Crypto is Thriving Through Offshore Corporate Structures
Marc Piano, Senior Associate at global offshore law firm Harneys, is a member of the Investment Funds, Corporate, and Banking & Finance teams in the Cayman Islands office. Phil Graham, Partner at Harneys, is global head of the Investment Funds and Regulatory groups and head of the transactional team in the British Virgin Islands.
The buzz around a virtual asset or web3 project will typically focus on the ‘front-end’ – the product offering, team, partnerships, and performance; how it is going to change the world. Whilst accepting that the corporate structuring behind the front-end is far less exciting, it truly can make the difference between a project’s success and sustainability or its failure and damaging fallout.
Many web3 projects aspire to decentralisation, but initially consist of a small and highly centralised team. Like any early-stage start-up, a crypto project will usually want to set up a corporate structure to protect the project’s team and its assets, secure funding, and start doing business with real-world counterparties.
Similar considerations will also apply to principals wanting to set up a cryptoasset-focused fund, who will want to seek and provide for attractive returns, have an optimised tax structure and, be appealing to an investor base all over the world, whilst protecting the investment management vehicle and the fund’s other service providers by using a flexible and appropriately regulated structure for their launch.
With that in mind, international financial centres (IFCs), such as the British Virgin Islands (BVI) and the Cayman Islands provide attractive solutions for both crypto projects and crypto funds.
For decades IFCs have offered tax-neutral and appropriately regulated financial services products to their users through sophisticated and experienced financial services providers. For example, many investment funds and other financial services products are domiciled in IFCs, including the vast majority of the world’s crypto funds: an estimated 63% of which utilise Cayman Islands and BVI vehicles.
One shining example of innovation by IFCs to create vehicles for specific uses is the Cayman Islands foundation company. Foundation companies are not required to have charitable or non-profit purposes and unlike most corporate vehicles, are not required to have members in order to remain in existence. These two factors make foundation companies attractive to projects aiming for decentralisation as they can serve as a memberless vehicle with the sole purpose of supporting the project or its governance protocol. The foundation company can engage with third parties or hold certain assets in support of the project and can be bound by its constitutional documents to act on the instructions of a governance protocol or its representatives.
In addition, virtual asset regulations in the BVI and the Cayman Islands allow BVI or Cayman Islands entities to be used as the token issuer, with private sales being largely unregulated and public sales of tokens being subject to appropriate levels of regulatory oversight.
A structure that is frequently used involves establishing a Cayman Islands foundation company, which owns a token issuing vehicle, typically formed in the BVI. The director(s) of these companies will often be a professional services provider, who can take guidance from the governance protocol adopted by the decentralised autonomous organisation (DAO). This approach separates each entity’s functions appropriately as well as reducing some risk and simplifying accounting for the project and team. For many projects, this can enhance decentralisation governance and further remove the founders and team from the corporate structure that will carry out activities.
All of this being said, there is no one size fits all approach to crypto fund or crypto project structuring. Each team must carefully consider their commercial requirements, risk appetite, and legal, regulatory, and tax position.
Slavishly copying a structure used by other projects is a dangerous game particularly without understanding that project’s objectives, legal and tax advice, and risk appetite in a shifting regulatory landscape.
Engaging crypto-experienced service providers early in the process means a fund or project can get the right advice early enough to avoid costly mistakes to understand fully their legal and regulatory position, the tax implications of a proposed structure (both for founders, users, and the project vehicles themselves), reduce risk where possible, and avoid consequences which may arise well after a fund or project is launched that could be difficult or impossible to remedy.
In addition to choosing the right structure, the global regulatory landscape crypto is in flux. The Financial Action Task Force (FATF)– the global money laundering and terrorist financing watchdog – published anti-money laundering standards and recommendations for certain crypto businesses which jurisdictions must implement locally to avoid being subject to sanctions such as blacklisting. Not all crypto businesses will be affected in the same way by new crypto regulations and, of course, other laws and regulations, such as securities, investments, banking, substance, and data protection legislation may apply to a project, so a local legal and regulatory analysis may be required for each vehicle in a structure.
In this context, it is incredibly important for readers to realise that using a vehicle domiciled in an IFC won’t absolve crypto projects of their obligations to comply with the relevant laws and regulations in countries in which they do business or in which their clients or customers are based, especially given the fact that a large number of the digital asset projects often involve a mixture of IFC vehicles and vehicles domiciled onshore.
Crypto continues to grow and thrive regardless of market setbacks and downturns. Many of the world’s largest crypto funds and businesses use IFC vehicles to optimise their corporate structure, and startup projects with the right advice can also benefit from the jurisdictional and structuring advantages offered by IFCs and their corporate vehicles.
IFC jurisdictions recognise the value of crypto in strengthening their global offering, so local governments and regulators regularly consult with industry to understand trends and implement frameworks to position themselves to capture crypto market share while complying with international standards around corporate and tax transparency and reporting.
This agility is difficult to find in onshore jurisdictions and helps IFCs maintain their reputation as preferred jurisdictions for businesses with a global client base, to the point where some projects have opted to have physical offices and staff on the ground itself. The physical benefits of residing in these jurisdictions are for an entirely separate publication, but there is no doubt that there is a perfectly aligned approach on both islands, which means that both the BVI and Cayman Islands should always be firmly in the mind of anyone operating in this space.
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