Insights
Williams v. Binance: An American Nightmare?
On March 8, 2024, Binance’s recent spate of legal troubles got worse as a class action lawsuit against them was revived by the United States Court of Appeals for the Second Circuit (“Court”).
A group of investors had accused Binance of unlawfully promoting, offering and selling tokens which were not registered as securities, and sought damages and to unwind the sales.
Initially, the United States District Court for the Southern District of New York ruled in favour of Binance, dismissing the investors on procedural grounds – namely, that the claims were extraterritorial (i.e. happened outside the jurisdiction of the US) and were also time-barred. On appeal, the Court overturned that decision (finding both that the Binance sales were domestic transactions in the US and not time-barred) and remanded the case for further consideration.
While the investors wait for the substantial hearing of their case, this procedural decision by the Court serves as a cautionary tale for crypto projects on how to (or rather how not to) land in hot water in the US.
Here are our main takeaways:
You are doing business in the US if “irrevocable liability” (i.e. when the contract becomes binding) is incurred in the US.
The Court found that the investors raised a plausible case of irrevocable liability attaching in the US because: (1) Binance has significant infrastructure in the US (particularly, the fact that Binance was primarily hosted on hosted on computer servers and data centers provided by Amazon Web Service); and (2) the investors were residing in the US when using the Binance platform and entering into the transactions.
Although Binance had set up restrictions to US users on its platform, the Court did not have to assess the viability of such safeguards since the investors could show that CZ (then the CEO of Binance) had been tweeting openly about how Binance users could (and were expected to) use VPNs to trade tokens on the platform.
Without going into the technical details of statutory limitation periods in the US (with respect to the various claims brought by the investors), it is sufficient for current purposes to say that the relevant claim period starts running from when an investor actually completes the purchase and not simply when the alleged violation of securities occurred.
The Court clarified that the sales transactions had to be completed before a claim could even arise and it did not make sense for the limitation period to start running, as Binance argued, from when an investor simply signed up for Binance’s platform and agreed with the terms of use.
You cannot say “not my token, not my problem” – promoting and distributing another project’s tokens can still get you into trouble.
It is important to recognize that Binance was on the hook despite not being the creator of the tokens (and their respective ecosystems) in question. Usually, one would expect that the projects issuing the tokens and preparing the white papers should be held responsible for any deficiencies, but the Court seemed to lean towards the investors having a potential case against Binance for such deficiencies.
Presumably, the Court took this view because the violation in question was offering and promoting tokens seen to be unregistered securities – an important lesson for not just other crypto exchanges but any project that promotes another project’s token (e.g. through a cross-collaboration).
However, it remains to be seen whether the investors’ claims against Binance will eventually succeed considering that there are thorny issues with setting a broad precedent that an exchange can be blamed if the assets listed on it turn out to be bad investments. To what extent should Binance be expected to scrutinize potential listings (assuming some basic checks were carried out)? Hopefully, the substantive case will shed light on this question.
If you have questions about the case or want to discuss practical tips on how to reduce the risks faced by Binance, feel free to reach out to us.
Centrium Advisory advises crypto businesses on the relevant risks (both compliance and operational) so as to optimise processes for the relevant stage of growth. Once we have worked with a project to recalibrate and refine the business model, we can arrange for competent and experienced legal partners to “bless” the overall plan.
Ripple v. SEC: A Hollow Victory for Crypto?
On 13 July 2023, the United States District Court for the Southern District of New York (“Court”) granted summary judgment in favour of Ripple Labs (“Ripple”) to the effect that Ripple was not in violation of securities offering rules at least with respect to two types of sales – namely, programmatic sales to public buyers on digital asset exchanges (“Programmatic Sales”) and other distributions to employees and third party service providers (“Other Distributions”).
At the same time, the Court granted summary judgment in favour of the SEC to the effect that Ripple’s sale of XRP tokens to institutional investors (“Institutional Sales”), primarily institutional buyers, hedge funds, and “on demand liquidity” customers, did violate securities offering rules.
The issue of whether Bradley Garlinghouse (former Ripple COO and current Ripple CEO, “Garlinghouse”) and Christian Larsen (former Ripple CEO and current Executive Chairman of Ripple’s Board of Directors, “Larsen”) were personally liable for aiding and abetting Ripple’s violation was also left open to be determined in later proceedings (“Aiding and Abetting Issue”).
While the Court’s decision has viewed in many corners as a ‘win’ for crypto and a declaration that tokens like XRP are not securities, we take the view that the opinion is not so positive.
All the opinion truly does is provide us with incremental information about what actions definitely make a coin a security (regardless of its ‘utility’) and provides at least one court’s view on how crypto businesses issuing coins should operate going forward.
