Unless you’ve been living under a rock for the last 18 months or so, you won’t have failed to notice that one of the biggest stories in financial markets was the rise and spectacular crash of digital assets like Bitcoin, which took investors on a roller coaster ride through 2017, culminating in an epic drop in value at the start of this year.
What was at one time the best investment on the planet, the price of Bitcoin, a digital currency based on the ability of “miners” to solve complex computer algorithms, surged from $985 in January 2017 to over $17,000 by mid-December in what bubble watchers described as akin to “tulip mania”, before crashing and finding a floor around $6,000 today. It seemed that just as Wall Street’s arrival to the party and the ability to short futures contracts on the digital assets had taken this niche investment into the mainstream, a sharp dose of reality had been metered out to a community convinced holding Bitcoin and other digital coins was a one way winning bet.
Amid this unprecedented level of volatility in a market, just nine years after the release of Satoshi Nakamoto’s seminal White Paper, Bitcoin: A Peer to Peer Electronic Cash System, the offshore legal world was waking up to the possibilities and opportunities of this new breed of digital investments and a profitable new line of business. Despite the volatile price swings in tokens like Bitcoin and clones such as Etheteum and Ripple, the real story was in the Blockchain technology that underpinned these assets.
Blockchain has the potential to disrupt every traditional business you can think of, using distributed ledger technology to create new ways of doing business online, which doesn’t require you to trust your counterparty. The network validates all transactions, providing the proof and evidence required to do business anonymously on a platform supported by digital tokens with real value that can be issued and traded.
Think of a distributed ledger as a giant spreadsheet in cyberspace, which is trusted by all its users because any transaction that doesn’t conform to the records agreed upon by all other participants will be kicked out and unvalidated.
Entrepreneurs and companies around the world have taken the opportunity to raise vast sums of capital by issuing their own digital tokens in a so called Initial Coin Offering. Over six billion dollars has already been raised in 2018 from over 1,000 ICOs (icodata.io), which basically involves setting out a business plan in a White Paper and the issuance of tokens that investors can purchase with the hope of the same exponential gains that Bitcoin saw last year.
As new ICOs issue, promising to disrupt industries from video games to shipping to the provision of medical services, via trustless, decentralized online platforms spring up on a weekly or even daily basis. The Cayman Islands has quickly become recognised as a particularly suitable jurisdiction for ICO issues, by virtue of its highly developed corporate legislation and the ability to raise funds in a tax neutral environment, without attracting tax at the company level. The Cayman Islands also found itself at the centre of this new method of fundraising, as US companies worked out that the regulatory environment was more attractive than in their domestic market, due to the IRS declaring that ICOs and the issuance of digital tokens could be considered securities under US law and subject to the regulations that accompany issuance of securities. For the Cayman Islands, the narrower definition of what constitutes a security gave issuers the latitude to distribute their tokens to international investors, outside of the regulatory reach of the IRS.
Certain Cayman Islands law firms have embraced this new method of fundraising and offered legal advice to ICO issuers, looking to find new ways of operating traditional businesses and investment managers establishing funds focused on cryptocurrencies.
While Cayman Islands law is not treating ICOs in the same manner as typical securities, a Cayman legal professional will tell you that the most important thing an ICO issuer can do is seek appropriate legal advice to ensure their operation does not breach other laws in the Cayman Islands in respect of Money Services provision or Anti-Money Laundering regulations. For the Cayman Islands, the potential reputational damage from an ICO that turns out to be a fraud or is linked to money laundering is immense. Although the Cayman Islands has not issued any form of regulations for issuers of digital tokens, the government has said that the financial regulator, the Cayman Islands Monetary Authority does intend to issue guidelines for best practice in this area.
As the cryptocurrency phenomenon has taken hold in the offshore legal market, something of a divergence has emerged among the major law firms, with some taking a very cautious tone, while others have formed Cryptocurrency practice groups to demonstrate their expertise in this area.
While the market is still in its early stages, the potential demand for lawyers with a regulatory background and exposure to fintech could make the Cayman Islands an interesting option for those looking to make the move offshore. Furthermore, being quite a niche area and a new industry, there is considerable opportunity for the right skill set with the potential for advancement as blockchain technology starts to change the way everyone is doing business.