The increasing complexity of mining algorithms is the biggest hurdle for new investors to get hold of a substantial amount of crypto assets. At the same time, the industry remains lucrative yet unpredictable. So, a new class of investors is coming up, who are interested in a managed capital of digital assets or a crypto fund, available to investors for replication.
Anyone can technically start a fund simply by introducing a new currency, but if you wish to do this, there are certain rules and laws that you should know.
When you set up a cryptocurrency fund, there are lots of legal procedures you will have to deal with. Firstly, there are variations of the types of funds that can be created. Secondly, tax jurisdiction of your targeted investors (especially the US) has a role to play in the fund structure. If you are targeting US-based, high net-worth individuals, they are the ones who are taxable. Pensioners will fall under the category of non-taxable individuals. Investors from countries outside the US have separate requirements.
Be sure to hire a legal expert who is well-versed in all the laws related to crypto funds.
While the valuation metrics of all major securities are well defined, for cryptocurrency fund managers this is still a challenging aspect. This poses problems when accepting capital from new or existing investors. The well-known currencies listed on large exchanges, like Coinbase and Kraken, have reliable valuation metrics provided by the exchanges involved. But those that have weaker volumes or are traded from foreign exchanges create confusion.
For ICOs, it is known that the US SEC considers most tokens as securities. If you are a fund manager, be sure to follow the applicable registration requirements imposed by your nation’s securities regulator beforehand. If you are investing in any ICO, make sure that they have detailed the tokenomics and clearly mentioned whether the token is a security or utility based one.
In case of mining, again the large currencies are easier to evaluate, based on the associated operational costs. In absence of any reliable system, however, it is better to side pocket the upfront and operational mining costs.
Seek proper tax advice before setting up a fund. There are rules that state that offshore funds won’t get taxed onshore, even if the fund manager is based onshore. Laws like these are in place to encourage investors, but these laws were not drafted with crypto investments in mind. In fact, the exemption law doesn’t even apply to cryptocurrencies. So, you may be taxed on the gains from the fund, along with any other personal tax that you need to pay. This means that the situation is unlikely to be a profitable one for you.
However, there are countries where taxation laws are being drafted to attract crypto investors. Again, an expert should look into these opportunities.
Strong governance is essential considering the many tough decisions that have to be taken, which will have significant impact on investors. Without proper fund governance, no institutional investor will be willing to put money into your fund. Today, most of the proper institutional investor funds have an independent board of directors, who are reputable people from various backgrounds. You should aim to develop a strong team as this will create authenticity and credibility. Also, things will proceed smoothly when decision-making is in capable hands.
You should know that the US SEC mandates any fund having more than $150,000,000 of gross assets to appoint a custodian, who will protect client funds. There are a lot of choices in the traditional space, from licensed custodians to prime brokers. In the crypto world, there are things called “wallets” that add to the complications. Wallets have private and public keys, and these keys are prone to hacking. A custodian technically will have to be given ownership of these keys, but under certain laws, a manager is not allowed to own the client’s assets.
So, make sure to take a look at the different issues that could impact your crypto fund and put proper controls in place. A lot of the issues listed above are in the process of getting fixed. Experts around the world are working towards developing feasible solutions and it is only a matter of time before all the complexities will be ironed out and things will be simpler for crypto enthusiasts.