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Appointing Independent Directors to Crypto and Blockchain Funds - Crypto Fund Governance

There are several benefits of having an independent director for crypto funds. Here are a few key advantages:

1. Expertise and Experience: An independent director brings extensive knowledge and experience in the crypto space. They understand the nuances of the market, the regulatory landscape, and can provide valuable insights to help navigate through the complexities of the industry. Crypto is very different to traditional asset classes and the board should have an understanding of the investment strategy, the risks inherent with how that strategy is deployed, what the portfolio is composed of, liquidity risks, cybersecurity and hacking risks, counterparty risks, detection of fraud and an understanding on crypto industry developments, be that with regulated custodians, staking, lending, OTC desks, wallet screening and compliance developments, ongoing wallet monitoring and fund specific policies and procedures on key access and controls.

2. Objectivity and Independence: Independent directors are not affiliated with the fund or its management, which ensures a high level of objectivity. They are able to provide unbiased advice and make decisions based on the best interests of the fund and investors, without any conflicts of interest. Independent directors are there also to avoid inherent conflicts of interest and ensure investors are treated fairly.

3. Governance and Compliance: Independent directors play a crucial role in ensuring robust governance and compliance practices within the fund. Their oversight helps maintain transparency, accountability, and adherence to regulatory requirements, enhancing investor confidence. For Cayman funds, in particular, there have been recent regulatory developments by the Cayman Islands Monetary Authority (CIMA), which substantially increase the expectations and requirements of investment funds and those in charge of governance:

Internal Controls

The new Rule and SoG on Internal Controls will apply to both regulated mutual funds (including master funds) and private funds, as well as to all other entities regulated under the Cayman Islands 'regulatory acts', including banks, company managers, insurers, mutual fund administrators, trust companies, virtual asset service providers and entities regulated under the Securities Investment Business Act.

The rules and guidelines set out in this regulatory measure are broken down into two parts; Part I applies generally to all regulated entities and Part II provides sector-specific requirements for trust companies, company managers, corporate services providers, and securities investment business. The five fundamental components of an internal controls framework applicable to all regulated entities, as set out in Part I, are:

  • the control environment (ie, the standards, processes and structures which facilitate effective internal control across an organization);

  • risk identification and assessment;

  • control activities (ie, those activities and structures which mitigate risks) and segregation of duties;

  • information and communications; and

  • monitoring activities and correcting deficiencies in internal controls.

Corporate Governance

The new Rule on Corporate Governance will, again, apply to all regulated entities in Cayman, including both regulated mutual funds (including master funds) and private funds.

This Rule requires regulated entities to establish, implement and maintain a corporate governance framework which addresses the following elements, at a minimum:

  • the objectives and strategy of the regulated entity;

  • the governance structure of the entity's governing body or operators (ie, the board of directors, general partner, or trustee(s));

  • appropriate allocation of oversight and management responsibilities;

  • independency and objectivity;

  • collective duties of the governing body and duties of individual directors of the governing body;

  • risk management and internal controls systems;

  • conflicts of interest and codes of conduct;

  • remuneration policy and practices;

  • reliable and transparent financial reporting;

  • transparency and communications;

  • duties of senior management (if any); and

  • relations with CIMA.

4. Risk Management: With their expertise, independent directors are well-equipped to assess and manage risks associated with crypto investments. They can provide valuable input in identifying potential risks, developing risk management strategies, and monitoring risk exposure to protect the fund and its investors.

5. Network and Connections: Independent directors often have extensive networks within the industry, which can be valuable in terms of sourcing investment opportunities, partnerships, or relevant service providers. Their connections can open doors to valuable resources and enhance the fund's reach and capabilities.

6. Investor Relations: Having an independent director helps foster better communication and transparency between the fund and its investors. They can act as a bridge between the management team and investors, addressing concerns, providing updates, and ensuring that investor interests are prioritized.

Overall, an independent director brings credibility, expertise, and objectivity to the management of a crypto fund. Their involvement can significantly enhance the fund's operations, governance, and ultimately, the overall success and growth of the fund.

How can Bell Rock assist?

As a leading provider of independent directors to Cayman hedge funds, venture capital, private equity funds and other investment entities, we have also created significant experience focused on crypto and blockchain funds and the industry as a whole. Each director takes on a select number of board positions and each director holds of 25 years of senior level industry experience, many years of fund governance experience and registered with CIMA under the Director Registration & Licensing Act. Bell Rock is a licensed and regulated Company Manager with CIMA. If you are looking to bolster the corporate governance of your crypto fund, then please feel free to contact us:

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