By Tom Cleveland, currency strategist for http://www.forextraders.com

When Christopher Columbus first set eyes on the Cayman Islands, they consisted of three uninhabited islands northwest of Jamaica.  Today, the islands are the fifth-largest banking center in the world, specializing in “banking, hedge fund formation and investment, structured finance and securitization, captive insurance, and general corporate activities.”  The islands, barely 50% larger than the District of Columbia in landmass, are now home for 55,000 inhabitants, the beneficiaries of a modern day success story in the Caribbean.

The Cayman Islands Dollar (“KYD”) is the national currency for this small island community and serves as a stable foundation for both present and future prosperity.  It was introduced in 1972, several years after the Cayman Islands stepped out from under the protective rule of the Colony of Jamaica in 1962.  English oversight in the region began as far back as 1670 when control of Jamaica and the Cayman Islands was transferred from Spain following the Treaty of Madrid.  Spanish “Pieces of Eight” were the prevailing international tender for trade in those bygone days, but the spread of the British Empire forced a change.

The transition to pounds and shillings did not happen overnight.  It was not until 1839 that Parliament acted to make British coinage the official legal tender for Jamaica, and thereby for the Cayman Islands, as well.  The Jamaican Pound held sway until 1968 when the Jamaican House of Representatives voted to decimalize the currency by introducing the dollar, a decision that led to its minting its own unique coinage.  At the time, one Jamaican Dollar was worth roughly one-half of a British Pound.

The Cayman Islands Dollar came into being in 1972 and replaced the Jamaican Dollar.  New coins and banknotes were issued, and the currency was “pegged” to the U.S. Dollar.  The “KYD” does not fluctuate in global foreign exchange markets, but is equivalent to USD$1.25.  U.S. Dollars are still accepted as legal currency by Caymanians, but any change related to a purchase will be distributed in the local currency.

How the Cayman Islands became a global financial powerhouse is another story.  The islands have always been a tax-exempt destination.  As a point of fact, neither the residents nor do local companies pay any direct income taxes to the government.  The majority of government fee revenues come from import taxes and other indirect means.  There are no taxes on profits or capital gains, and no estate taxes exist either.  There are restrictions, however, on employment.  Foreigners must first have a job on the islands and can only relocate after their employer has obtained an official work permit.

The Cayman Islands status as an “offshore tax haven” has attracted a stampede of financial institutions, insurance companies, and hedge funds to set up shop and use the islands as a central base of operations.  More than 55% of the local economy is generated by the financial services industry.  It also has nearly 300 banks, mostly international by nature with 40 branches established by the 50 largest banks in the world.  Bain Capital and Mitt Romney are not the only ones that have focused on this unique banking center.

The low-tax posture of the islands has been the major attraction, leading to enormous growth since the 1990’s.  There have been public attacks, however, from various international bodies.  Consequently, island authorities have stepped in to negotiate favorable outcomes by committing to various regulatory reforms to improve transparency and to provide requested information exchanges related to citizens from other taxing jurisdictions.

Today, the Cayman Islands Dollar is considered one of the highest-valued currency units in the world.  Success breeds stability.