As expanded on below, here are 3 practical takeaways from the Court’s decision:
Depending on how they are sold and marketed, utility tokens can be the subject of investment contracts. Having disclaimers and restrictions in token sale contracts does not change this position (such concepts actually make it obvious that there is an investment contract). Crypto businesses are expected to grow their communities and market presence organically. Raising funds from institutional investors remains a good way to kickstart / accelerate growth but the usual securities rules need to be followed (e.g. doing a Reg D filing if working with investors in the US).
Compliance risk assessments need to evolve beyond the utility versus security token analysis and place more emphasis on the token marketing and distribution strategies because that is a significant factor in determining whether (and what) securities rules need to be followed.
Obtaining legal memorandums or opinions is almost an expected “insurance policy” for both the businesses (and the management team). Such memorandums or opinions should cover both the nature of the tokens and how they will be marketed / distributed.
1. “HOW” you distribute is more important than “WHAT” you distribute
Sure, the utility versus security token analysis is an important consideration and it is comforting to see that the Court noted that XRP was not a security. But it is crucial to understand that the this question was never the thrust of the SEC’s case nor the focus of the Court’s decision. As the Court recognised:
“…ordinary assets—like gold, silver, and sugar—may be sold as investment contracts, depending on the circumstances of those sale . . . Plenty of items that can be consumed or used . . . have been the subject of transactions determined to be securities because they had the attributes of an investment. Even if XRP exhibits certain characteristics of a commodity or a currency, it may nonetheless be offered or sold as an investment contract.”
The Court was therefore not concerned with the question of XRP’s being a security or not. It was concerned with the question of whether the contracts for selling XRP were investment contracts. As we have known for quite some time, SAFTs themselves are securities. And, as would be expected, the Court noted that the SAFTs for the Institutional Sales constituted an unregistered securities offering.
In coming to this conclusion, the Court looked at how:
(1) XRP had used the funds from Institutional Sales to fund its operations (the fact that the funds were maintained in separate bank accounts by different Ripple subsidiaries did not matter);
(2) XRP was marketed to institutional investors (more on that below); and
(3) how the contracts with institutional investors had terms inconsistent with the idea that the XRP tokens were for consumer use (particularly: lock-up provisions, resale provisions, and indemnities arising out of the sale and distribution of XRP).
In contrast, distributions of tokens (assuming the tokens themselves are not securities) to public users through a digital asset exchange is clearly not a violation of securities rules.
The Programmatic Sales were not an investment contract in the Court’s eyes because the sales through exchanges were blind bid/ask transactions such that Ripple did not know who was buying XRP and the public buyers did not know where the XRP being bought was sourced from. As such, it could not be said that these public buyers were investing in Ripple, since they could not know whether they were buying directly from Ripple. The fact that they could very well be purchasing XRP for speculative purposes did not matter to the Court. Moreover, the Court found that the public buyers did not did not have access to the same marketing materials as the institutional investors, nor were buyers subject to any contractual restrictions imposed by Ripple.
Distributions of tokens to compensate employees and service providers will generally not be regarded as securities offerings. The Court found that the Other Distributions were not investment contracts because the “money” was flowing the other way – i.e. the recipients of XRP were being paid by Ripple in exchange for contribution of services rather than providing any funding to Ripple. However, the Court hinted that the assessment could be different if the employees or service providers were in a position of helping to facilitate payments to the project – for example, being a broker or market maker whose role is to sell project tokens to other parties and give the payments received back to the project after deducting their “cut”.
Projects should be aware that distributions of tokens to employees, in particular, may nevertheless have significant tax implications and while the Court may have adjudicated the security offering issue, it says nothing at all about tax. Projects should continue to refer their compensation and incentivization plans to their tax advisors prior to distribution.
2. Marketing – consider the focus of the message, access rights, and the level of audience sophistication
How Ripple marketed XRP played a significant part in the Court’s determination that the Institutional Sales are securities offerings.
The Court noted that the focus of the marketing materials provided by Ripple to investors explicitly connected the efforts of Ripple as an enterprise to the price of XRP. In other words, the documentation treated XRP exactly as one would treat a security. Ripple’s senior leaders replicated their explicit linkage between the two on various social media platforms.
Examples:
One of Ripple’s marketing reports to institutional investors stated that Ripple’s efforts in “continu[ing] to sign up banks to commercially deploy its enterprise blockchain solution and join its global payments network”—may have had an impact on XRP’s price increase and “impressive” trading volume.”
One of Ripple’s co-founders (who was also the Chief Cryptographer) posted on Reddit that: “Ripple can justify spending $100 million on a project if it could reasonably be expected to increase the price of XRP by one penny over the long term.”
