Setting Up a Cayman Crypto and Blockchain Fund

To set up a Cayman crypto fund, first settle the investment strategy, then choose the structure that fits it: an open-ended exempted company for liquid cryptocurrency trading, or a closed-ended exempted limited partnership for longer-term blockchain investments. Both will usually need CIMA registration and a full set of service providers, with custody and valuation the questions CIMA examines most closely.

Key takeaways

• The strategy drives the structure: liquid trading strategies usually use an open-ended exempted company, and long-term venture strategies usually use a closed-ended exempted limited partnership.
• Open-ended funds register with CIMA under the Mutual Funds Act and closed-ended funds under the Private Funds Act, unless an exemption applies.
• Tokenising a fund's equity interests does not take it outside CIMA registration.
• CIMA focuses closely on the custody and valuation of cryptocurrencies.
• Not every service provider works with digital assets, so the provider line-up should be settled early.

Why the Cayman Islands is used for crypto funds

Once the investment strategy has been determined, the next decision is the structure of the fund. The Cayman Islands often forms part of the structure where some investors are located outside the United States or are US tax-exempt. Cayman is tax-neutral at the fund level, and investors and managers may be taxed in their own jurisdictions.

The reasons managers and investors choose Cayman include:

• familiarity to managers and investors;
• a flexible legal framework for investment funds;
• a stable political climate;
• the availability of experienced service providers; and
• an established record as an international financial centre.

Questions to consider when structuring a crypto fund

1. What will be the investment strategy of the fund?
2. Will the fund mainly invest in and trade cryptocurrencies, invest in blockchain start-ups, or a combination of the two?
3. If cryptocurrencies, which exchanges will the fund trade on?
4. Will the fund use DeFi protocols, and if so, how will the administrator and auditor perform valuations? Is there a valuation policy?
5. Will the fund accept subscriptions in fiat currency, digital assets or both?
6. What volume of trades will the fund undertake each day and each month?
7. What liquidity will investors have? Will the fund be open-ended or closed-ended?
8. What management and performance fees will the manager charge?
9. Where will the investors be located?
10. What type of investors will the fund have, for example friends and family, family offices or institutions?
11. Does the manager already have a fund management company?
12. Has the manager's home-jurisdiction tax adviser expressed a preference for the type of legal entity the fund should be?
13. Does the manager need help appointing service providers? Not all service providers will act for crypto funds.

The valuation question deserves early attention. A fund's valuation policy needs to explain how illiquid tokens, DeFi positions and assets on exchanges will be priced and by whom.

Legal structures for Cayman crypto and blockchain funds

The two most common structures for cryptocurrency and blockchain funds in the Cayman Islands are set out below.

Open-ended Cayman Islands exempted company

This structure is more common where the strategy focuses on trading cryptocurrencies. These strategies tend to be liquid, and investors can redeem their investment at their own initiative. The fund is therefore open-ended, much like a traditional hedge fund.

Open-ended funds need to be registered with the Cayman Islands Monetary Authority (CIMA) under the Mutual Funds Act (As Revised) unless an exemption applies. A registered fund must have at least two directors, who must themselves be registered with CIMA. Where the fund's equity interests are to be tokenised, CIMA still regards the fund as offering equity interests, so registration is still required.

Closed-ended Cayman Islands exempted limited partnership

This structure is more common where the strategy focuses on long-term investments in blockchain start-ups or projects. These strategies tend to be illiquid, and investors cannot redeem without the manager's consent. Such funds resemble private equity or venture capital funds. Under the Private Funds Act (As Revised), closed-ended funds must also register with CIMA unless an exemption applies. Our overview of the Cayman private funds regime sets out the registration and operating requirements.

Service providers for a Cayman crypto fund

Once the structure is decided, the fund needs to engage a range of service providers. The key appointments are as follows.

Offering and constitutional documents

The fund's documents must be prepared before launch, including the offering memorandum, the investment management and advisory agreements, subscription documents, side letters and other ancillary agreements.

