Offshore Structures for Crypto Assets – Best Practices and Jurisdictions

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Crypto investors are taking their operations overseas, and it’s easy to see why—many foreign countries have far more favorable laws when it comes to taxes, reporting, and cryptocurrency in general. These structures should be set up in a way that is consistent with both foreign and domestic laws, and that takes planning.

In this article, we’ll look at some of the advantages and requirements of offshore crypto-asset protection structures along with some general tips for success.

Offshore Entities – Some Basics

Crypto investors may set up trusts or other types of organizations in foreign jurisdictions in order to safeguard their assets. Domestic taxes, reporting requirements, and other potential sources of liability can be counteracted by managing assets outside of your native country.

Offshore entities offer a number of benefits to investors. When it comes to crypto-based companies, these benefits include the following:

Tax Benefits

One advantage is a lower tax burden. Some jurisdictions, such as the British Virgin Islands or Cayman, have minimal taxes and reporting requirements, which can help investors minimize their tax exposure. Revenue from these sources may or may not be reported on a U.S. tax return, depending on how the entity is set up.

Privacy

The reporting requirements may be less stringent in other locales than they would be in the U.S. or any other heavily regulated country. Given the often anonymous nature of blockchain-based transactions, this can be a massive benefit to those looking to invest in this technology.

Flexibility

Local laws may have fewer obstacles to initial coin offerings (ICOs) or other crypto-related matters. For instance, there may be less exacting reporting requirements on activities that would qualify as securities trading, which could translate into lower overhead costs.

Good Jurisdictions for Offshore Legal Structures

When it comes to offshore structures, two jurisdictions in particular come to mind: the BVI (British Virgin Islands) and the Cayman Islands. Both can be favorable havens for crypto trading due to the relative ease of setting up a trust or business there.

British Virgin Islands (BVI)

The BVI have no legal frameworks that prohibit blockchain businesses or virtual currencies, making them a sound haven for a foreign entity. The islands are also highly flexible when it comes to corporate structures, which can be a great benefit for blockchain-based businesses that may not follow traditional structure types.

Some of the regulatory matters FinTech organizations will need to keep in mind when setting up in the BVI include the following:

    • Securities and Investment Business Act (SIBA): This law may apply to ICOs, though it depends on the facts surrounding the token and its functions. To avoid being regulated by SIBA, an organization should avoid any language indicating that it is an investment company.
    • Banking and Physical Presence: An organization with an ICO can only have a bank account if it has a physical presence or it can show a connection between its operations and the BVI.
  • AML and Due Diligence: A utility token sale may or may not be subject to enhanced due diligence requirements, but establishing KYC (know your customer) and AML policies is still a good idea regardless.

There’s little in the way of legal language governing digital assets in the BVI, but that is likely to change in coming years. Fortunately, the government seems interested in fostering the technology rather than hampering it, so it should continue to be favorable for companies wanting to make ICOs or deal in cryptocurrency within the isles.

Cayman Islands

With about 70% of the world’s offshore investment funds being handled within its shores, the Cayman Islands are another place for investors to make initial coin offerings and deal in crypto. The islands have no direct taxes on companies or people, making it an excellent place for financial tech organizations.

Investors looking into the Cayman Islands will want to keep the following legal matters in mind:

  • Physical Presence: The Cayman Islands have a special economic zone that allows outside FinTech companies to have a physical presence, which can help legitimatize their operations.
  • Securities Investment Business Law (SIBL): SIBL may apply to ICOs, depending on the facts surrounding the tokens. Measures should be taken to avoid fraud and misrepresentation in any case.
  • Economic Substance: Some entities are required to demonstrate economic substance in order to legitimatize their operations within the Cayman Islands. These requirements may or may not apply to ICO projects, depending on their operations and purpose.
  • AML and KYC Requirements: Anti-money laundering laws and KYC requirements may apply. Following them is generally good practice regardless of hard requirements.
  • Banking: ICO projects can have local bank accounts, though additional documentation may be requested by individual banks.

In terms of taxes and overall legal support, the Cayman Islands are a great place for an investor to make an ICO or establish a FinTech company.

General Tips for Offshore Structures

In addition to the jurisdiction-specific tips mentioned above, here are some general pointers for setting up an offshore structure for cryptocurrency trading:

Establish Legitimacy

It helps if you establish your organization as a legitimate business rather than a thinly-veiled attempt at avoiding taxes or creating investment revenue. It should play a genuine economic role in the jurisdiction where you’re setting it up.

Choose the Right Structure

The corporate structure of your entity should reflect its intended operations. In addition, it should also match the requirements of your desired jurisdiction. For example, a FinTech company set up in the BVI should be structured in a way that does not imply investment trading.

Match Your Jurisdiction

Finally, choose the right jurisdiction. This requires you to know your company’s needs and objectives beforehand. By assessing your intended operations, you’ll be able to pick a jurisdiction with laws that support your intended outcomes.

Domestic laws should also be considered. Given the complexity that these structures can present, legal guidance is often necessary, so don’t be afraid to involve a professional in your offshore planning.

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