This explicit “linking language” was then connected by the Court to a mismatch in access to information. By providing institutional investors with information that is different from that provided to the general public, Ripple was ensuring that the relationship between Ripple and these institutional investors was special. Not only did they have access that no other investor had, they had access to information that appeared to treat them as being different in their level of sophistication from the general public. This differentiated treatment of institutional investors led the Court to find that Ripple was communicating to institutional investors that they would derive profits from the efforts of Ripple as an enterprise if they purchased XRP.
According to the Court:
“An ‘examination of the entirety of the parties’ understandings and expectations,’ including the ‘full set of contracts, expectations, and understandings centered on the sales and distribution of’ XRP supports the conclusion that a reasonable investor, situated in the position of the Institutional Buyers, would have been aware of Ripple’s marketing campaign and public statements connecting XRP’s price to its own efforts.”
The Court took the view that public buyers participating in the Programmatic Sale who were less sophisticated would not share the same level of understanding:
“There is no evidence that a reasonable Programmatic Buyer, who was generally less sophisticated as an investor, shared similar “understandings and expectations” and could parse through the multiple documents and statements that the SEC highlights, which include statements (sometimes inconsistent) across many social media platforms and news sites from a variety of Ripple speakers (with different levels of authority) over an extended eight-year period.”
It is important to pause here and note that the SEC and courts have always taken a dim view of any difference in access to information, so the fact that access to information is important cannot be a surprise to anyone. The key takeaway is that information about a project should be the same for all categories of persons.
It is also important to pause and appreciate what it means that the Court parrots the SEC’s position that “normal humans” cannot possibly read up on and become knowledgeable about a topic. If a buyer is not an institution, or rich, or can prove a lengthy trading career, then he or she is forever a “mom and pop” of dubious sophistication in the eyes of the SEC and the Courts, and therefore requires special protections. Whether or not you agree with this theory, the key takeaway is that a project’s marketing strategies must be written for the least sophisticated audience.
So, whether or not a token is a security, the marketing materials for that token: (a) cannot use the language of investments nor refer to the typical marketing hype where the project and the token are linked; (b) the information must not change depending on the final recipient; and (c) must be written for the “lowest common denominator”.
In particular, we wish to emphasize that the above takeaways mean that social media posts cannot be made with abandon. We refer to when Elon Musk got in trouble with the SEC for his tweets that were reprehensible not so much for content but because his tweets, made only on Twitter, altered the ‘information access’ part of the equation when he asked his twitter followers whether he should sell shares to pay his taxes. “Mom and pop” may, after all, not have Twitter accounts and would have been taken by surprise when the price dropped. Therefore we reiterate as strongly as possible that whatever is posted cannot differ in any way from what is written in the white paper or told to potential token buyers. Discipline is key. Please note that this rule applies to any post in whatever language and likely on whatever platform (even or perhaps especially if the media platform is not owned by an American company).
3. The role of the lawyers
While the Court had enough information to make a determination on whether the Institutional Sales are securities offerings, it determined that it did not have enough information to decide on the Aiding and Abetting Issue, that is, whether Garlinghouse and Larsen are personally liable for the violations of the laws by Ripple.
As the Court clarified, the SEC did not have to show that Garlinghouse and Larsen actually knew that Ripple’s transactions and schemes were illegal. The SEC only needed to show that Garlinghouse and Larsen knew or recklessly disregarded the facts that made Ripple’s transactions and schemes illegal.
One of the main reasons why the Court decided that the SEC did not have an easy case to show that Garlinghouse and Larsen knew or recklessly disregarded the relevant facts is because Ripple had obtained a legal memorandum from a multinational law firm in the US to the effect that XRP is not a security and undertook specific steps to ensure compliance with the guidance and advice provided by the legal memorandum.
Of course, it also helped that regulators from other jurisdictions where Ripple was operating had also previously determined that XRP was not a security, adding further credence to the position taken by the lawyers in the legal memorandum.
The takeaway here is that a legal opinion or memorandum (for tax as well) should always be among the most important elements of a project. Once a project had thought through how it will work and has a concrete plan, that plan must be run by the lawyers. If restructuring is required, it must be done. In the end, it may be that a Court disagrees with the opinion of the lawyer, but the Court will never penalize a project for having followed the advice of its advisors. The project may still be fined and penalized, but the size of the fine or penalty, and whether founders and employees become personally liable, will be determined by how professionally they acted with respect to seeking out and following legal (and tax )advice.
Centrium Advisory advises crypto businesses on the relevant risks (both compliance and operational) so as to optimise processes for the relevant stage of growth. Once we have worked with a project to recalibrate and refine the business model, we can arrange for competent and experienced legal partners to “bless” the overall plan.
