Asia Eyes Jersey Digital Asset Funds – Financials and Banking

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The space of digital assets, similar to the fruit of the durian, can divide opinion. With a global crypto market cap of $ 2.3 trillion in October 2021 and no signs of slowing down, the hype is real. Digital assets are now starting to form a permanent feature of investment portfolios, and many managers suggest that the asset class should make up at least 5% of investor portfolios.

Institutional investors are starting to approach this emerging asset class with some serious cash – eagerly looking to connect to the digital world, diversify their portfolios and hedge against inflation, but desperately seeking certainty and regulation. in an increasingly decentralized world. Fund managers who can find ways to protect investors and mitigate risk are ready to reap the rewards.

Investors want a good return, but it is just as important for them to know that their investments are in good hands and that a regulator supervises the funds and the fund managers. The 3rd Annual Global Crypto Hedge Fund 2021 report by PwC, Elwood Asset Management and the Alternative Investment Management Association (AIMA) mentioned that regulatory uncertainty was one of the biggest barriers to entry for investment, along with a need for conservation and conservation improvements. For a fund manager looking to build a digital asset fund, it all starts from the beginning: building a solid foundation.

Jersey is an attractive choice for Asia-based fund managers and offers a host of benefits, including:

  • a company law regime (similar to Cayman) which has its roots in English law and therefore brings familiarity and stability;
  • proximity to the EU and the European Economic Area (EU / EEA);
  • a stable infrastructure and an extensive network of banks, lawyers, accountants and service providers;
  • fiscal neutrality; and
  • a trusted jurisdiction with a respected regulator who reassures institutional investors with reservations about investing in the asset class. Fund managers may have corporate structures that “look like” the Cayman in Jersey funds. Umbrella fund structures called Protected Cell Companies and Incorporated Cell Companies are also available.

WELL REGULATED

Jersey is a well-established international financial center and a pioneer in the field of digital assets. the Jersey Financial Services Commission (JFSC) is a highly regarded regulator and is considered the gold class standard for its forward thinking, which engaged industry and stakeholders early on to integrate digital assets into its existing regulatory framework, and established Jersey as a a jurisdiction favorable to cryptography.

In 2014, the JFSC approved the world’s first regulated bitcoin fund, Global Advisors Bitcoin Investment (GABI), and granted its investment advisor a regulatory license. Jersey was also one of the first jurisdictions to adopt a regulatory regime for virtual currencies. Jersey continued to lead the way in approving the launch of what would be the first Ethereum-denominated fund (Coinshares Fund I), as well as the establishment of one of the world’s largest crypto exchanges, Binance, and the launch of XRD, a token used to power Radix’s rapidly growing Decentralized Finance (DeFi) platform. Most recently, the JFSC approved the launch by the first Singapore-based fund manager of a Jersey-based digital asset fund managed and administered in Asia, which paved the way for others.

Although Jersey is considered crypto-compatible, it is not a “free for all”. This is because the JFSC has high standards and expectations, especially for digital asset funds, and seeks to ensure that fund managers and funds perform appropriate risk assessments on counterparties, custodians, stock exchanges and advisers, and put in place appropriate guarantees for the protection of investors and assets.

JERSEY FUND PLAN

In 2017 Jersey revamped its fund regime to a streamlined framework offering various fund options and products on a sliding regulatory scale, largely based on the investor’s profile and the jurisdictions in which the fund is marketed. The majority of funds in Jersey are also eligible to be marketed in the EU / EEA under the Alternative Investment Fund Managers Directive (AIFMD) through national private placement regimes and (when available) through the “passport” regime.

The most popular fund structure for Asia-based fund managers launching their digital asset funds is a Jersey private fund, which can be turned into an expert fund if it proves successful.

Main characteristics of a Jersey private fund:

  • Maximum of 50 investors at any time and a maximum of 50 initial offers;
  • Must not be listed on the stock exchange. It can be open or closed for redemptions by investors;
  • Investors must qualify as professional investors and / or subscribe to interest with a value of at least 250,000 GBP (341,000 USD);
  • No limit on the size of the fund, no investment or borrowing restrictions;
  • Simple consent from the JFSC is required under local law;
  • A non-Jersey director can be appointed;
  • Must have a designated service provider in Jersey;
  • No audit requirement (although generally expected for a digital asset fund);
  • No custodian requirement (although generally expected for a digital asset fund); and
  • No requirement for a fund official (eg a manager or investment adviser) to be regulated in Jersey.

Some additional requirements apply if the fund is actively marketed in the EU / EEA, but it is possible to ‘reclassify’ a private Jersey fund so that it can be marketed in the EU / EEA at a later stage, and this process is relatively straight and well-trodden path.

Main characteristics of an expert fund:

  • No limit on the number of investors or offers;
  • It can be open or closed for redemptions by investors;
  • Investors must be qualified as expert investors and / or subscribe to interest with a value of at least 100,000 USD;
  • No limit on the size of the fund, and no investment or borrowing restrictions;
  • The fund must have two Jersey resident directors – these can be provided by a local administrator;
  • The consent of the JFSC is required, as well as the approval of the JFSC of the administrators and beneficial owners of the fund;
  • The manager or investment adviser must be in good standing and approved by the JFSC;
  • A Jersey administrator must be appointed, but services may be contracted out to a non-Jersey administrator;
  • Audit requirement;
  • A Jersey custodian or, in the case of hedge funds, an international prime broker must be appointed for funds open for redemption at the discretion of investors; and
  • No requirement for a fund official (eg a manager or investment adviser) to be regulated in Jersey.

TAX NEUTRAL

Jersey funds that are Jersey tax residents are subject to a tax rate of 0% on income and gains from their investments. Jersey applies a generalized value added tax on goods and services (GST) supplied on the island. However, generally, Jersey funds are registered as international service entities, which means that no GST will be levied on supplies made by the funds. GST is not payable on supplies received by the funds.

Jersey does not impose withholding tax on dividend or interest income paid by Jersey resident companies (e.g. the fund) to non-residents. There is no tax on gifts, inheritance tax, inheritance tax or transfer tax.

Jersey and Singapore have entered into a Double Taxation Agreement (DTA) which provides Jersey digital asset funds that are tax resident in Jersey with a potential relief or exemption from tax exposure on any gain in nature of income resulting from the sale of crypto-currencies in Singapore. . DTAs between two countries are designed to: (1) help determine the tax residency status of a person or business; (2) guard against the risk of double taxation when the same income is taxable in two countries; and (3) provide certainty of treatment for cross-border trade and investment.

The availability of relief under the Jersey-Singapore DTA is subject to conditions and anti-abuse rules, so professional tax advice should be sought. It should be noted that at the time of writing, Jersey has also implemented comprehensive data transfer agreements with other jurisdictions, including the United Arab Emirates, Qatar, Luxembourg, and Hong Kong.

An original version of this article was first published by Asia Business Law Review, December 2021

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.


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