BVI funds — no bad options

Cautious but continued interest for crypto

Q&A with Paul Waldron, Walkers

1. How has the sentiment towards crypto and digital assets changed in the past year? Does this differ within the BVI compared to other regions?

Sentiment in BVI towards crypto and digital assets generally has largely tracked sentiment internationally. Interest in crypto and digital assets generally spiked during the pandemic, with prices for Bitcoin and most major crypto currencies, coins and NFTs hitting a peak in late 2021. Since then, as the prices of crypto currencies and tokens drifted lower (and in some cases to close to zero) the sense of FOMO gradually evaporated from the market. Managers and investors have taken a more cautious approach to investing in crypto generally. Following some highprofile failures of crypto-focussed hedge funds, exchanges and lenders during the course of 2022 managers and investors are taking a harder look at investment in crypto and digital assets. That said, we still see considerable interest in this space, and continue to receive a steady flow of queries and instructions. This is mirrored by my colleagues in Walkers’ other offices.

2.What impact has this shift had on your business and on the BVI as a fund jurisdiction?

The shift in sentiment has resulted in a less exuberant and more cautious approach to launching new crypto funds, and something of a dip in the flow of new instructions. However BVI continues to be a very attractive jurisdiction to launch a crypto or digital asset-focused fund. In particular, BVI is the go-to jurisdiction for small and medium-sized managers, incubator funds, ‘friends and family’ funds and venture capital funds in the crypto and digital asset space.

3. Are crypto clients’ requirements changing in the BVI and if so, how are you responding to these additional demands?

Crypto managers’ requirements are evolving as the crypto sector matures, but this is a gradual process. As elsewhere crypto managers are watching the collapse of competitors and crypto service providers during the course of 2022. For the first time, we are now advising BVI crypto managers who may have exposure to collapsed crypto exchanges or lending platforms and who may need to restructure or rationalise their operations. We anticipate crypto managers will be focusing more on the small print of their fund documents and service contracts, and looking for guidance from BVI counsel to avoid industry pitfalls.

4. Can you identify the most significant areas of growth going forward within the BVI crypto space and the triggers which could affect their trajectory?

The BVI is in the process of passing legislation to regulate virtual asset service providers (or “VASPs”). BVI has taken a two-step approach here. First of all VASPs are required to ensure compliance with the BVI AML regime by 1 December 2022. Secondly, within six months of the new VASP legislation coming into force existing VASPs will have six months to register with the FSC (the BVI financial regulator). We anticipate a lot of activity for crypto clients in this space in 2023.

We are also seeing the increased use of decentralised autonomous organisations (“DAOs”) by crypto token issuers. We expect to see increased use of BVI structures for DAOs. Regulation elsewhere could result in a shift to BVI for DAO vehicles.

5. What are the main advantages of setting up a crypto fund in the BVI and what are the primary challenges managers face in this regard?

There are a number of benefits to using the BVI as the domicile for a crypto fund and / or a crypto investment manager. First of all BVI has a very well established but flexible funds regulatory regime. The existing rules relating to the establishment and operation of hedge funds and venture capital funds apply equally to new crypto funds. The FSC is also very familiar with and comfortable with crypto and digital assets generally. This is one of the reasons which BVI has developed a well-earned reputation as a crypto-friendly jurisdiction. The sheer volume of BVI crypto funds, ICOs and digital asset start-ups means that the larger crypto investors are already very familiar and comfortable with BVI as a jurisdiction.

Another advantage is speed to market – the FSC is committed to turning around new fund applications within five business days. The FSC typically achieves this and high-quality fund and approved manager applications are routinely approved in five business days or fewer. While this has obvious attractions to all investment managers this is of particular benefit in the fast moving crypto space. Another well-known advantage is cost – BVI funds and approved mangers are very cost effective to both establish and operate. For starters a BVI company or limited partnership is an extremely cost-competitive vehicle. In addition the FSC’s fees are competitive as against the other main offshore jurisdictions. Furthermore the FSC does not impose a local audit requirement, which means managers are free to shop around widely for the most suitable and cost-effective audit solutions. In many cases the FSC is happy to waive the audit requirement entirely for closed-ended / venture capital funds, in recognition of the fact that many investors in such funds have little use for annual audited financial statements.

The BVI approved investment manager (discussed elsewhere) is another useful tool for crypto managers. They are cost-effective to establish and operate, and can be launched in tandem with a new fund, this saving crucial time to market.

Few BVI-specific challenges arise for managers of BVI crypto funds. However for some crypto managers the BVI anti-money laundering regime can be an education. BVI (and all the main offshore jurisdictions) follow international best practice in this area. First time crypto managers are not always immediately aware of the importance of the BVI AML and sanctions regimes. The AML regime can be a challenge sometimes for pure token issuers – while they do not always fall strictly within scope of the AML regime best practice is to comply with it anyway, on the assumption that any gaps in the AML regulations will shortly be closed. The AML regime can also present some challenges for managers seeking to accept in-kind crypto subscriptions (as in other jurisdictions).

Walkers

Walkers is a leading international firm that provides legal, corporate and fiduciary services to global corporations, financial institutions, capital markets participants and investment fund managers. It advises businesses partnering with or investing in fintech firms, as well as financial institutions and asset managers developing their own fintech products and services. Walkers covers fintech’s core financial industry sectors – asset management, investment, banking, finance, insurance, trading and exchanges, and payments – with particular expertise in advising businesses specialising in blockchain, virtual assets (including Web3, DeFi and NFTs), the metaverse and alternative model finance.

