With the boom in growth and value of Cryptocurrencies around the world doubtless demand for Cryptocurrency exchanges is going to increase.
For the uninitiated a Bitcoin or Cryptocurrency Exchange is an Online market place where you can buy and sell cryptocurrencies and even pay for one type of Cryptocurrency using another form of Cryptocurrency.
Such a business lends itself well to an “Offshore” Corporate Structuring Plan. In principle here’s how it can/will work:
- A nil tax offshore company (commonly an International Business Company “IBC”) is incorporated to own/operate the Exchange business
- A website is created and tailor made software developed – the IBC (or a subsidiary) will be the owner of this website and the software and all the hardware required to run it
- The IBC owns/operates the business (eg ownership of the web-domain and the website/artworks or trademark/s or any sole distributor rights are held by or transferred to the IBC)
- The Company would be seen to be managed/controlled from Offshore (ie nil tax jurisdiction) – this would entail the deployment of a nil tax jurisdiction based “Nominee” director
- An Offshore account (which received payments via a merchant account) is set up in a nil tax banking centre
- Ideally the server is located in a country which does not tax business on the basis of server location (eg Singapore)
- Customers contracts with and agreed to pay the IBC a commission on all sales concluded as a consequence of buyer/seller introduction enabled by the site.
- The website/terms conditions would be worded in such a way as to provide that the service contract with the customer is to be concluded upon acceptance of the Customers offer by the IBC which shall occurr in the (nil tax) jurisdiction from which the IBC is managed/controlled
- All such monies are banked free of tax in the first instance
- You or your local company would be contracted by the IBC to manage sales/delivery of product/website maintenance/whatever.
- You would invoice the IBC periodically (eg monthly) for this service which income would be assessable income in your home state – though a smart Tax Accountant should be able to assist you to claim a series of expense against this income (eg home office, equipment, travel, phone/internet/utilities etc) to significantly reduce the amount of tax payable on this income.
- Often there is some kind of intellectual property (“IP”) created or behind the website based business (even if it’s just the website/design). It may be advantageous to you down the track if ownership of the business and the IP were held by 2 different entities. What you can do there is set up a 2nd IBC to own the IP. The first IBC (ie the Trading Company) pays license fees periodically to the 2nd IBC which fees wold be receipted tax free. This could be advantageous if you wanted to bring ownership of the web-business onshore or if you wanted to sell the business but keep a passive (potentially tax free) income stream
- Ideally once you start to grow you and to add substance you would be wise to set up your MD/Board and or a sales team onshore to take orders and receive income in a low tax onshore environment (eh Hong Kong, Ireland, Singapore, Cyprus etc as per the Amazon/Google model)
Management, Control & Beneficial Ownership
To minimise the chances of the IBC being taxed onshore ideally the IBC should be (and be seen to be) managed and controlled from offshore. How this can be achieved is including a Nominee Director etc as part of the Corporate structure. See this page for details of how that can work:
http://offshoreincorporate.com/faq/should-i-engage-nominees-or-should-i-direct-and-hold-the-shares-in-my-offshore-company/
http://offshoreincorporate.com/faq/how-can-i-protect-my-underlying-ownership-of-my-offshore-company-where-a-nominee-is-engaged-to-act-as-director-or-shareholder/
Additionally if you/the owners of the IBC live in a country which has CFC laws (see attached which explains what CFC laws are) and/or if you don’t want your local tax authorities to become aware of your Offshore Company’s Bank Account (and, incidentally, your position as “beneficial owner” of the Company) you’d be wise to include a Foundation as part of the Corporate structure.
Decentralized or a Centralized Exchange?
In crypto, a Centralized Exchange (“CEX”) is an online trading platform that allows people connected to the internet to buy, sell, and swap crypto assets. It acts as an intermediary ie like a Bank in that it accepts and holds Client Funds (typically in either Fiat or Crytocurrency format) pre exchange. Unlike a Decentralized Exchange (“DEX”) a CEX ie actually takes custody of a buyer and or sellers funds pre exchange (and then charges a commission for moving currency form the buyer to the seller or vice versa.
These days most CEXs require new clients to provide Know-your-Customer/Anti-Money Laundering (KYC/AML) docs (ie Proof of ID and address) before agreeing to open an account for a potential customer/trader.