Registered office in the Cayman Islands

The fund is legally required to have a registered office in the Cayman Islands. The registered office provider also attends to a wide range of administrative matters for the fund. Our guide to the Cayman registered office explains what the role covers.

Administrator

Open-ended funds commonly appoint a third-party administrator to account for investor subscriptions and redemptions and to calculate the fund's net asset value.

Custodian

Many sponsors with expertise in digital assets prefer to self-custody rather than appoint a third-party custodian. Institutional investors, however, are likely to require a third-party custodian, and applicable laws may require one once a fund reaches a particular size. CIMA focuses on the valuation and custody of cryptocurrencies and is likely to review the fund's offering documents on these points carefully.

Auditor

Open-ended funds registered as mutual funds and closed-ended funds registered as private funds must each appoint a local auditor based in the Cayman Islands to sign off the annual audit. Locating an auditor for a CIMA-registered fund is generally straightforward. The Cayman fund audit requirements set out what must be filed and when.

Independent directors

Directors act as a check for investors over the investment manager and the fund's other service providers. Crypto funds increasingly appoint independent directors to demonstrate independent oversight of fund functions. With regulatory requirements increasing, directors who have experience of Cayman funds and of digital asset markets can give comfort to investors and regulators alike. The governance case is set out in our article on governance priorities for crypto fund boards.

FATCA, CRS and AML

The fund must comply with Cayman Islands requirements relating to FATCA, the Common Reporting Standard and anti-money laundering. Funds commonly appoint specialist third-party providers to assist, particularly new funds with limited experience of these regimes. Where the fund accepts subscriptions in cryptocurrencies, CIMA permits this provided the administrator can carry out the AML due diligence, including on source of wealth. CIMA also requires natural persons to be appointed as AML officers to investment funds, and those individuals carry personal responsibility in the role.

Bank account

The fund will almost always need a bank account to receive investor subscriptions and to move cash to exchanges, convert it into cryptocurrencies or fund the fund's wallets.

How Bell Rock supports a crypto fund launch

Bell Rock, a CIMA-licensed company manager, supports managers launching Cayman digital asset funds through its Cayman crypto fund formation services. Bell Rock coordinates entity formation, registered office and corporate services, CIMA registration and regulatory reporting, and works with managers on the choice of structure and the service providers each fund needs. Independent directors are available through named individuals who act in their personal capacity.

Bell Rock also supports the formation of Cayman fund management companies alongside a fund launch, and the formation and governance of Cayman foundations used by DAO communities and blockchain start-up companies. Bell Rock is not the fund's investment manager, administrator, custodian or auditor.

Frequently asked questions

Does a Cayman crypto fund need to register with CIMA?

Usually, yes. Open-ended funds register under the Mutual Funds Act and closed-ended funds under the Private Funds Act, unless an exemption applies. Tokenising the fund's equity interests does not remove the requirement.

Can a Cayman crypto fund accept subscriptions in cryptocurrency?

CIMA permits subscriptions in cryptocurrencies provided the administrator has the capability to conduct the required AML due diligence, including on source of wealth.

Does a crypto fund need a third-party custodian?

Not always. Many sponsors self-custody, but institutional investors are likely to require a third-party custodian, and applicable laws may require one once the fund reaches a particular size.

Emerging managers considering a turnkey regulated platform can also explore CV5 Capital, a partner of Bell Rock Group. The platform provides fund infrastructure and operational support; portfolio decisions remain with the appointed investment manager.

Related reading

• Cayman VASP registration and licensing requirements
• Setting up a Cayman fund management company
• Cayman foundation companies for DAOs
• Cayman VASP Application: Scope, Registration or Licence and Steps
• Digital Asset Custody for Cayman Funds: What Boards and CIMA Expect
• Tokenised Fund Structures in the Cayman Islands

Bell Rock coordinates digital asset fund launches through its Cayman crypto fund formation services.