Cryptocurrencies are booming through offshore companies
Discussions about virtual assets and Web3 projects usually focus on the “front end” – the product offering, the team, the partnerships, the performance – and how it will change the world. While acknowledging that there is a less exciting corporate structure behind the front end, it can certainly make the difference between a project’s success and sustainability, or failure and disruptive results.
Many Web3 projects aim to be decentralized but initially consist of small, highly focused teams. Cryptocurrency projects, like other early-stage startups, typically want to establish a corporate structure to protect the project team and its assets, secure funding, and initiate transactions with real-world counterparties.
Similar considerations apply to principals who wish to establish a fund dedicated to crypto assets that seek and deliver attractive returns, optimize taxation, and attract investors from around the world. On the other hand, a flexible and appropriate regulatory structure can protect investment managers and other service providers from the fund from start-ups.
For decades, IFC, through its established and experienced financial service providers, has been offering users tax-neutral and appropriately regulated financial service products. For example, many investment funds and other financial services products are registered with the IFC, including the majority of the world’s cryptocurrency funds.
The Cayman Islands Foundation Corporation shines as an innovative example of an international financial firm establishing a vehicle for a specific purpose. Foundations do not need to be charitable or non-profit and, unlike most corporate forms, do not need to have a membership in order to survive. These two factors make foundations attractive to decentralized projects because they can function as non-membership vehicles whose sole purpose is to support the project and its governance agreement. Foundations can work with third parties or hold certain assets to support a project and can be bound by their articles of incorporation to act in accordance with their operating agreement and the instructions of their representatives.
A common practice is to set up a foundation corporation in the Cayman Islands and have it own a token-issuing vehicle that is usually established in the BVI. The directors of these companies are usually professional service providers and can take guidance from the governance protocols employed by decentralized autonomous organizations (DAOs). This approach allows for proper separation of the functions of each entity, mitigates some of the risks, and simplifies project and team accounting. For many projects, decentralized governance can be enhanced, further separating the founders and teams from the corporate structure in which their activities take place.
In summary, there is no one-size-fits-all approach to the formation of a cryptocurrency fund or cryptocurrency project. Each team must carefully consider business requirements, risk appetite, and legal, regulatory, and tax situations.
Hiring a service provider with cryptocurrency experience early in the process will ensure that the fund or project receives the right advice early on, avoids costly mistakes, and ensures that the legal and regulatory positions, tax implications of the proposed structure (including founders, users, and the project vehicle itself) fully understand the implications, minimize risk, and avoid consequences that may arise after the fund or project is launched. may be difficult or impossible to remedy.
In addition to choosing the right structure, the global regulatory landscape for cryptocurrencies is constantly evolving. The Financial Action Task Force (FATF), the global watchdog for money laundering and terrorist financing, has issued anti-money laundering standards and recommendations for specific cryptocurrency operations that governments should implement locally to avoid blacklisting and other sanctions. Not all cryptocurrency businesses will be affected by the new cryptocurrency regulations and, of course, other laws and regulations such as securities, investment, banking, materials, and data protection laws may apply to your project, so an analysis of local laws and regulations may be required for each vehicle within the structure.
Regardless of market setbacks and downturns, cryptocurrencies will continue to grow and prosper. Many of the world’s largest cryptocurrency funds and companies use IFC’s tools to optimize their corporate structures, and startup projects with the right advice can also benefit from the jurisdictional and structural advantages that IFC and its corporate tools offer.
IFC jurisdictions recognize the value of cryptocurrencies in improving global services. As such, local governments and regulators regularly consult with the industry to identify trends and implement frameworks that will allow them to capture a share of the cryptocurrency market while complying with international standards for corporate and tax transparency and reporting.
This flexibility is hard to come by onshore, so much so that some projects have chosen to maintain IFC’s reputation as the jurisdiction of choice for businesses with a global client base and have chosen to locate physical offices and staff locally themselves. While the substantive benefits of domicile in these jurisdictions are an entirely different publication, there is no doubt that the approaches of both islands are perfectly aligned, which means that the British Virgin Islands and the Cayman Islands should always be on the minds of those in this field.
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