If you’re like most new startups – and looking to a launch a new DEX (Decentralized Cryptocurrency Exchange) – you’re probably in a bit of a quandary about how you should structure your DEX from a Corporate/Legal Perspective. It can be a bit confusing and frankly there’s a lot of misinformation out there on the nett written by people with tech knowledge but no legal background.
I’ve been a Lawyer for 33 years, have worked exclusively in the “Offshore” Corporate Structuring field for the last 23 years and and have specialized in assisting Crypto startups for the past 7 years +. I’ve done a TON of research on this topic and assisted A LOT of such businesses to get structured. Hopefully this Article will cut to the thrust and tell you EXACTLY what you need to know…
(As you may know) 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 third party funds in a custodial relationship, or assisting third 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 now either a prohibited activity or they require the enterprise to apply for some form of License.
There are a number of Licenses you could potentially apply for “Offshore” for a DEX 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
10.A UAE Crypto business license
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.
That said, if you’re on a budget, you’ll be pleased to hear that it’s still possible still to incorporate such a business “Offshore” without needing to apply for some of Special License. Panama, St Vincent and Samoa all present options in that regard. Check this Article for details: https://offshoreincorporate.com/where-to-incorporate-a-crypto-token-launch-business-offshore/
DEX Legal Structures – Overview
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.
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. (For more information of what DAO is and where you might set one up check this Article: https://offshoreincorporate.com/how-where-to-set-up-a-dao/ )
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 if 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.
Potentially each of the Service/Etc Companies/Entities could be set up in a nil tax jurisdiction to help potentially deliver an enhanced bottom line. Popular jurisdictions include the BVI, Seychelles, Belize, Nevis, Hong Kong etc.
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.
Would you like to know more? Then please Contact Us:
info@offshorecompaniesinternational.com
DISCLAIMER: OCI is a Company/Trust/LLC/LP/Foundation Formation Agency. We are not tax advisers or legal advisers. You are advised to seek local legal/tax/financial advice in regards to your local reporting/tax requirements before committing to set up or use an Offshore Company or other entity.
