and potential uses of blockchain technology.
Have crypto-currencies now hopped over into the mainstream in terms of investment strategies?
Yes, they absolutely have. We are starting to see, for example, some large financial institutions investing their own resources in developing blockchain driven systems and products, as well as investing in crypto-currencies. Hedge fund managers in particular are starting to set up dedicated funds or allocate parts of their existing portfolios to crypto-currency investments. It is not on the fringes anymore, it really has become part of the mainstream. Any balanced investment strategy needs to consider a position on crypto-currencies.
What are the next likely developments in this area?
We are starting to see more and more interest from larger institutions and the banks. We will probably see more blockchain-based and distributed ledger technology-based businesses and products being adopted by Fortune 500 companies next. We will also see more and more individual currencies and tokens out there, and eventually significant M&A activity. There will be price corrections too, but blockchain technology is here to stay and crypto-currencies are here to stay too. I suspect we will witness governments issuing their own crypto-currencies in the near future as we know a few governments are currently considering this.
From an offshore perspective, and specifically as a legal practitioner in Cayman, people who want to set up or invest in a business that will utilise a digital token or crypto-currency will want to know that there is somewhere that they can do it and Cayman is such a place. We currently have a number of clients who are existing fund managers investing in or setting up new funds or separate portfolios dedicated to the space, new managers who are developing their own strategies to invest in and benefit from the sector, and blockchain-based companies that are setting up ICO issuers for their own tokens and crypto-currencies. We are very actively involved in the space and have the expertise and experience to assist clients wishing to go offshore for their crypto-currency and blockchain technology activities.