Jurisdictions for Crypto Asset Managers: It’s a Big World Out There and There are Options
It’s no secret that lack of regulatory clarity in the US has significantly hindered the full development of the crypto industry, and the markets reflect this: regulatory news perceived as positive for the industry is followed by a broad market pop, while news perceived as negative tends to trigger a market pullback.
For investment managers and funds located in the US, this lack of clarity has been particularly onerous, and many are now contemplating the idea of either launching their operations in other jurisdictions or relocating altogether. The good news? The world is a big place and there are attractive jurisdiction options that exist outside of the United States.
In this post, Valmar will delve into the essential considerations one must bear in mind when exploring different jurisdictions and then proceed to examine specific global options that are worth considering.
Choosing the appropriate jurisdiction for one’s business is a decision that should not be taken lightly. At least for some meaningful period, the selected place will likely serve as the home for the management firm and possibly some of its members. Thus, certain critical considerations should be thoroughly evaluated before making the final decision and initiating the move. They include:
Framework: Is there a comprehensive, and well-structured framework for the management of digital assets? Can your business adhere to and operate within this framework?
Investor Base: Where are your current and potential investors located? Will they be able to access and invest in the jurisdiction you're considering? Is there any untapped local investor base?
Talent: Will the essential members of your current team be willing to move to the jurisdiction? Do they have to? Is there a pool of local talent available for your firm as it scales?
Service Providers: Are all the necessary high-level service providers available, such as legal, financial, compliance, and operation support, readily available?
Reputation: What is the global reputation of the jurisdiction? Is it perceived as reputable or questionable? How do investors, reputable service providers, and other industry leaders view that jurisdiction?
Legal System: What type of legal system does the jurisdiction operate under?
Time/Cost: What is the expected timeline and cost associated with setting up your business in the jurisdiction?
Incentives: Does the jurisdiction offer any potential incentives that could be advantageous for your business, such as capital benefits, favorable taxation policies, assistance with work visas and office set up, and other types of financial help?
Taking all these factors into account will help gain a clearer understanding of the different jurisdictional options available outside of the United States and ultimately make an informed decision.
United Arab Emirates (UAE)
United Arab Emirates (UAE) offers a plethora of opportunities for businesses in the digital asset industry, with three distinct jurisdictions to consider: Abu Dhabi Global Market (ADGM), Dubai International Financial Centre (DIFC), and the newly established Virtual Asset Regulatory Authority (VARA).
In Abu Dhabi, ADGM operates with a comprehensive digital asset framework that has been in place since 2018, providing businesses with clarity and confidence to operate within defined boundaries, and access to talent and a rapidly growing investor base. Key ADGM considerations:
Framework: Strong digital asset framework in place since 2018. Its regulator, the Financial Services Regulatory Authority (FSRA), is seen as the most credible in the region, having been established more than 4 years ago and being the first to issue regulations on digital assets.
Investor Base: Rapidly growing and offering access to an untapped pool of Abu Dhabi-based family offices and sovereign wealth funds.
Talent: Attractive work/life balance for non-domestic team; substantial pool of local talent available.
Service Providers: Full suite of essential service providers in place.
Reputation: Over the past decade since its establishment, ADGM has earned a robust reputation largely attributed to its crypto friendly approach, which has brought prominent international investment management firms, including Millennium, Brevan Howard, and TCI Fund Management to set up a presence in Abu Dhabi under ADGM.
Legal System: ADGM represents one of the “Financial Free Zones” within UAE and operates under the English Common Law.
Time/Cost: Set-up time roughly 2-4 months, with reasonably low setup cost.
Incentives: Potential incentives (capital and corporate tax); capital and other types of incentives available to qualified investment managers via related Abu Dhabi Investment Office (ADIO).
Dubai-based DIFC is a more mature jurisdiction, as it was established in 2004, but is also more restrictive when it comes to digital assets. Despite these restrictions, DIFC's reputation as the leading financial center in the region adds credibility and stability to businesses. Furthermore, it has recently launched its digital asset framework, making it an option to monitor for future developments. Some key consideration concerning DIFC:
Framework: The digital asset framework in DIFC only launched a year or so ago and is currently less comprehensive and more restrictive than competing ones in ADGM and VARA, lacking provisions for broad crypto trading activities. However, efforts are underway to develop a more thorough and comprehensive framework in the future.
Investor Base: Rapidly growing investor base, with impending interest from sovereign wealth funds seeking to make institutional investments in the region.
Talent: Decently attractive for non-domestic team in terms of work-life balance; substantial pool of local talent available.
Service Providers: Full suite of expected service providers in place.
Reputation: As the longest-standing regulatory authority in the UAE, established in 2004, DIFC is widely recognized as the leading and more credible financial center in the region.
Legal System: Operating as one of the "Financial Free Zones," DIFC follows the English common law legal system, providing businesses with a familiar and robust legal framework.
Time/Cost: Set up time typically takes around 6-9 months. While the setup costs are reasonably low, it should be noted that DIFC may be slightly more expensive compared to ADGM.
Incentives: Corporate tax incentives.
The third option in UAE is the newly established VARA. VARA stands as a dedicated regulatory authority for digital assets within Dubai and offers flexibility to conduct activities anywhere except DIFC. However, VARA's track record and experience are limited, not to mention that its legal framework is based on local Islamic law as opposed to English Common Law, making it a more challenging choice for international businesses.
In the end, while it is encouraging to see that multiple options are opening in the UAE, given the regulatory landscape, our conclusion is that setting up a management company in UAE realistically narrows down to ADGM. That is, until DIFC comes out with a framework allowing broader activities for crypto funds and VARA establishes itself over time.