How it works is aCEX matches buyers and sellers by collecting their orders in an “order book.” The exchange acts as a trusted intermediary between the buyers and sellers. Users rely on the exchange for the entire transaction process, trusting that the exchange won’t use their privileged place of knowledge to its advantage. The exchange also acts as a custodian for any cash or crypto held in user accounts, hopefully providing a safe place for users to store their funds. This has unfortunately not been true for many exchanges in the past
What’s the difference between a CEX and a DEX?
CEXs and DEXs are both platforms that help buyers and sellers trade. While a CEX is operated by a single entity, a DEX is run permissionlessly through smart contracts on a blockchain. An entity or project may help set up and maintain a DEX, but it can run itself as long as people provide liquidity. Unlike CEXs, to use a DEX only requires a crypto wallet and some cryptoassets. Due to its decentralized nature, there’s typically minimal onboarding requirements.
CEXs can offer customer support and a more user-friendly experience; however, they are susceptible to attack, take higher transaction fees from users and their solvency is often opaque which leads to the last and most important weakness, they require users to relinquish custody of their funds. If the Exchange goes bust (as can happen with a run on a Bank) the clients/depositors can lose their money (as happened with one of the world’s top 5 Centralized Exchanges ie FTX in 2022)
Given the Custodial character of a CEX in 99% of jurisdictions you’ll need to apply for some form of special License when incorporating your Offshore Company.
There are a number of Licenses you could potentially apply for “Offshore” that would enable you to run a Licensed Cryptocurrency Exchange including:
- A Gibraltar DLT License
- An Estonian Cryptocurrency Exchange (and/or Crypto Wallet Provider) License
- A Malta Crypto business license
- A Mauritius VASP License
- An Isle of Man ICO License
- A Swiss ICO license
- A Lithuanian Cryptocurrency Exchange/Wallet Provider License
- A Caymans VASP License
- A BVI VASP License
- A UAE Crypto business license
- A Vanuatu Financial License (Class D)
The cost to incorporate and apply for a License for businesses of the kind described above typically ranges from $U15,000 00 to circa $50,00 depending largely on which jurisdiction you choose.
The question of where to set up a Licensed Exchange can be quite a difficult one to answer. OCI can guide you in your choice of Jurisdiction/License. We have a widely experienced Lawyer in house who (for the past 7 years) specializes in assisting Blockchain related startups. If you’d like a free introductory consultation with our In House Lawyer please Contact us:
info@offshorecompaniesinternationalcompanies.com
ocil@protonmail.com
DEX Legal structures – Overview
Unlike a Centralized Cryptocurrency Exchange (“CEX”) a Decentralized Cryptocurrency Exchange (“DEX”) typically does not provide any custodial facility, ie it simply provides a platform where people can meet and trade, sell or swap Cryptocurrency peer to peer. Given the DEX model of exchange never holds customer funds this makes it difficult for law makers to overlay traditional regulatory oversight. Generally speaking where an entity is holding 3rd party funds in a custodial relationship or assisting 3rd parties to move or invest funds this is a Licenseable Activity.
That said a lot of the jurisdictions whereat we used to incorporate DEXs have decided that such an enterprise is either a prohibited activity or they require the enterprise to apply for some form of License.
Who Controls a DEX?
Next up you might want to check out a key Organogram entitled “Typical Crypto Exchange Legal Structures DIAGRAM Current” (which can be accessed via this Link: https://www.dropbox.com/scl/fi/v1b7sdfr9oa36p2ungmsm/Typical-Crypto-Exchange-Legal-Structure-DIAGRAM-Current.jpg?rlkey=10yzn0kir068hb6cxaow794gx&st=513xwak8&dl=0 )
In the case of a DEX, the Exchange company Platform provider can’t access the platform user’s assets. Nor can the owners. The token swap protocols of the DEX are, in most cases, ownerless and non-custodial. As such the DEX platform provider (general negligence principles aside) owes no Fiduciary duty to the Users. This is why the typical regulations encapsulating CEXs aren’t applied to DEXs.
That said, as an owner of a DEX, it’s important that you give considered thought to how you are going to structure the enterprise from a legal/entity perspective. In short, you’ll need to strike a balance as between potentially competing interests viz a viz the various stakeholders. At its core the legal/ownership structure should take into account and cater/provide for:
- Limiting the Founders’ liability in the event of a law suit against the DEX +
- Investor sensibilities +
- Ensuring that the relationships as between the DEX owners are carefully documented/governed +
- Tax Planning considerations +
- Insurance against potential allegations of non compliance with “onshore” Managed Investments Laws and/or Securities Industry Regulations
Behind the DEX protocols, we often see a Decentralized Autonomous Organisation (DAO) (like Uniswap DAO and Sushi DAO), the members of which vote for the protocol’s strategy (the principles of its work, commission sizes, etc.) and manage the Treasury (e.g., issue grants/tokens) in a decentralized way. (For more details of what a DAO is and how a DAO works, see attached “What is a DAO”).