Paul Waldon

Paul Waldron is a partner in the Global Investment Funds Group and is based in Walkers’ BVI office. He has over 15 years’ experience in both hedge funds, private equity funds and approved managers.

Paul advises institutional asset managers and established and start-up investment managers on all aspects of investments funds matters, including pre-formation strategy, launches, governance, reorganisations, ongoing operations, exit and termination. He also regularly works with managers and service providers in the fintech space.

BVI Finance is the ‘voice’ of the British Virgin Islands’ financial services industry; marketing and promoting its products and services, as well as managing its excellent reputation as a premier international business and finance centre.

BVI Finance was incorporated as a company limited by Guarantee in December 2016 and has operated as a public-private partnership since then. BVI Finance maintains a strong relationship with key stakeholders including Government and its many partners locally and internationally, media outlets and investors in emerging and traditional markets. For further information see www.bvifinance.vg

Mourant is a law firm-led, professional services business with over 60 years’ experience in the financial services sector. We advise on the laws of the British Virgin Islands, the Cayman Islands, Guernsey and Jersey and provide specialist entity management, governance, regulatory and consulting services. We bridge the gap between legal advice and its implementation, taking an integrated approach to deliver the best results for our clients.

Our ‘one firm’ approach means that working together with clients we deliver seamless, objective and commercially grounded advice on the comparative advantages and disadvantages of the leading offshore fund jurisdictions. Our team exercises true commercial judgment in delivering advice often going the extra mile, with a personal approach, and forming genuine partnerships with our clients and their advisers.

Learn more at www.mourant.com

Conyers is a leading international law firm with a broad client base including FTSE 100 and Fortune 500 companies, international finance houses and asset managers. The firm advises on the laws of Bermuda, the British Virgin Islands and the Cayman Islands, from offices in those jurisdictions and in the key financial centres of Hong Kong, Singapore and London. Through its global network it provides responsive, sophisticated, solutiondriven advice to clients on matters including: general corporate, capital markets, M&A, banking and finance, insurance and reinsurance, investment funds, private equity and venture capital, asset finance (including shipping and aircraft finance), litigation and dispute resolution, insolvency and restructuring, and private client and trusts. The firm also provides a wide range of registered agent, registered office, corporate director and secretarial services, as well as specialised company trust, management, compliance and governance services.

Visit us at www.conyers.com

O’Neal Webster holds a decidedly unique position among all British Virgin Islands law firms, being among the first to establish exclusively in the BVI to serve onshore and offshore clients in their corporate, finance, banking, business, real estate, admiralty, investment fund, intellectual property, and trust and estate needs. The firm is recognized for its expert handling of transactional, regulatory, and adversarial matters and is highly-regarded for consistently delivering exceptional service, exceeding expectations in both international and domestic engagements. The firm is ranked in leading legal directories and is the BVI member of Lex Mundi and World Services Group, two top global referral networks. Learn more at onealwebster.com.

Learn more at www.onealwebster.com

Harneys is a global offshore law firm with entrepreneurial thinking. Experts in British Virgin Islands, Cayman Islands, Cyprus, Luxembourg, Bermuda, Anguilla, and Jersey* law, the firm’s service is built around professionalism, personal service and rapid response. Harneys advises an international client base, which includes the world’s top law firms, financial institutions, and investment funds, as well as high net worth individuals. Harneys is a full service law firm spanning all major transactional, contentious, and private client disciplines and works alongside Harneys Fiduciary, its associated corporate and fiduciary services arm.

*Jersey legal services are provided through a referral arrangement with Harneys (Jersey) which is an independently owned and controlled Jersey law firm. Learn more at www.harneys.com

Appleby is one of the world’s leading international firms. Our global teams of legal specialists advise public and private companies, financial instituions and private individuals.

Through Appleby Global Services, we offer a range of administration, reporting and fiduciary services focused on corporate structures.

Weare regularly recognised for our professionalism, integrity and excellent client service, and these are the values we pride ourselves on and are at the core of our business. For further information see www.applebyglobal.com

Walkers is a leading international firm that provides legal, corporate and fiduciary services to global corporations, financial institutions, capital markets participants and investment fund managers. It advises businesses partnering with or investing in fintech firms, as well as financial institutions and asset managers developing their own fintech products and services. Walkers covers fintech’s core financial industry sectors – asset management, investment, banking, finance, insurance, trading and exchanges, and payments – with particular expertise in advising businesses specialising in blockchain, virtual assets (including Web3, DeFi and NFTs), the metaverse and alternative model finance. Visit us at www.walkersglobal.com

In the British Virgin Islands, PwC has a dedicated team working together for a common purpose — building relationships that create value for you and your business. This is PwC. Every day our people work with you to build the value you’re looking for.

With many years of excellence in the British Virgin Islands, we provide industry focused advisory and consulting services for public, private and government clients. Our primary area of focus is the international financial services industry.

At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 152 countries and more than 327,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and

tell us what matters to you by visiting us at www.pwc.com.

Hatstone is a leading boutique multi-jurisdictional group providing legal, fund administration and corporate and fiduciary services with offices in the British Virgin Islands, Ireland, Jersey, London, Panama and South Africa.

The firm has a very experienced BVI investment funds practice, which is partner-led and commercial in its approach, providing BVI fund formation, fund administration, corporate, director and regulatory services. Clients value Hatstone’s longstanding experience in the area of investment funds and its active role in the market.

Visit us at www.hatstone.com