United Kingdom (UK)
Similar to the UAE, the UK offers a few different pathways for digital asset firms seeking jurisdiction. Two primary approaches are available: direct registration with the Financial Conduct Authority (FCA) and indirect registration through as a UK Appointed Representative (AR) of a registered entity that operates as a “host”.
Key factors to consider for a direct FCA registration are the following:
Framework: FCA has yet to finalize and institute a digital asset framework but has been working on developing one for several years, and a favorable framework is expected within the next few quarters.
Investor Base: Europe, with the UK at the forefront, boasts one of the largest investor bases in digital assets, with increasing institutional investments.
Talent: The UK provides an appealing work-life balance for non-domestic teams, and local talent availability is substantial.
Service Providers: The UK offers a comprehensive suite of service providers for seamless business operations.
Reputation: FCA enjoys a stellar reputation as one of the world’s leading regulatory bodies.
Legal System: English common law.
Time/Cost: Set up time is typically 10-12 months but could take longer than 1-year and entail relatively high costs.
Incentives: to our knowledge, no incentives are currently offered by any specific organization.
A more efficient alternative, especially beneficial for emerging managers seeking to establish a track record, is to register as a UK Appointed Representative (AR) under the auspices of a registered firm acting as a "host" entity. Service providers such as Starmark Investment Management Limited or Strata Global offer such hosting services. Under this arrangement, the AR is granted exemption from certain FCA regulations and gains the ability to act as an Investment Advisor to the host fund, while the host firm assumes overall compliance responsibilities.
To initiate this process, the firm must incorporate a UK limited company and designate its director. Subsequently, the umbrella firm will seek FCA approval to endorse individuals for controlled functions and grant AR status to the entity. The approval process typically takes up to 3 months. This streamlined approach allows emergent managers to swiftly establish their presence while benefiting from the regulatory support and compliance expertise provided by the hosting entity.
The key considerations for an AP approach are largely similar to those for direct FCA registration with some major differences: a) time of initial setup is dramatically reduced to about 2 months; b) costs are estimated to be between $2500 and $5000 per month; and c) compliance will be taken care of by the hosting firm, which is the entity that is directly regulated by FCA.
The UK's appeal as a jurisdiction lies in its history, reputation, and quality of life. Depending on specific needs, both direct FCA registration and hosting solutions offer viable options for firms seeking to venture into the UK's dynamic digital asset industry. The choice will depend on a firm's preferences, resources, and desired setup timeline. For smaller firms and emerging managers, it may be more sensible in our opinion to first explore the regulatory hosting structure, at least as a steppingstone while simultaneously pursuing direct FCA registration.
Cayman Islands
While perhaps less advertised than UAE and UK options, the Cayman Islands offers a compelling choice for international crypto businesses, considering its robust framework, reputation as a leading offshore jurisdiction, and proximity to the United States. Specifically, one should consider the following:
Framework: Strong digital asset framework in place. The Cayman Islands government and regulators are crypto-friendly and well-versed in the crypto landscape, making it an attractive destination for digital asset firms. Registering a fund in the Cayman Islands is straightforward; it simply needs to be registered as a Mutual Fund with the Cayman Islands Monetary Authority (CIMA). Unlike service providers such as exchanges, Investment Managers do not need to register under the Virtual Asset Service Provider Act (VASP), which has been in effect since 2020.
Investor Base: While not necessarily a large domestic investor base, Cayman Islands are a well-known jurisdiction for US and international investors, given that Caymans still accounts for an estimated 40% of all new fund formations.
Talent: Attractive for work/life for non-domestic team (safe, clean, proximity to US); substantial local talent available.
Service Providers: Full suite of expected service providers in place.
Reputation: CIMA is regarded as a leading offshore jurisdiction for nearly 30-years.
Legal System: English common law.
Time/Cost: Set up time 2-3 months via a straightforward process.
Incentives: Tax incentives and Concierge services, which facilitate office setup and visa processing within six weeks, are available within Cayman “Special Economic Zones” by organizations such as TechCayman and Cayman Enterprise City.
Just because Cayman has not been loud about its activity does not mean it’s not ready for crypto business. While Cayman might not offer as many incentives as Abu Dhabi or Dubai, Cayman's crypto-friendly environment, knowledgeable regulators, and straightforward registration process make it a viable and attractive option for digital asset firms seeking an international jurisdiction for their operations.
Conclusions
Selecting the optimal jurisdiction for your crypto investment management business is a strategic decision that impacts your firm's future growth. As the crypto industry rapidly evolves, it is essential to recognize that other systems governing our existence will also continue to evolve alongside the market. While the United States seems to be lagging other international jurisdictions in instituting strong and good regulation, Valmar remains optimistic that the largest capital market in the world will eventually figure it out. And we are beyond excited for that as it will likely serve as a significant market and price catalyst. In the interim, though, if the US does not presently suit your firm’s needs, other jurisdictions await with open arms and large amounts of enthusiasm to welcome crypto investment managers seeking a supportive environment.
At Valmar, we are actively researching additional jurisdictions, including Switzerland, Hong Kong, and Bermuda, and we will provide information on those jurisdictions when the information is consolidated.
When selecting the right jurisdiction for you, take your time, carefully consider the specifics of your business as measured against critical considerations highlighted in this post, and get as much information as possible. The choice of jurisdiction can make or break your firm, especially during these evolutionary (and revolutionary) times. Emerging markets require fluid solutions, and digital assets are no different. We will get there together.
In closing, we express our gratitude to Copper, Global DCA, and several unnamed lawyers (you know who you are) for their contributions to Valmar’s education and research on crypto jurisdiction. As always, if we can provide more information, please contact us directly.