Given at its core the typical/pure DAO is an unincorporated association (like a Club meaning all the members could be made jointly and severally liable if the DAO were to be sued) these days most such DAOs are usually incorporated/registered as ownerless legal entities (eg Private Foundations) or as Limited Liability Companies (eg DAO LLCs). Generically we refer to this as applying or setting up a DAO Legal Wrapper. These legal wrappers aim to protect DAO members from unlimited liability and implement the decentralized governance of the DAO.
The Ideal DEX Legal Structure
There are various ways to Legally structure a DEX but the most common approach we see to the legal structuring of a DEX is to create a collective of legal entities including:
- A DAO Foundation +
- A Developer Company +
- The (Consumer facing) Exchange Company
- A Token Distribution/Issuance Company (Token Co) ie the Exchange intends to sell it owns native Token
- A Management Company
In terms of roles the DAO Foundation can potentially do several things ie it can/would/could:
- Engage/pay the Developer Co
- Act as an Incubator fund for collecting seed Capital (eg privately introduced/early stage investors and/or DAO members could make donations to the Foundation and in return receive tokens or a SAFT ie a Simple Agreement for Future Tokens)
- Own the Tokens as developed and or it could own/provide working capital to the Exchange Company (ie act as a/the Treasury)
- It could be used to incentivize sweat equity (ie it can be used to gift and/or air drop tokens to high performing team members or to benefactors)
The Developer Company would be engaged to do the IT/Tech work and would typically be owned by the Tech Members of/Coders for the Collective. This enables the software developers to be remunerated on a commercial basis for the work they do.
The Exchange Company would own and operate the business, in effect, ie, it is the Entity that would engage/contract with the DEX Platform users and receive the fees/commissions generated by their Cryptocurrency sales/swaps.
If you plan to develop/sell your own Coin or Token (ie a Token that could be publicly traded) then ideally (eg to minimise liability exposure to the rest of the Group) this function should be carried out by a stand alone Company. This Company could be owned by the Exchange Co or it could be owned by the DAO Foundation and or by stage 2 Investors.
To ensure that the Founders get paid fairly for running the business ideally the Founders should form their own Management Company. This Company would be engaged via contract by the Exchange Co (and the Token Issuing Co) to manage the day to day affairs of the business.
Sometimes we see the DAO Foundation form an IP Company so that the technology/IP can be sold separately later and/or protected from law suits. Where an IP Company is deployed typically it is owned by the DAO Foundation and it hires/engages the Developer Company.
Occasionally we see a Holding Company deployed to own the Exchange Co and or the Token Issuing Co. Typically post launch Commercial Investors (eg if/when you need to do a 2nd capital raise to fund expansion) would hold shares in this Company as would the Founders of the Enterprise.
There’s no one perfect way to structure a DEX> Every business is different. Moreover you don’t necessarily need to kick off with a menage of Companies – some can be “bolted on” later as the business grows. That said I/OCI can provide detailed guidance in this regard ie we can assist you to tailor a Legal structure designed to meet your particular goals/needs having regard to your budget, potential for legal exposure, location, growth aspirations and time frames.
Decentralized Autonomous Organizations (DAOs)
A DAO is a Blockchain structure (like a secure database), that any member can leverage to self-govern through participation; A DAO sets rules – baked into code – and permits voting through digital tokens (a form of cryptocurrency) — all while leveraging smart contracts. Only that DAO’s Token holders have the power to vote.
In essence, a DAO allows groups of participants to create organizational forms beyond the hierarchical, top-down corporate firm (which must be responsive to the needs of a board and shareholders). DAOs essentially eliminate or minimize the roles of executives and managers in the organization, relying instead on transparent rules that apply to all members and participants.
The primary aim behind the creation of a DAO is to create a virtual entity to replace the central management of previous forms of organization. A decentralized autonomous organization (DAO), is an organization, particularized by rules encoded as a computer program, that is transparent, and controlled by the organization members. In terms of decision making a DAO is, in effect, unable to be influenced by any outside party including any central government.
