Asia eyes Jersey digital asset funds

The digital assets space, similar to the durian fruit, can divide opinion. With a global crypto market cap of USD2.3 trillion as of October 2021, and no signs of slowing down, the hype is real. Digital assets are now beginning to form a permanent feature of investment portfolios, and many managers suggest that the asset class should be making up at least 5% of investor portfolios.

Institutional investors are starting to approach this emerging asset class with serious money – eagerly looking to plug into the digital world, diversify their portfolio and hedge against inflation, but desperately seeking certainty and regulation in an increasingly decentralised world. Fund managers who can find ways to protect investors and mitigate risks are set to reap the rewards.

Investors want a good return, but it is equally important for them to know that their investments are in safe hands, and that a regulator is holding funds and fund managers to scrutiny. The 3rd Annual Global Crypto Hedge Fund Report 2021 by PwC, Elwood Asset Management and the Alternative Investment Management Association (AIMA) mentioned that regulatory uncertainty was one of the greatest barriers to entry for investing, as well as a need for improvements in custody and safekeeping. For a fund manager looking to set up a digital asset fund, it all starts at the beginning – building solid foundations.

Jersey is an attractive choice for Asia-based fund managers and offers a wealth of advantages including:

a company law regime (similar to Cayman) that 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 extensive network of banks, lawyers, accountants and service providers;
tax neutrality; and
a trusted jurisdiction with a respected regulator that provides comfort to institutional investors with reservations about investing in the asset class. Fund managers can have corporate structures that “look and feel” like Cayman funds in Jersey. Umbrella fund structures called protected cell companies and incorporated cell companies are also available.

Well-regulated

Jersey is a well-established international financial centre and a pioneer in the digital asset space. The Jersey Financial Services Commission (JFSC) is a highly regarded regulator and is considered the gold class standard for its forward-thinking, which engaged the industry and stakeholders early on to bring digital assets within its existing regulatory framework, and established Jersey as a crypto-friendly jurisdiction.

In 2014, the JFSC approved the world’s first regulated bitcoin fund, the Global Advisors Bitcoin Investment (GABI), and granted its investment adviser a regulatory licence. Jersey was also one of the first jurisdictions to adopt a regulatory regime for virtual currencies. Jersey continued to lead the way when it approved the launch of what is believed to be the first Ethereum-denominated fund (Coinshares Fund I), as well as the setup of one of the world’s largest crypto exchanges, Binance, and the launch of XRD, a token used to power Radix’s fast growing decentralised finance (DeFi) platform. More recently, the JFSC approved the first Singapore-based fund manager’s launch of a Jersey-domiciled digital asset fund managed and administered in Asia, which has set the path for others to follow.

While Jersey is considered to be crypto-friendly, it is not a “free for all”. Indeed, the JFSC has high standards and expectations, particularly for digital asset funds, and seeks to ensure that fund managers and funds are conducting appropriate risk assessments on counterparties, custodians, exchanges and advisers, and are putting in place appropriate safeguards for the protection of investors and assets.

Jersey funds regime

In 2017, Jersey overhauled its funds regime into a simplified framework offering various fund options and products on a sliding scale of regulation, largely depending on the investor profile and the jurisdictions to which the fund is being marketed. The majority of funds in Jersey are also eligible to be marketed into the EU/EEA under the Alternative Investment Fund Managers Directive (AIFMD) through national private placement regimes and (once available) through the “passporting” regime.

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

Key features of a Jersey private fund:

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 (USD341,000);
No limit on fund size, no investment or borrowing restriction;
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;
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 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/EEA, but it is possible to “upgrade” a Jersey private fund so that it may be marketed into the EU/EEA at a later stage, and that process is a relatively straight forward and well-trodden path.

Key features of an expert fund:

No limit on the number of investors or offers;
It may be open or closed for redemptions by investors;
Investors must qualify as expert investors and/or subscribe for interests with a value of at least USD100,000;
No limit on fund size, and no investment or borrowing restriction;
The fund must have two Jersey resident directors – these can be supplied by a local administrator;
Consent from the JFSC is required, and JFSC’s approval of the directors and beneficial owners of the fund;
The investment manager or adviser must be of good standing and approved by the JFSC;
A Jersey administrator must be appointed, but services can be outsourced 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 option of investors; and
No requirement for any functionary of the fund (e.g. investment manager or adviser) to be regulated in Jersey.

Tax neutral

Jersey funds that are Jersey tax residents are subject to tax at 0% rate on income and gains derived from its investments. Jersey applies a broad-based value-added tax on goods and services (GST) supplied on the island. Still, generally, Jersey funds are registered as international services entities, meaning that no GST will be levied on any supply made by the funds. GST is not chargeable 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 gift tax, inheritance tax, death duties or capital transfer tax.

Jersey and Singapore have entered into a Double Taxation Agreement (DTA) that provides Jersey digital asset 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. DTAs between two countries are designed to: (1) help determine the tax residency status of a person or a company; (2) protect against the risk of double taxation where the same income is taxable in two countries; and (3) provide certainty of treatment for cross-border trade and investment.

Availability of relief under the Jersey-Singapore DTA is subject to conditions and anti-abuse rules, so professional tax advice should be sought. It is worth noting that, at the time of writing, Jersey also has full DTAs in place with other jurisdictions including the UAE, Qatar, Luxembourg and Hong Kong.

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