Enhanced Expectations on Operators of Private Funds in the Cayman Islands
On 14 April 2023, CIMA announced various updated regulatory measures, including a Statement of Guidance on Corporate Governance – Mutual Funds and Private Funds (“SOG”). The focus of these changes is on modernizing and streamlining pre-existing measures regarding corporate governance and internal controls across the board for all regulated entities. Regulated entities are expected to comply with these updated regulatory measures by 14 October 2023.
One of the significant changes is that the measures now extend to private funds, when previously they only applied to mutual funds.
This write-up takes a look at each aspect covered by the SOG and the practical considerations private funds should keep in mind to comply with the enhanced regulatory expectations.
1. Oversight function of the Operators
The SOG, along with the other updated regulatory measures, recognize the operators of a regulated fund as its governing body. The “operator” is the Board of Directors where the fund is a corporation, the general partner where the fund is a partnership, the manager (or equivalent) where the entity is a limited liability company, and the board of trustees where the entity is a trust business.
The SOG states that a regulated fund should “constitute an appropriate number of individual(s), as required by the relevant regulatory acts and regulations, as applicable, with a diversity of skills, background, experience and expertise to ensure that there is an overall adequate level of competence at the operators level.”
In terms of the actual number of such experienced persons, a fund needs to follow the “four-eyes principle”. Basically, there must be at least 2 sets of experienced eyes to keep watch over things (so at least 2 directors for a company or at least 2 natural persons for the general partner of a partnership). It is unclear whether the principle extends to funds structured as limited liability companies. However, a prudent approach entails there being at least 2 managers for funds structured as limited liability companies, especially since proportionality and consistency are overarching themes of CIMA’s updated regulatory measures.
The operators can outsource functions to service providers (fund administration, fund managers, AML/KYC, asset custody etc) but the ultimate responsibility (and accountability to CIMA) rests with the operators. Operators must remain up to date about WHAT the service providers are up to and HOW the service providers are performing.
So, a fund should have its own policies / adopt the policies of its service providers to make sure there are a consistent set of standards for how the fund will be run. Operators must ensure that such policies include procedures for reviewing and updating such policies regularly.
2. Conflicts of Interest
The SOG emphasizes that each regulated fund needs to have a written conflicts of interest policy.
Operators must be cognizant of how and when conflicts of interests may arise and have procedures in place to identify, disclose, monitor and manage such conflicts.
It is imperative that the operators have a robust conflicts of interest framework that flag and address any areas of concern, not just when operators’ other interests are involved but when the interests of service providers (e.g. the fund manager, valuer etc) are involved too.
An important aspect that is intrinsically tied to a good conflicts of interest policy (but usually overlooked) is how the operators (and their employees, consultants, advisors and agents) are compensated. There should be a written policy in place to ensure that such payments align incentives with the fund’s objectives and the interests of investors. Payment arrangements should not encourage excessive or inappropriate risk taking.
3. Operator meetings, duties of operators and documentation of meetings
The SOG states that the operators of a private fund should meet at least once a year. A higher frequency of meetings may be necessary depending on the size, complexity, structure, nature of business and risk profile of its operations.
The SOG also expressly sets out a list of duties that CIMA expects from operators, which generally require staying on top of the fund’s operations and acting in a manner that is compliant, transparent, prudent and in the investors’ best interest.
Operators now need to pay more attention on how decision-making is carried out, and more importantly, recorded.
The SOG states that meeting records should include:
The agenda items and circulated documents.
A list of attendees present at the meeting and whether that attendance was in person or via telephone or video conference.
The matters considered and decisions made.
The information requested from, and provided by, service providers and advisors.
A declaration of conflicts of interest.
Meeting records should show that the operators are carrying out their CIMA prescribed duties. In line with the expectation that the operators serve the oversight function, it may not always be sufficient for the meeting records to show information requested from or provided by service providers. It is prudent to also show that the operators are in regular communications with service providers (i.e. the input from service providers are up to date and refreshed). Where appropriate, service providers may even be involved in the meetings with the operators.
4. Relations with CIMA
The SOG requires operators to conduct a regulated fund’s affairs with CIMA in a transparent and honest manner. Operators must always disclose to CIMA:
any matter which could materially and adversely affect the financial soundness of the regulated fund (i.e., the regulated fund’s ability to continue as a going concern); and
any non-compliance with the applicable acts, regulations, and regulatory measures, including those of CIMA.
Previously, a private fund would simply make sure that certain information (e.g. annual returns, audit, economic substance notification and tax) were reported by statutory deadlines. A tricky enough process (especially when there are multiple entities involved) but one that can be managed by developing a reliable compliance calendar and tasking someone or a team to stay on top of it.
