Legislative Framework

The Cayman Islands government has recently passed new framework, addressing the treatment of virtual assets, and AML, within the nation.

This framework, which was first put forth in early May of 2020, is comprised of 5 bills; each of which has the goal of facilitating a transparent, and safe, environment for market participants.  Finance Minister, Tara Rivers, noted the following points, elaborating on the goals of this framework.

• Innovate financial services
• Provide regulatory clarity
• Protect consumers
• Comply with FATF recommendations

By passing this framework, the Cayman Islands have put a good foot forward in their treatment surrounding virtual assets.

The Highlights

Found within this new framework are two notable highlights.

• The Virtual Asset Service Provider Law
  • Under this newly passed law, virtual asset service providers (VASP) must register with the Cayman Islands Monetary Authority (CIMA)
• Regulatory Sandbox
  • This ‘sandbox’ is essentially a program which allows for companies to test/prove the viability of new products and services, without the need for full licensing.

Legitimate Business

When commenting on the purpose of these bills, Finance Minister, Tara Rivers, indicated that one of the reasons behind this move is to attract ‘legitimate businesses’.

Cayman Islands has long been noted as a tax haven nation.  Due to friendly regulations surrounding taxation, businesses world-wide seek to ‘set-up-shop’ in the tiny Caribbean nation.

While this may have been the case at one point in time, regulators have been working hard to change this narrative/perception.  This new framework is just one such example, as it is structured to enforce compliance with international AML practices; in doing so, it is hoped that criminal activity, which often makes use of new technologies, will be abated.

Cayman Islands

With a population of roughly 65,000 people, Cayman Islands is one of the larger island nations found in the Caribbean.

On island, multiple regulatory bodies work together to ensure companies employ safe practices.  Two of these, which had a hand in the passing of this new framework, include:

• The Caribbean Financial Action Task Force
• The Cayman Islands Monetary Authority (CIMA)

In Other News

While a newly established sandbox within Cayman Islands is a good thing, they are not the first to take the leap in establishing such a program.  We recently took a look at another sandbox program, established by industry leading, Vertalo.  While the former is overseen by government regulators, the latter offers similar benefits; the ability to test out services in a low-risk environment.

Playing in the Tokenization Sandbox with Vertalo

This week, the company responsible for Facebook’s Libra wallet services, Calibra, announced a rebranding. The blockchain-based provider will now go by Novi. The rebranding demonstrates Facebook’s continued commitment to introduce the Libra project to the market, despite heavy opposition from lawmakers. Additionally, it signals a fresh marketing strategy on the part of the Libra team.

As part of the rebranding, Facebook created a new subsidiary – Novi Financial. Interestingly, the word Novi is derived from the Latin words “Novus via” which means “New way”. The name seems fitting as Libra developers search for a new way to get regulator approval for their advantageous project.

In a recent interview, company executives spoke publicly about the decision to rebrand the firm. Importantly, they stated that the name change didn’t change the companies commitment to bring financial service to all parts of the world. Executives explained that the rebrand was part of a larger strategy to bring the company more in line with the fluidity of cryptocurrencies and the overall goal of the Libra project.

Novi Details

According to developers, the Novi crypto wallet features a host of helpful features to support the Libra ecosystem. The Dapp will function as a standalone feature. However, it will have full interoperability within Facebook’s sphere of influence. This strategy would see the Novi wallet available to all Facebook, Messenger, and WhatsApp clients.

Potential Novi Wallet Users via Facebook

Notably, the wallet will offer users near-instantaneous transaction times. Additionally, users can send funds between each other at a fraction of the costs of traditional money sending services. Executives didn’t sate how the fee structure for the system will work, but they did say there would be no hidden fees. One is left to assume that the company intends to take a small percentage of each transaction.

Importantly, the Novi Wallet features built-in AML and KYC compliance mechanisms. Speaking on these systems, developers stated that users will need to verify their identity in various ways. These verification systems can include providing government-issued ID and verification video chats. Novi executives also didn’t give any details on a potential release date.

Their hesitant is well warranted as the Facebook Libra project continues to go through court proceeding with SEC regulators. To date, regulators have shown no sign of budging on their anti-Libra stance. Despite the current atmosphere of distrust, Facebook believes it has the capability to sway the tides.

SEC Taking Wins

Surely, Libra has a rocky road ahead of it. For one, the SEC continues to block any cryptocurrency projects presented from large social media platforms. A perfect example of their entanglement strategy occurred this week when Telegram withdrew its application for the TON blockchain ecosystem.

