How a British Overseas Territory Became the Largest Holder of U.S. Debt

China, which was the largest holder of U.S. government debt as recently as 2019, has cut its holdings to the lowest level since 2008, driven by changing trade patterns, geopolitical concerns, and domestic economic pressures.

The Cayman Islands has emerged as an unlikely place to fill the gap. This small British overseas territory held $427 billion in U.S. Treasuries as of November 2025, making it the sixth-largest foreign holder. But a 2025 Federal Reserve analysis revealed that the total figure was actually closer to $1.4 trillion by the end of 2024—with some estimates reaching as high as $1.85 trillion—after nearly 40 percent of new treasury notes and bonds were purchased in the Cayman Islands after 2022.

While these figures suggest that the territory is the largest foreign holder of U.S. debt, the main buyers are not Caymanians or the government, but hedge funds. After the territory passed its Mutual Funds Law in 1993 amid the 1990s hedge fund boom, these vehicles began incorporating in large numbers, drawn by flexible regulation and low taxes. The Cayman Islands today is home to roughly three-quarters of the world’s offshore hedge funds.

Many have used so-called “basis trades,” borrowing heavily to profit from small price gaps between U.S. Treasury bonds and their future equivalents. The strategy has grown so large and opaque that it has triggered a Federal Reserve investigation.

Emergence and Evolution of a Financial Hub

The Cayman Islands has played a major role in global finance since the 1960s, operating as a center for tax evasion and asset parking. Mostly European banks trading in dollars outside the U.S., nicknamed Eurodollars, could lend these dollars beyond the reach of American regulations and capital controls. As the market grew, the Cayman Islands became a central place to store and use these Eurodollars.

Local Cayman lawmakers also passed financial laws to attract international businesses in the 1960s, including having no direct taxes on individuals, corporate profits, or capital gains, which helped cement the islands’ role as an offshore financial center. The legal system, based on English common law, offered clear rules, modern legislation, and independent courts. Packaged into a simple, finance-focused framework, it gave investors confidence and turned the territory into a quiet financial powerhouse.

Despite the Cayman Islands’ own elected government led by a premier, key powers remain with the United Kingdom. Final appeals in major cases are heard in London, while a governor appointed by the British monarch, on the advice of the British government, oversees internal security and coordinates foreign affairs with London. In theory, Britain can also intervene in the territory’s governance, providing a level of political stability valued by outside investors.

The Cayman Islands’ success has come from a “collaborative policymaking process that involved local leaders, expatriate professionals, and British officials,” according to a working paper by the University of Alabama, along with embracing financial trends. Home to more than 120,000 companies as of 2025, including thousands registered at the five-story Ugland House, hedge funds are just one of several recent financial booms. The parent company of Theleme Partners LLP, a hedge fund linked to former UK Prime Minister Rishi Sunak, “lists the notorious Ugland House as its address. The small office is the registered home to approximately 40,000 entities,” stated the Good Law Project.

In 2022, the bankruptcy of cryptocurrency exchange FTX exposed billions in missing customer funds and became one of the largest financial frauds of the decade. Court filings showed that more than a fifth of its registered customer accounts were from the Cayman Islands—greater than any other jurisdiction—highlighting how easily new and risky ventures could be structured.

The territory also plays a central role in shadow banking. After banks pulled back from lending following the 2008 financial crisis, non-bank loans and financing surged, and many such funds have been domiciled in the Cayman Islands, such as Blackstone’s iCapital Offshore Access Fund SPC.

The Cayman Islands were also central to the 2020–2021 boom in special purpose acquisition companies (SPACs), which raised capital through IPOs to merge with private firms and take them public. Of the more than $100 billion raised in 2021, half of the SPACs were Cayman-incorporated. Rising interest rates and increased regulatory scrutiny slowed the expansion, but SPAC activity in Cayman has seen a resurgence since 2024.

It also sits at the center of China–U.S. capital markets. Because Chinese law restricts foreign ownership in certain industries, many Chinese firms list abroad via Cayman holding companies using variable interest entity (VIE) structures. This includes giant Chinese e-commerce company Alibaba, whose ultimate parent company is incorporated in the Cayman Islands.

The scale is remarkable, with Cayman-registered investment funds holding more than $8 trillion in assets by the end of 2023, in a territory with a population of less than 80,000 people.

London and Other Jurisdictions

The Cayman Islands are part of a wider network of British-linked financial jurisdictions. According to Global Financial Integrity, “The UK’s offshore tax havens are estimated to facilitate nearly 40 percent of the tax revenue losses suffered annually by countries around the world.”

This system is closely tied to the City of London, a nearly 2,000-year-oldfinancial district that hosts some of the world’s largest banks, law firms, insurers, and financial services companies. London-based institutions design and manage offshore structures, earning substantial fees while channeling capital through London’s broader financial system, helping the city competewith Wall Street and other global financial centers.

The U.S. largely tolerates this arrangement, since it is operated through a close ally and provides a trusted platform for U.S. investors, ultra-wealthy individuals, and corporations to park and deploy capital. Unlike American territories, which are bound by federal law, British-linked jurisdictions can set their own corporate and tax rules with minimal oversight.