With the SOG, it is no longer just the case of sharing such information with CIMA at predefined intervals. The SOG places an emphasis on active communication with CIMA in an honest and transparent manner whenever the operators of a fund are aware of any matter that potentially affects the financial soundness of the fund or any compliance breach.
It is therefore all the more important for a private fund to have proper record keeping and monitoring protocols in place to signal when an issue needs to be flagged for internal action and when things need to be escalated as a report to CIMA.
5. Risk Management
The SOG requires operators to ensure that there is suitable oversight of the risk management of the regulated fund such that the fund’s risks are always appropriately managed and mitigated, with material risks being discussed at operator meeting and the operators taking appropriate action where necessary.
It is not enough for operators to just identify risks in the fund’s offering documents and disclaim liability if such risks happen. The operators need to demonstrate that there is a framework for proactively assessing and managing such risks – especially material / more likely risks such as conflicts of interest and trading, counterparty and custody risks.
We function as an outsourced general counsel / compliance department for funds. If you have questions about the SOG or would like a review of your current fund operations to see how well they line up with the SOG, contact us at cateam@centriumadvisory.com.
Centrium’s Erika Evasdottir is interviewed by Block-Sol following her presentation on “Investor Readiness for Start-Ups”at Blockchain Fest 2023
Video by Block-Sol: https://www.youtube.com/watch?v=uh1nM2Cegmo&feature=youtu.be
Capital Markets Services Licence
Singapore
Singapore Capital Markets Services Licence
Next: Inland Revenue Department’s New Guidance on Profits Tax with respect to Digital Assets
What is a Capital Markets Services Licence ("CMSL")?
If your company ("Company" or "Applicant") wishes to conduct regulated activities ("Regulated Activities") under Singapore's Securities and Futures Act (SFA), it must hold a CMS licence and therefore must apply for one.
The Regulated Activities include the following:
Fund management (i.e., managing the property of, or operating, a collective investment scheme, or undertaking on behalf of a customer (whether on a discretionary authority granted by the customer or otherwise) (a) the management of a portfolio of capital markets products; or (b) the entry into spot foreign exchange contracts for the purpose of managing the customer’s funds, but does not include real estate investment trust management.)
Advising on corporate finance
Dealing in capital markets products (e.g. securities, units in a collective investment scheme (CIS), over-the-counter (OTC) derivatives or exchange-traded derivatives)
Real estate investment trust management
Product financing
Providing credit rating services
Providing custodial services for securities
What are the CMSL's application requirements?
When assessing an application for a CMSL, the Monetary Authority of Singapore ("MAS") takes into account factors such as:
i. Fitness and propriety of the Applicant, its shareholders and directors.ii. Track record and management expertise of the Applicant and its parent company or major shareholders.
iii. Ability to meet the minimum financial requirements prescribed under the SFA (see Part C below).
iv. Strength of internal risk management and compliance systems.
v. Business model/plans and projections and the associated risks.
Your Company will also need to appoint the following individuals:
i. Minimum of 2 directors, at least one is resident in Singapore.
ii. Chief Executive Officer with least 10 years of relevant experience and is resident in Singapore.
iii. Minimum of 2 full-time Singapore-based individuals for each Regulated Activity (except REIT management). Such individuals are required to be appointed as representatives under the SFA.
Financial Requirements
Quick Links
Williams v. Binance: An American Nightmare?
Ripple v. SEC: A Hollow Victory for Crypto?
Enhanced Expectations on Operators of Private Funds in the Cayman Islands
Singapore Capital Markets Services Licence
Inland Revenue Department’s New Guidance on Profits Tax with respect to Digital Assets
New Registration Requirements for Cayman Islands Funds
The EU Removes the Cayman Islands from the EU Tax Blacklist
Cyberport Venture Capital Forum 2020: Update
Centrium Presents at the 19th Annual ALB Hong Kong Law Awards
Centrium’s Sandra Wu Speaks at a Dutch Chamber of Commerce Webinar
Cayman Islands Virtual Asset (Service Providers) Law, 2020
Centrium’s Erika Evasdottir Speaks at Deacons’ Virtual In-House Corporate Counsel Forum 2021
Financial Requirements
4. How to Apply
Submit Form 1 under the Securities and Futures (Licensing and Conduct of Business) Regulations (SF(LCB)R) and pay a non-refundable application fee.
5. Timing
This application process will take 3-4 months for straightforward applicants (with previously licenced representatives) and 4-6 months on more complicated applications.
NEXT STEPS
Please reach out to CASL if you are interested in applying for the CMSL.
