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New legislation is pushing the boundaries of possibilities for Web3, DAO and De-Fi. In particular, the Cayman Islands has emerged as a leader in this digital revolution with cutting-edge legislation which continues to quickly evolve; and a significant rise in the number of Web3 and digital asset entities being established in recent years.
The attorneys at Stuarts Humphries take a look at the key factors driving this growth and shed light on the jurisdiction’s appeal for those venturing into the dynamic realms of Web3 and virtual assets.
The Cayman Islands has been the leading offshore jurisdiction for the establishment of funds for over 30 years. Its reputation has been due in part to the use of innovative legislation, the absence of taxation and exchange controls and the longstanding presence of sophisticated and professional service providers, ensuring responsible supervision and regulation and a safe and trusted environment for investors.
How is legislation empowering the growth of Web3?
In the dynamic Web3 landscape, the Cayman Islands stands out with its progressive legislation, notably the Virtual Asset (Service Providers) Act (VASPA) and the Special Economic Zones Act (SEZA). These laws have played a pivotal role in enabling the growth of Web3 and other virtual asset entities and those wishing to be set up in the special economic zone. VASPA sets a robust regulatory framework monitored through the Cayman Islands Monetary Authority (CIMA), fostering a secure and transparent environment for these entities to thrive in.
What is the best structure to use for establishing a Web3 entity?
The Cayman Islands offers a versatile array of options for Web3 and virtual asset entities:
Foundation company
Foundation companies emerge as the preferred choice for Web3 and virtual assets. This popularity is attributed to several key factors:
• Liability protection: a robust shield, safeguarding stakeholders from personal liability.
• Flexibility of a trust: the adaptability of a trust provides a dynamic framework for operations.
• No shareholders: operates without shareholders, fostering a more decentralised model.
• Objects are the priority: prioritises their specified objects, aligning them with their unique goals and functions.
Decentralised finance (De-Fi)
Cayman Islands legislation accommodates various De-Fi products through the versatile structure of a foundation. The foundation company provides a legal “wrapper” with a corporate personality. In this role, the foundation company can undertake many of the real-world activities as required by the De-Fi project. The foundation company can act as a service provider for De-Fi projects by signing documents and engaging developers or consultants on behalf of the project. It can also act as a fundraising vehicle for early-stage and VC private funding, hold a De-Fi project’s treasury assets to pay for ongoing services, or act as a vehicle for providing marketing services such as airdrops for tokens, NFTs, P2E games and metaverse projects.
Decentralised autonomous organisation (DAO)
Combining the limited liability protections of a corporate entity with the flexibility of a trust, the foundation company provides DAO projects with a user-friendly option. Foundation companies, unlike trusts or partnerships, have a separate legal personality, can hold assets, assume obligations and can act as corporate parents with subsidiaries.
Token Issuers
A token issuer can be set up as a standalone entity to issue tokens or NFTs (the “token issuer”) or, more commonly, as a subsidiary of a second entity that develops the platform or protocol (the “developer”). In this way, much of the regulatory liability of the token issuer is separated from the value built up in the developer entity. For the developer, many options are available including a foundation company. However, for the token issuer, most Web3 and blockchain companies choose an Exempted Limited Liability Company.
Exempted Limited Liability Company
Many Web3 and virtual assets entities choose an exempted company as the tax-neutral vehicle to be the token issuer. A Cayman Islands special economic zone company (SEZC) can also be used , being a form of exempted limited company established within the SEZ and which enjoys several special benefits due to that status.
Platform controlling entities
An entity that controls a platform that only provides a forum where sellers and buyers may post bids and offers or, a forum where the parties trade in a separate platform or in a peer-to-peer manner will be exempted from the requirement to obtain a licence from CIMA under the VASP Act. This kind of platform controlling entity could be formed using any one of the other described legal forms contained in this article, but most commonly would use an exempted company.
Intellectual property holding companies
As a complementary entity to a DAO, clients often incorporate a separate entity to separate IP holding companies or separate software operators. This choice is often driven by the preferences of each business, its risk appetite and its tax considerations.
The preferred vehicle for an entity established to hold Web3 intellectual property is an exempted company. Any vehicle established for the sole purpose of holding, exploiting or receiving income from intellectual property assets will not be required to register with CIMA under the VASP Act, but it may be required to satisfy an extended economic substance test under the International Tax Co-operation (Economic Substance) Act.
Funds
The Cayman Islands are home to both regulated mutual and private fund structures which may be used for Web3 and blockchain applications.
Mutual funds
There are many types of mutual funds that are subject to regulation and supervision under the Mutual Funds Act by CIMA, but the one most popular for virtual assets funds is the registered mutual fund where:
• The initial minimum equity interest purchasable by an investor is US$100,000, or;
• Equity interests are listed on an approved stock exchange such as the Cayman Stock Exchange
Private funds
The Private Funds Act regulates private funds under the supervision of CIMA which operate as closed-ended funds.
Exchange traded funds (ETFs)
Offering exposure to the cryptocurrency market through traditional exchange-traded funds is another popular choice among investors.
Read more on how Bitcoin ETF’s work in the Cayman Islands.
Segregated portfolio company (SPC)
SPCs offer a unique advantage by segregating assets and liabilities between different portfolios, reducing risk and enhancing efficiency.
An SPC is one legal entity with different “pools” called “segregated portfolios” whose assets and liabilities are separated and protected (under Cayman Islands status) from the liability of all other segregated portfolios in the same SPC.
A burgeoning crypto community: Cayman Special Economic Zone
The Special Economic Zone (SEZ) has further catalysed the growth of Web3 and virtual asset entities. The SEZ provides a conducive environment for innovation, offering tax incentives, streamlined regulatory processes and a collaborative ecosystem for businesses to thrive.
The Cayman Islands continues to position itself at the forefront of Web3 and virtual assets expansion. The strategic selection of a legal framework, whether through foundation companies, diverse fund structures or the advantages offered by the SEZ, positions the Cayman Islands as one of the best places to establish and nurture Web3, DAOs and De-Fi entities. For those seeking a dynamic environment and legal infrastructure conducive to digital innovation, the Cayman Islands beckons as a hub for the future of Web3.
About Stuarts Humphries
Stuarts Humphries is a leading offshore Cayman Islands legal practice specialising in investment funds and fintech. Our experienced, award-winning attorneys offer exceptional, timely legal advice to clients around the world on their most significant and challenging commercial transactions, structures, liabilities and obligations.
Stuarts Humphries builds and maintains enduring relationships with clients through the combined legal expertise and business acumen of its practice groups and by providing outstanding service.
For any help with the above information or to schedule a consultation, email info@stuartslaw.com.
E: info@stuartslaw.com | T: +1 (345) 949-3344 | W: www.stuartslaw.com ]
by Chris Humphries, Managing Director and Head of Fintech and Funds, Stuarts Humphries
Jonathan McLean, Partner and Head of Regulatory, Stuarts Humphries
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