Digital Assets Report


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Cautious but continued interest for crypto

Q&A with Paul Waldron, Walkers

1. How has the sentiment towards crypto and digital assets changed in the past year? Does this differ within the BVI compared to other regions?

Sentiment in BVI towards crypto and digital assets generally has largely tracked sentiment internationally.  Interest in crypto and digital assets generally spiked during the pandemic, with prices for Bitcoin and most major crypto currencies, coins and NFTs hitting a peak in late 2021.  Since then, as the prices of crypto currencies and tokens drifted lower (and in some cases to close to zero) the sense of FOMO gradually evaporated from the market.  Managers and investors have taken a more cautious approach to investing in crypto generally.  Following some high-profile failures of crypto-focussed hedge funds, exchanges and lenders during the course of 2022 managers and investors are taking a harder look at investment in crypto and digital assets. That said, we still see considerable interest in this space, and continue to receive a steady flow of queries and instructions. This is mirrored by my colleagues in Walkers’ other offices.

2. What impact has this shift had on your business and on the BVI as a fund jurisdiction? 

The shift in sentiment has resulted in a less exuberant and more cautious approach to launching new crypto funds, and something of a dip in the flow of new instructions.  However BVI continues to be a very attractive jurisdiction to launch a crypto or digital asset-focused fund.  In particular, BVI is the go-to jurisdiction for small and medium-sized managers, incubator funds, ‘friends and family’ funds and venture capital funds in the crypto and digital asset space.

3. Are crypto clients’ requirements changing in the BVI and if so, how are you responding to these additional demands? 

Crypto managers’ requirements are evolving as the crypto sector matures, but this is a gradual process.  As elsewhere crypto managers are watching the collapse of competitors and crypto service providers during the course of 2022.  For the first time, we are now advising BVI crypto managers who may have exposure to collapsed crypto exchanges or lending platforms and who may need to restructure or rationalise their operations.  We anticipate crypto managers will be focusing more on the small print of their fund documents and service contracts, and looking for guidance from BVI counsel to avoid industry pitfalls.

4. Can you identify the most significant areas of growth going forward within the BVI crypto space and the triggers which could affect their trajectory?

The BVI is in the process of passing legislation to regulate virtual asset service providers (or “VASPs”).  BVI has taken a two-step approach here.  First of all VASPs are required to ensure compliance with the BVI AML regime by 1 December 2022.  Secondly, within six months of the new VASP legislation coming into force existing VASPs will have six months to register with the FSC (the BVI financial regulator).  We anticipate a lot of activity for crypto clients in this space in 2023.

We are also seeing the increased use of decentralised autonomous organisations (“DAOs”) by crypto token issuers.  We expect to see increased use of BVI structures for DAOs.  Regulation elsewhere could result in a shift to BVI for DAO vehicles.

5. What are the main advantages of setting up a crypto fund in the BVI and what are the primary challenges managers face in this regard?  

There are a number of benefits to using the BVI as the domicile for a crypto fund and / or a crypto investment manager.  First of all BVI has a very well established but flexible funds regulatory regime.  The existing rules relating to the establishment and operation of hedge funds and venture capital funds apply equally to new crypto funds.  The FSC is also very familiar with and comfortable with crypto and digital assets generally.  This is one of the reasons which BVI has developed a well-earned reputation as a crypto-friendly jurisdiction.  The sheer volume of BVI crypto funds, ICOs and digital asset start-ups means that the larger crypto investors are already very familiar and comfortable with BVI as a jurisdiction.

Another advantage is speed to market – the FSC is committed to turning around new fund applications within five business days. The FSC typically achieves this and high-quality fund and approved manager applications are routinely approved in five business days or fewer. While this has obvious attractions to all investment managers this is of particular benefit in the fast moving crypto space.  Another well-known advantage is cost – BVI funds and approved mangers are very cost effective to both establish and operate.  For starters a BVI company or limited partnership is an extremely cost-competitive vehicle.  In addition the FSC’s fees are competitive as against the other main offshore jurisdictions.  Furthermore the FSC does not impose a local audit requirement, which means managers are free to shop around widely for the most suitable and cost-effective audit solutions.  In many cases the FSC is happy to waive the audit requirement entirely for closed-ended / venture capital funds, in recognition of the fact that many investors in such funds have little use for annual audited financial statements.

The BVI approved investment manager (discussed elsewhere) is another useful tool for crypto managers.  They are cost-effective to establish and operate, and can be launched in tandem with a new fund, this saving crucial time to market.

Few BVI-specific challenges arise for managers of BVI crypto funds.  However for some crypto managers the BVI anti-money laundering regime can be an education.  BVI (and all the main offshore jurisdictions) follow international best practice in this area.  First time crypto managers are not always immediately aware of the importance of the BVI AML and sanctions regimes.  The AML regime can be a challenge sometimes for pure token issuers – while they do not always fall strictly within scope of the AML regime best practice is to comply with it anyway, on the assumption that any gaps in the AML regulations will shortly be closed.  The AML regime can also present some challenges for managers seeking to accept in-kind crypto subscriptions (as in other jurisdictions).

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