CASL can assist with:
your CMSL application
introducing and liaising with the Regulators (e.g. MAS)
project-managing third party service providers (e.g. local directors) that can help with or are required for the CMSL application
drafting compliance and operational manuals etc.
conducting mock interviews so you are prepared for meetings with regulators
New Guidance on Profits Tax
with respect to Digital Assets
Hong Kong
Inland Revenue Department’s New Guidance on Profits Tax with respect to Digital Assets
Previous: Singapore Capital Markets Services Licence
Next: New Registration Requirements for Cayman Islands Funds
In March 2020, Hong Kong’s Inland Revenue Department (“IRD”) issued guidance notes regarding the IRD’s views on profits tax with respect to digital assets (“Digital Assets”). The IRD takes the view that profits tax treatment of Digital Assets would depend on their nature and use.
As a reminder, Hong Kong has only profits tax, salaries tax, withholding tax and stamp duty on the transfer of shares and immovable property. There is no capital gains tax or sales tax (VAT/GST) in Hong Kong.
Background
To the IRD, Digital Assets consist of payment tokens, security tokens and utility tokens.
Payment tokens: used as a means of payment for goods or services and encompass Digital Assets.
Security tokens: provide the holder with particular interests and rights in a business.
Utility tokens: provide the holder with access to particular goods or services which are typically provided using a blockchain platform.
Under Section 14 of the Inland Revenue Ordinance (Cap. 112), profits tax shall be charged on every person carrying on a trade, profession or business in Hong Kong in respect of his or her assessable profits arising in or derived from Hong Kong from such trade, profession or business. Before a charge to tax can arise, three conditions must be satisfied:
the person must carry on a trade, profession or business in Hong Kong;
the profits to be charged must be from such trade, profession or business carried on by the person in Hong Kong; and
the profits must be “profits arising in or derived from” Hong Kong.
Profits Tax with respect to Digital Assets in Hong Kong
Initial Coin Offering ("ICO")
An ICO involves the issuance of new digital tokens by an issuer to the subscribers (i.e. token holders) in exchange for their Digital Assets or fiat currency (i.e. legal tender whose value is backed by the government that issued it).
The tax treatment of the proceeds from an ICO generally follows from the attributes of the tokens that are issued. It is the nature of the rights and obligations of the tokens, not the form in which the tokens are issued, that determine the tax treatment.
Security tokens - the proceeds of the ICO would be capital in nature.
Utility tokens - the proceeds of the ICO would be viewed as a prepayment for future goods or services. Therefore, profits arising in or derived from Hong Kong from the ICO can be charged to profits tax.
Digital Assets Held for Investment
If Digital Assets are bought (e.g. through an ICO or Digital Assets exchange) for long-term investment purposes, any profits from the disposal would not give rise to profits tax.
Businesses Involving Digital Assets
Hong Kong-sourced profits from businesses involving Digital Assets are chargeable to profits tax. Some examples of such businesses include trading in Digital Assets, Digital Asset exchanges, and the mining of Digital Assets.
Digital Assets Used in Business Transactions
A person engaging in a business may conduct transactions using Digital Assets for various purposes (e.g. a person may accept Digital Assets as payment from customers or use it for purchasing goods). The market value of the Digital Asset accrued at the date of transaction should reflect the amount of sales and purchases.
Digital Assets as Employee Income
If employees receive remuneration (e.g. salary) in Digital Assets, the same salaries tax treatment would apply to such income from employment even though it is paid in Digital Assets. The amount to be reported as the employee’s employment income should be the market value of the Digital Asset at the time of accrual.
NEXT STEPS
If you are:
an ICO issuer;
conducting a business involving Digital Assets;
Receiving renumeration in the form of Digital Assets; or
Having questions about profits tax with respect to Digital Assets
Please reach out to CASL so that we can help you:
conduct a gap analysis on your current setup;
assist with compliance with the IRD’s new guidance notes on profits tax with respect to Digital Assets; and/or
connect you with a suitable service provider for your profits tax planning.
New Registration Requirements
Cayman Islands
New Registration Requirements for Cayman Islands Funds
Previous: Inland Revenue Department’s New Guidance on Profits Tax with respect to Digital Assets
Next: The EU Removes the Cayman Islands from the EU Tax Blacklist
In February 2020, the Cayman Islands government has further enhanced the oversight and regulation of Cayman Islands investment funds through updates to the Mutual Funds Law (2020 Revision) (“MFL”) that continues to regulate open-ended investment funds and the introduction of the Private Funds Law 2020 (“PFL”) that now brings closed-ended investment funds into scope for regulation by the Cayman Islands Monetary Authority (“CIMA”).
