The Government of Gibraltar and the Gibraltar Financial Services Commission have recently reiterated their intention to make Gibraltar a prime jurisdiction for crypto business. Following the introduction of the new Distributed Ledger Technology Providers Regulations on 1 January 2018, the interest in Gibraltar has been over and above what anyone expected. This has been complemented by the support of Turicum Private Bank and Gibraltar International Bank, which quickly developed the relevant skillset and obtained necessary internal approvals to ensure they could provide banking services to crypto businesses and individuals involved in such businesses. In the coming months, it is expected that other Gibraltar banks will also start operating in this space.
The cryptocurrency craze has also seen the emergence of the crypto fund, as institutional investors and other “no-coiners” look to those with more experience and expertise to invest with. The demand is amplified due to the FOMO (Fear Of Missing Out) phenomenon, which has become something of a cliché within crypto circles. Crypto funds, however, need to be carefully structured in order to appropriately protect investors. Otherwise, they can easily be used as a means to defraud unknowing investors with little or no chance of recovering their money.
The Gibraltar Funds & Investments Association has therefore recommended that all crypto funds, dealing with third party money, should be regulated by the GFSC as Experienced Investor Funds. EIFs are restricted to persons that fall within the definition of “experienced investor”, which covers high net worth individuals, investment professionals and anyone who invests at least €100,000 (or €50,000 with professional advice). In addition, GFIA will be issuing an addendum to its existing funds Code of Conduct to tackle the specific problems thrown up by crypto funds. Since crypto EIFs are set up under the existing EIF regulations, they do not require a DLT licence.
EIFs require two local authorised EIF directors, an approved fund administrator and a local auditor. The fund will also require a bank account, crypto wallet(s) and an offering memorandum which meets the requirements of the EIF regulations. At Hassans, our crypto EIFs will also have tailored written policies covering storage, transmission and valuation of cryptos.
EIFs do not require pre-approval from the GFSC before launching. EIFs are launched based on a Gibraltar legal opinion, provided that the required documentation is submitted to the GFSC within 10 days. This means that there is no regulatory downtime when considering speed to market.
EIFs are set up with ordinary shares and participation shares. Ordinary shares carry the voting rights with limited or no economic rights, whilst participation shares carry the economic rights with limited or no voting rights. The fund promoters and/or fund managers will own the ordinary shares and the investors will be issued participation shares.
The crypto EIF will need to set out clearly the valuation methodology for its cryptos. This may be as simple as going by the price given by CoinMarketCap.com at a specific time and day (e.g. at 5pm CET on the last day of the month) as long as this is set out clearly in the fund’s offering memorandum. The fund’s administrator is responsible for calculating the net asset value per participation share.
EIFs may be managed by a third party investment manager or self-managed by its board of directors. The investment manager or investment director regularly charges a management fee, based on a percentage of assets under management, plus a performance fee, calculated as a percentage of any increase in the net asset value per participation share above the fund’s high water mark.
Crypto EIFs can also be set up as protected cell companies. With PCCs, fund promoters can create separate cells (i.e. sub-funds) the assets and liabilities of which are statutorily segregated from each other. This structure is especially popular with multi-strategy managers who can implement different strategies under the same umbrella. As an example, a crypto PCC can be set up with 2 different cells, one cell focussing on ICOs and another with a buy and “hodl” strategy. There is no limit to the amount of cells that a PCC may have.
As a fund promoter, the main crypto-related issues to consider are: Which wallet(s) will the fund use? Who will have access to the private keys? How to control the transmission of cryptos so that no one person can effect a transfer on their own? What type of cold storage will be used? Where will the cold storage device be kept securely? In what proportion will the cryptos be kept in hot or cold storage? What crypto exchanges will be used?
By Aaron Payas, CFA