While the Cayman Islands may be Britain’s most prominent offshore jurisdiction, other British territories in the Caribbean also play influential roles. The British Virgin Islands (BVI) has become a major center for company incorporation. Its International Business Companies Act, introduced in 1984, simplified company formation, and the BVI is now the “leading domicile for corporate registrations.” With roughly 400,000 companiesregistered there, many of them simple shell companies with often unknown owners, it surpasses even the Cayman Islands in number.

BVI-registered companies hold around $1.5 trillion in assets, while the territory’s GDP is around $1.7 billion. The 2016 Panama Papers, leaked from law firm Mossack Fonseca, revealed that a massive share of the shell companies used by politicians, oligarchs, celebrities, and criminals to shelter wealth were registered in the BVI. Mossack Fonseca was reportedly unaware of the owners of 75 percent of the offshore entities.

Similarly, the Paradise Papers, leaked from law firm Appleby in the British Overseas Territory of Bermuda, highlighted how corporations and individuals used offshore structures for tax planning and asset protection. Bermuda is also the global “leader in captive reinsurance companies,” hosting many of the world’s largest catastrophe insurers and reinsurers. Investors can hedge or speculate on risks ranging from hurricanes to financial shocks.

In 2023, Vesttoo, a Bermuda-based insurtech company, used fake collateral documents to back reinsurance deals, fabricating billions in financial guarantees, in what a Delaware court filing described as Bermuda’s “largest insurance fraud ever.” In October 2024, the Tax Justice UK ranked the BVI and Cayman Islands as the world’s most damaging tax havens, with Bermuda coming in third place.

While these territories are notorious globally, Britain’s Crown Dependencies—specifically Jersey, Guernsey, and the Isle of Man—serve a more Europe-facing role. More self-governing than the British overseas territories but still closely tied to the City of London, they specialize in wealth management for European and global clients.

Their European focus does not mean all funds are European. These jurisdictions often act as gateways, channeling wealth from around the world into investment vehicles that can then be deployed into Europe. In 2019, Jersey authorities announced the seizure of more than $267 million from people connected to former Nigerian dictator Sani Abacha, found in an account held by shell company Doraville Properties Corporation.

Guernsey and the Isle of Man have also faced headwinds recently. In early 2026, Guernsey regulators fined Utmost International Guernsey a record £1.96 million, or approximately $2.5 million, for failures in establishing anti-money laundering controls after the firm did not properly monitor high-risk clients for over a decade, many having links to South and Central America.

The Isle of Man has, meanwhile, developed one of the world’s largest online gambling licensing regimes, and regulators have signaled concern about its vulnerability to misuse. Authorities flagged online gambling as a money laundering risk in 2026, warning that organized crime groups, particularly from Southeast Asia, were exploiting its platforms.

These jurisdictions are deeply interconnected. Multinational investment firm Brevan Howard is headquartered in Jersey but manages separate Cayman Islands-domiciled hedge funds. BH Macro Limited, based in Guernsey, meanwhile, channels nearly all its investments into the Cayman-domiciled Brevan Howard Master Fund, transporting billions of dollars across global markets.

Regulation Attempts

The activity of these jurisdictions continues to attract international regulatory attention. The Organization for Economic Cooperation and Development (OECD) is currently pushing for greater tax transparency through a variety of initiatives.

Even the UK has taken notice: a 2022 inquiry into corruption in the BVI, led by former Court of Appeal judge Gary Hickinbottom, concluded that “almost everywhere, the principles of good governance, such as openness, transparency and even the rule of law, are ignored,” and recommended that the government be dissolved. Former UK Deputy Foreign Secretary Andrew Mitchell, meanwhile, warned in 2024 that nearly 40 percent of the world’s dirty money flowed through the City of London and British foreign jurisdictions.

U.S. authorities are similarly looking to step in. In 2022, BVI Premier Andrew Fahie was arrested by the Drug Enforcement Administration in Miami on charges of money laundering and conspiring to import cocaine into the U.S. for Mexico’s Sinaloa cartel in exchange for a cut of the profit.

And as tensions with Iran continue to rise, greater attention is likely to focus on how Iranian regime figures and their proxies have used international financial networks to hold and move wealth, including through London properties and UK-registered entities.

Such attention, however, has existed for years. In 2009, former President Barack Obama noted that the Cayman Islands’ Ugland House was either “the largest building in the world or the largest tax scam in the world,” in a critique of offshore registries. In response, former president of the Cayman Islands Financial Services Authority, Anthony Travers, stated thatDelaware’s Corporation Trust Center is the registered office of almost 220,000 companies, highlighting how American jurisdictions also play a similar game.

Despite rivalries, UK and U.S.-linked financial systems are deeply integrated. Institutions like the International Accounting Standards Board are based in the City of London but legally registered in Delaware. While it sets accounting rules, such entities primarily serve to protect the offshore industry and ensure all players stay aligned.

These offshore hubs thrive because elites, companies, and wealthy interests rely on them to move and shelter enormous sums of money. Though only decades old, the British offshore system is continually adapting to changing global economic conditions and financial trends. Given their value to powerful actors and the stakes involved in altering the system, these jurisdictions will resist any significant regulation that threatens the flow of wealth to ensure they remain central players in global finance.

This article was produced by Economy for All, a project of the Independent Media Institute.

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