Open-ended Funds under the MFL
Key Requirements: The MFL eliminates the exemption from CIMA registration of section 4(4) funds with fifteen (15) or fewer investors where the majority of those investors are capable of appointing or removing the fund’s operator.
Previously exempted section 4(4) funds and new section 4(4) funds are each now required to:
Register with CIMA, which shall entail:
filing a certified copy of the fund’s constitutive documents which specify that a majority of investors in number are capable of appointing or removing the operator of the fund;
filing such other information as may be required in the prescribed form; and
payment of the prescribed registration fee;
Have at least two (2) directors that are required to register on the CIMA Director Gateway in accordance with the Directors Registration and Licensing Law; and
Have its accounts audited annually by a CIMA- approved local Cayman-based audit firm and have such accounts and an annual return filed with CIMA.
Key Date: All new section 4(4) funds will need to comply immediately with the MFL while existing section 4(4) funds will have a transitional period until August 7, 2020 to comply and all managers and operators of section 4(4) funds will be responsible for compliance.
Closed-ended Funds under the PFL
Key Requirements: Prior to the enactment of the PFL, closed-ended private funds were not regulated by CIMA and, hence, not required to register with CIMA. The PFL now provides for private funds’ registration with, and their regulation by, CIMA.
Existing private funds and new private funds are each now required to:
Register with CIMA, which shall entail providing details of the fund, its structure and its service providers;
Have at least two (2) directors appointed in respect of a general partner or corporate director of a Private Fund;
Have an asset valuation performed by:
an independent third party;
the manager or operator of the fund (provided that the valuation function is independent from the portfolio management function or that potential conflicts are properly identified and disclosed); or
an administrator and must be carried out at a frequency that is appropriate to the assets held by the private fund and in any case at least on an annual basis;
Appoint a custodian to hold, in segregated accounts, the custodial fund assets and verify and maintain a record of other fund assets to which the fund holds title (unless it is neither practical nor proportionate to appoint a custodian which in that instance, the private fund must notify CIMA and appoint either an independent third party or, subject to appropriate conflicts management, the manager or operator to carry out the title verification);
Appoint either an administrator, custodian, independent third party or, subject to appropriate conflicts management, the manager or operator to perform cash monitoring; and
Maintain a record of the identification codes of the securities and make these available to CIMA upon request if the private fund regularly trades securities or holds them on a consistent basis.
Key Date: All new private funds will need to comply immediately with the PFL while existing private funds will have a transitional period until August 7, 2020 to comply and all managers and operators of such private funds will be responsible for compliance.
NEXT STEPS
If you are:
an existing section 4(4) fund;
an existing private fund; or
planning to setup a section 4(4) fund or private fund;
Please reach out so that we can:
conduct a gap analysis on your current section 4(4) fund or private fund setup;
assist with compliance with the MFL and/or PFL; and/or
connect you with a suitable service provider for your fund and budget.
The EU Removes the Cayman Islands From the EU Tax Blacklist
The EU Removes the Cayman Islands From the EU Tax Blacklist
Previous: New Registration Requirements for Cayman Islands Funds
Next: Cyberport Venture Capital Forum 2020: How to Handle Due Diligence and How to Impress Investors with Compliance and Governance
On October 6, 2020, the European Council (“Council”) removed the Cayman Islands from the EU blacklist of non-cooperative jurisdictions (“List”) for tax purposes, which is a positive results for Cayman Islands companies with EU connections and, in particular, the funds industry.
The List is of non-EU countries that encourage abusive tax practices, which erode member states’ corporate tax revenue. The Cayman Islands was added to the List on February 18, 2020. The Council’s reasoning for the addition of the Cayman Islands to the blacklist was because “[the] Cayman Islands does not have appropriate measures in place relating to economic substance in the area of collective investment vehicles.” There were issues too with timing, as the Cayman Islands was late in passing certain legislation wanted by the EU.
After being put on the List, the Cayman Islands passed and enacted The Private Funds Law 2020 and Mutual Funds (Amendment) Law 2020. The Cayman Island’s financial services regulator, the Cayman Islands Monetary Authority, was also given regulatory authority over all funds in the Cayman Islands rather than merely a subset. These measures have satisfied the EU that the Cayman Islands is now a cooperative jurisdiction for tax purposes.
The effect on the Cayman Islands of being blacklisted did not result in sanctions or penalties. However, because investors, particularly institution investors or individuals in certain tax jurisdictions such as France, would find investing into funds located in blacklisted jurisdictions a difficult proposition, the Cayman Islands’ listing as uncooperative did have a negative impact on the funds industry in the Cayman.
