With this continued interest, a number of Singapore are managers using Jersey as the jurisdiction in which to domicile their funds. This choice is driven by several factors.

Singapore tax treatment of digital assets. Digital assets do not fall within the definition of a “designated investment” for the purposes of Singapore tax legislation. This means that a Singapore domiciled fund will be subject to tax in the country, and such tax leakage is hugely unattractive to investors.

Tax neutrality. Funds that are structured as Jersey companies, and which are Jersey tax resident, are subject to tax at a 0% rate on income derived from their investments. Jersey does not impose withholding tax on dividend or interest income paid by Jersey tax resident companies. There is also no gift tax, inheritance tax, debt duties or capital gains tax in Jersey.

Double tax treaty. Jersey and Singapore have entered into a double-taxation agreement (DTA) that provides Jersey domiciled digital assets funds that are tax resident in Jersey, with potential relief or exemption from exposure to taxes on any gains of a revenue nature that arise from the disposal of cryptocurrencies in Singapore.

The DTA between the two countries is designed to:

• Help determine the tax residency status of a person or company;
• Protect against the risk of double-taxation, where the same income is taxable in two countries; and
• Provide certainty of treatment for cross-border trade and investment.

Availability of relief under a Jersey or Singapore DTA is subject to conditions and anti-abuse rules, so professional tax advice should be sought.

It is worth noting that Jersey also has full DTAs in place with other jurisdictions including the UAE, Qatar, Luxembourg and Hong Kong.

Regulatory certainty. Jersey is a well-established international finance centre, and it is known as a domicile for funds including the world’s largest fund, Softbank Vision Fund, with USD93 billion of committed capital. Unlike some other jurisdictions, Jersey is not a crypto free-for-all, and the Jersey Financial Services Commission (JFSC) does scrutinise funds that invest in digital assets to ensure that the fund promoter, structure and operation are credible.

JERSEY FUNDS REGIMES

Jersey has two principal fund regulatory regimes, the Jersey private fund and the regulated Jersey expert fund. A key distinction between the two is that a Jersey private fund may not have more than 50 investors or make more than 50 formal offers to investors (the so-called “50 or fewer test”).

By contrast, a Jersey expert fund can make an unlimited number of offers and have an unlimited number of “expert investors”, but is subject to a formal regulatory approval process.

The most popular regulatory regime for Asia-based fund managers launching their digital asset funds has been the Jersey private fund. Indeed, recent experience has shown that a Singapore manager wishing to launch a fund out of Jersey should start the fund’s life as a Jersey private fund and, if the manager builds a track record, then subsequently upgrade to a Jersey expert fund. The key features of a Jersey private fund are:

• Maximum of 50 investors at any time and a maximum of 50 initial offers;
• Must not be listed on a stock exchange. It may be open or closed for redemptions by investors;
• Investors must qualify as professional investors and/or subscribe for interests with a value of at least GBP250,000 (USD300,000);
• No limit on fund size, no investment or borrowing restriction (other than those that are agreed with investors);
• A simple consent is required from the JFSC under local legislation;
• A non-Jersey administrator can be appointed;
• Must have a Jersey designated services provider, or DSP (i.e., a Jersey regulated administrator);
• No audit requirement (although this is generally expected for a digital asset fund);
• No custodian requirement (although generally expected for a digital asset fund); and
• No requirement for any functionary of the fund (e.g., investment manager or adviser) to be regulated in Jersey.

Some additional requirements apply if the fund is actively marketed into the EU or European Economic Area (EEA), but it is possible to “upgrade” a Jersey private fund so that it may be marketed into the EU or EEA at a later stage, and that process is a relatively straightforward and well-trodden path.

LESSONS LEARNED SO FAR

Since Jersey was first identified last July as a domicile for Singapore fund managers, a number of digital assets funds have been launched, and some very valuable lessons have been learned, which are summarised below.

Structuring. Using a Jersey company as the fund vehicle offers great flexibility, with recent Jersey fund structures for Singapore managers including:

• The fund as a standalone Jersey company;
• A Jersey master or feeder (akin to the traditional hedge fund structure);
• A Jersey company as a sub-fund of a Singapore Variable Capital Company (VCC), which accommodates certain types of investors who must invest via the VCC; and
• A Jersey company underneath a Cayman Islands segregated portfolio company.

Administration arrangements. The Jersey private fund regime requires the fund to appoint a Jersey-regulated administrator as the DSP. The role of the DSP is to confirm the promoter’s credentials to the JFSC and to ensure that the fund meets the requirements in the Jersey private fund guide (including that all investors having been subject to anti-money laundering checks in compliance with Jersey law).

For obvious reasons, many Singapore fund managers want the actual administration of their fund (including net asset value calculation, dealing with subscriptions and redemptions, fund accounting, etc.) to be undertaken in the same time zone as the fund manager.

Therefore, any Singapore manager wanting to launch a Jersey domiciled digital asset fund should ensure that the roles and the responsibilities of the Jersey DSP and the Singapore administrator are carefully delineated so that there is no overlap but, equally, so that nothing falls through the cracks from both an operational and regulatory standpoint.

Interaction with the JFSC and approval timing. Because crypto is a sensitive activity for the JFSC, the normal 48-hour approval timeframe does not apply. Instead, a Singapore manager should expect regulatory approval to take between eight and 10 weeks from the date of the submission of the Jersey private fund application.

The JFSC will want to see a copy of the fund’s offering memorandum and some background on the promoter and its principals. The JFSC will particularly focus on the fund’s custody arrangements to ensure that the investors are adequately protected when they invest in an asset class that has historically been vulnerable to hacking and the misappropriation of assets.

Number of investors. The 50 or fewer test mentioned above applies on a “look through” basis, so that managers cannot put a number of different feeders into the Jersey private fund and claim that the total number of investors in the Jersey fund does not exceed 50.

There is a helpful carve-out for any discretionary investment manager investing on behalf of non-professional investors, where the discretionary investment manager counts as a single investor.

The original version of this article was published by Asia Business Law Journal, September 2022.