Novi to Bank

Regardless of the fate of Libra, Novi may still find a comfy home in the crypto sphere. For now, the entire crypto community awaits to see how Facebook plans to transform the mood of regulators and bring the Libra concept to light.

CoinShares Group, the digital asset management firm took another step forward in establishing the presence of digital assets in the institutional investing space. 

CoinShares Launches New Digital Asset Index

The CoinShares Group announced the launch of the Coinshares Gold and Cryptoassets Index (CGCI). This is the first index that has exposure to a digital asset and is also compliant with the EU Benchmark Regulations (EU BMR).

A huge milestone for cryptoassets, as Bitcoin which is often touted as the digital version of gold as an asset class, becomes an integral part of a financial product for institutional investors that seek to have exposure to digital assets.

Moreover, the pairing with gold in this index is done to combine the high volatility of cryptoassets with the low volatility of the precious metal. The risk profile of the index is smoothed out considering that there is no high correlation between gold and Bitcoin, according to CoinShares Group.

The index methodology maintains a basket of 5 equally-weighted cryptoassets weighted against gold. There is no fixed list of cryptoassets eligible for being included, but the criteria is based on 6 month-rolling market capitalization and excludes any ERC-20 tokens and privacy-focused cryptoassets. 

The financial product goes through a re-balancing process, which occurs monthly, with the cryptoasset basket rebalances to include the top 5 eligible market cap weighted cryptocurrencies as of the time of rebalancing. The calculation of the index relies on Kaiko cryptocurrency market data along with Messari’s supply data – two leading data providers in the digital asset space.

Meanwhile, the weights between the cryptoasset basket and gold is determined based on a weighted-risk allocation scheme.

The development of the CGCI resulted from research conducted between CoinShares and Imperial College London, published in 2019, identifying that the pairing of gold and cryptoassets delivers a risk and return profile that is superior to holding either alone.

Cryptoassets Paired with Gold for Better Risk-Reward Profile

The index methodology was created from the research and experimentation conducted with the EU registered benchmark administrator, Compass Financial Technologies to ensure a robust and benchmark compliant index. As the first EU BMR compliant index, the CoinShares Gold and Cryptoassets Index is also live on popular financial data providers like Bloomberg Terminal and Refinitiv.

There are already several options for institutional investors to get exposure to cryptoassets, but with the high volatility of the market, investors may shy away from committing. This new weighted pairing with gold – one of the assets that is known to have a low volatility – allows investors to enter the digital asset space and benefit from higher returns while minimizing their exposure to volatility risk. 

The CoinShares Group already has a great track record in the cryptocurrency space with several financial products which include the first regulated Bitcoin hedge fund and the first exchange-traded Bitcoin product.

Daniel Masters, Executive Chairman of CoinShares believes this is a major step forward for the digital asset space drawing parallels with the institutional adoption of commodities, stating:

“Robustly researched and documented index products were the catalyst for institutional adoption of commodities in the late ’90’s through the advent of the Goldman Sachs Commodity Index. This crypto and gold index aims to do the same, by using academic research and its benchmark regulated status to pass muster with even the most stringent investment committees.”

The Evolving Space of Digital Assets

The digital asset space has been longing for the attention of institutional investors for some time. In the last couple of years there have been several incursions by big institutions into cryptoassets. Established traditional financial institutions like Fidelity or ICE have launched separate entities for the digital asset industry since then.

However the crown jewel for the crypto space remains to be an approved Bitcoin ETF by the SEC, which would cement the asset’s place in its separate category. Nonetheless this goal seems to be as elusive as two years ago.

Several applications from different asset management firms have been rebuffed by the regulatory authority, and each one of them citing reasons related to the supply side of the cryptocurrency market – the lacklustre custody options, the inaccurate price data and uncertainty over exchange volumes.

Even though the cryptocurrency space developed ever since and more custody solutions appeared for institutional investors, and data providers seem to have built more robust price indices, there is no talk of progress towards approval of  a Bitcoin ETF.

Maybe the key lies in the demand – when there is a sufficiently high institutional demand for digital assets, regulators may quickly change their tune.

CoinShares is part of this cohort of companies working to improve the infrastructure for digital asset financial products. With this new product, the company not only has the potential to generate institutional demand for cryptoassets, but also blazes a trail for further product innovation for others in the space.