DAOs are particularly prevalent in the Ethereum blockchain ecosystem, combining ideas about organizational forms, coordination, network effects, blockchain, and smart contract technology. A DAO allows a group to organize around a mission or goal and to coordinate the mission via smart contracts, enforced immutably and autonomously on the blockchain. DAOs represent an evolution in how people coordinate with one another, as the organization itself is autonomous from any third party intermediary’s influence and goals.
The main reason a DAO is formed is to decentralize and automate the governance of an organization. The rules by which a DAO operates are encoded as a computer program that is accessible via the blockchain, and controlled by all of the organizing members, rather than by a central governing board. Since the blockchain is essentially a public record, the DAO seeks to provide total transparency, requiring that all of its financial transaction records be recorded by a public facing blockchain. There is no top-down hierarchal structure to a DAO; A DAO depends almost entirely on the operation of autonomous smart contracts to enliven the rules and carry out the decisions made by/within the organization. In terms of where you might incorporate a DAO in a low or nil tax environment:
- You could set up a Marshall Islands DAO LLC (Check this link for details: https://offshoreincorporate.com/marshall-islands-dao-llcs/ )
- You could set up a Wyoming DAO LLC (Check this link for details): https://offshoreincorporate.com/products-services/offshore-companies/wyoming-dao-llcs/
- You could set up a Panama Foundation DAO (Check this link for details: https://offshoreincorporate.com/panama-foundation-daos/ )
You could also potentially set up a Caymans Foundation Company to act as a DAO (Check this link for details: https://offshoreincorporate.com/dao-structures-the-caymans-foundation-company-option/ ). However, you’d need to be able to satisfy the Compliance people in the Caymans that what you’re proposing is a not a licenseable under the Caymans VASP Legislation.
Where to Incorporate a Licenseless DEX?
There are several jurisdictions where you could incorporate an Exchange Company (DEX) without needing to apply for an Exchange License or some other form of Special License.
The first such option to consider would be to incorporate as an IBC or as an LLC Company in St Vincent & the Grenadines (“SVG”), a small but well regarded Caribbean Island Tax/Privacy Haven Jurisdiction.
Notwithstanding that SVG has passed VASP (Virtual Asset Service Provider) Licensing Legislation it is possible to set up a Company in SVG presently and conduct cryptocurrency activity without having to apply for a VASP License as the SVG Government is yet to pass regulations governing the License application process.
That said, once the SVG Government passes the Regulations you will need to either redomicile the Company to another jurisdiction (that does not require a license eg Panama or Samoa, see below) or you’ll need to shut the Company down, or you’ll need to apply for a VASP license in SVG.
To set up such a Company in SVG would cost around $US1,500.
For detailed information in regards to St Vincent check this Link: https://offshoreincorporate.com/saint-vincent-and-the-grenadines-svg-companies/
Samoa
If you’re wanting to incorporate a Crypt Token issuing business without having to apply for a special License the second option would be to incorporate as an IBC in Samoa.
Samoa is a small self-governed (former British colony) island nation in the South Pacific region. It has offered a nil tax IBC Company regime since around 1994 and, whilst not a wealthy country, it does have a history of political stability + the comfort of a British style legal system.
Samoa has not passed VASP Legislation and has not yet publicly expressed any intention to do so.
To set up such a Company in Samoa would cost around $1,500. For detailed information in regards to Samoa check this Link: https://offshoreincorporate.com/samoa-international-business-companies/
Panama
The third option to consider if you want to avoid having to apply for a VASP style license would be the Central American Economic powerhouse of Panama.
Panama is an interesting case study …
You see, the Panama authorities favored the implementation of VASP regulation and the Legislature passed the required Bill.
BUT the Panamanian President (as is/was his right) challenged the validity of the proposed legislation by issuing a legal challenge in the Panama Supreme Court.
To many observers surprise, the Court found in the President’s favour ie the proposed Panama VASP was found to be unconstitutional by the Panama Supreme Court and hence struck down ie it never made it past the Bill stage. Hence there is very little (if any) risk, if you incorporate in Panama, of a law being passed subsequent to your incorporation requiring you to either migrate/redomicile out of the jurisdiction or apply for a VASP license.
To set up such a Company in Panama would cost around $1,500. For detailed information in regards to Panama check this Link: https://offshoreincorporate.com/panama-offshore-companies/
Would you like to know more? Then please Contact Us:
www.offshoreincorporate.com
info@offshorecompaniesinternational.com
ocil@protonmail.com
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