Crypto Investment Fund Formation
The Cayman Islands has fast become one of the leading markets for cryptocurrency funds, and other digital and blockchain products in part due to its attractive regulatory environment.
Structure One of the main reasons that the Cayman Islands is so popular as an offshore jurisdiction is because of the flexibility of the fund products available. It is important to consider your proposed fund terms at the outset. The following questions are a useful guide:
What is your timing for launch?
Name of your proposed crypto fund?
Name and location of investment manager?
Location of Investors?
Any US Investors?
How many investors?
Minimum initial investment amount per investor (normally US$100k or equivalent in other currencies)
What tokens will the fund invest in?
How many tokens?
List tokens
Any DeFI? Provide details.
Any Staking? If so, from whom?
Any Collateralized Borrowing? If so, from whom?
What exchanges will the fund use to trade crypto?
Will there be an leverage used? Any derivatives? If so, on what exchange(s)?
What fees will the investment manager charge (management/Performance
Hurdle Rate?
Frequency of investor subscriptions?
Frequency of Investor redemptions?
Any lock-up? If so, for how long? If so, any early redemption penalty?
Why Cayman Islands is the Choice for your Crypto Fund
Some of the benefits of using the Cayman Islands include:
Familiarity to Managers and Investors, particularly institutional investors.
Cayman’s existing legal framework provides the flexibility to allow cryptocurrency strategies and technologies like blockchain to thrive.
Stable Political Climate.
Availability of High Quality Service Providers.
Proven Record as a World Leading Financial Centre.
Speed - Fund entities can be set up in as little as 24 hours and there is no approval process with the regulator (just a filing that meets all of the regulatory requirements)
The Cayman Islands is a tax-neutral jurisdiction: it has no direct taxes of any kind. There are no income, corporation, capital gains or withholding taxes or death duties. In addition, a company can apply (for a fee of course) to the government of the Cayman Islands for a written undertaking that, should any applicable taxation ever be introduced in the Cayman Islands, it will be exempt from of direct taxation, for a minimum period of 20 years (and such certificate can be renewed at the end of that period.
There are no exchange control restrictions or regulations in the Cayman Islands. This means that funds can be freely transferred in and out of the Cayman Islands in unlimited amounts.
Service Providers Once you have decided on the most appropriate structure for your fund it is important to consider the range of services providers that your fund may need to engage. Some of the key ones are:
A Registered Office provider in the Cayman Islands
It is a legal requirement for the fund to have a registered office (“RO”) in the Cayman Islands. The RO will also attend to a wide range of administrative matters on behalf of the fund.
An Administrator
For open-ended funds it is common to appoint a third-party administrator who will be responsible for the accounting of investor subscriptions and redemptions and computing the net asset value of the fund.
Custodian
With an increasing allocation by institutional investors, the requirement to appoint a custodian is often required. There are a wide range of custodians that can be appointed based on requirements.
An Auditor
A CIMA registered fund will need to appoint a local auditor based in the Cayman Islands who will be responsible for signing off the fund’s annual audit. All of the major accounting firms have branches in the Cayman Islands so it is relatively straightforward to find an auditor for CIMA registered funds.
Independent Directors
It is more common to see independent directors in open-ended structures. They are seen to act as “watchdogs” for investors over the investment manager and other service providers to the fund. There is a requirement for two (2) CIMA registered directors. Aside from any tax benefits of having offshore resident directors on the board, there are also governance benefits given increasing compliance and local regulatory requirements. Having experienced independent directors also avoids conflicts with the investment manager and ensures that investors are treated fairly.
FATCA and AML
The fund will be required to comply with Cayman Islands laws relating to FATCA, the Common Reporting Standard and Anti-Money Laundering. It is common for funds to appoint specialist third-party providers to assist with this. This is especially common for new funds who have limited experience with these regulatory regimes. To the extent that the fund accepts subscriptions in cryptocurrency, CIMA permits this provided that the administrator has the capability to conduct the AML due diligence including the source of wealth. CIMA now also requires natural persons to be appointed as AML officers to investment funds (who are subject to personal liability).
Bank Account
The fund will require a bank account to receive funds from investors.
Timing
Most funds can be set up in approximately 4-6 weeks.
Bell Rock Group - Crypto Fund Services
We routinely assist with the formation of crypto investment funds working closely with managers or onshore legal counsel, as the case may be. We often structure the entire process including the appointment of service providers via our key relationships in the crypto fund ecosystem. We are also often asked to act on the board as independent directors given our experience in hedge fund governance combined with the crypto industry specialization, provide introductions to other service providers in the crypto ecosystem such as custodians, banks, OTC desks, insurance, exchanges, institutional staking arrangements etc.
If you are contemplating launching a crypto investment fund then please feel free to contact us: info@bellrockgroup.com