Now that the Cayman Islands is off the List, asset managers with Cayman Islands entities in their structures will no longer have to worry about the restrictive, and possibly even punitive, consequences of the defensive measures EU member states are required to adopt against non-cooperative jurisdictions by the end of 2020. Certain DAC 6 reporting obligations are now also avoided. The Cayman Islands now has stronger regulations on AML/KYC and tax transparency than many onshore countries and, despite this slight hiccup caused by delays in passing relevant regulation, will continue to be the offshore jurisdiction of choice particularly for the institutionalized fund industry.
The Cayman Islands Government press release can be found at this link: https://www.gov.ky/news/press-release-details/cayman-islands-government-welcomes-eu-listing-decision#:~:text=The%20Cayman%20Islands%20Government%20welcomes,cooperative%20jurisdictions%20for%20tax%20purposes.&te
Cyberport Venture Capital Forum 2020: How to Handle Due Diligence and How to Impress Investors with Compliance and Governance
Centrium’s Erika Evasdottir Presents at the Cyberport Venture Capital Forum 2020
Previous: THE EU REMOVES THE CAYMAN ISLANDS FROM THE EU TAX BLACKLIST
Next: Cyberport Venture Capital Form 2020: Update
Please join our Co-Founder and Managing Director, Erika Evasdottir, at the Cyberport Venture Capital Form on November 3, 2020 at 15:00 to 16:00 (Hong Kong time). With extensive experience from working in law firms and in-house on corporate and fund transactions in Asia, Erika will be sharing her insights with respect to “How to Handle Due Diligence and How to Impress Investors with Compliance and Governance”.
Please find more information about the event at https://cvcf.cyberport.hk/programme/rundown/year/2020.
Please register now for the event at https://app.eventxtra.com/registrations/8d401311-37d3-4a86-9705-b62827d2f71d?locale=en.
Cyberport Venture Capital Forum 2020: Update
Cyberport Venture Capital Form 2020: Update
PREVIOUS: centrium’s erika evasdottir presents at the cyberport venture capital forum 2020
NEXT: centrium’s sandra Wu speaks at the cfa society hong kong
We are delighted to share that our Co-Founder and Managing Director, Erika Evasdottir, on November 3, 2020, presented at the Cyberport Venture Capital Form on the topic of “How to Handle Due Diligence and How to Impress Investors with Compliance and Governance”.
Please see her talk at the following link: https://www.youtube.com/watch?v=JLO7Ed8wC1w&ab_channel=CVCF2020 and her presentation slides at the following link: https://cvcf.cyberport.hk/mediacentre/presentation#presentation-7.
Centrium’s Sandra Wu Speaks at the CFA Society Hong Kong
Centrium’s Sandra Wu Speaks at the CFA Society Hong Kong: Hong Kong Limited Fund Partnership Ordinance - Latest Developments and Where Do We Go From Here?
PREVIOUS: Centrium’s Erika Evasdottir Presents at the Cyberport Venture Capital Forum 2020: Update
NEXT: CENTRIUM presents at the 19th annual alb hong kong law awards
We are delighted to share that our Co-Founder and Managing Director, Sandra Wu, on November 23, 2020, spoke as a panelist on a webinar presented by the CFA Society Hong Kong on the topic of ‘Hong Kong Limited Fund Partnership Ordinance (LPFO) - latest developments and where do we go from here?’. With a panel of speakers that included seasoned experts from the regulatory, legal, tax, fund management, and capital raising sectors, Sandra and the other panelists shared their thoughts and views on the LPFO drawing from experiences in their respective fields.
Please find more information about the event at https://www.hksfa.org/event_details_identity.php?id=1033.
Centrium Presents at the 19th Annual ALB Hong Kong Law Awards
Centrium’s Sandra Wu Presents the Award of ACC HK Award Hong Kong In-House Team of the Year at the 19th Annual ALB Hong Kong Law Awards
PREVIOUS: Centrium’s Sandra Wu speaks at the Cfa society Hong kong
NEXT: CENTRIUM’s sandra wu speaks at a dutch chamber of commerce webinar
On November 27, 2020, our Co-Founder and Managing Director, Sandra Wu, who is also the President of the Association of Corporate Counsels Hong Kong, served as a judge and presented the award of ACC HK Award Hong Kong In-House Team of the Year at the 19th annual ALB Hong Kong Law Virtual Awards Ceremony.
Centrium would like to extend its congratulations to the winner of the award, Ant Group, and the other finalists as follows:
AXA
China International Capital Corp (Hong Kong)
ESR Cayman
Fung Group
Hang Lung Group
ICBC International
Klook
Link Asset Management
State Grid Overseas Investment
Telstra International
Uber Technologies
Please find more information about the event at: https://www.legalbusinessonline.com/sites/default/files/e-magazines/ALB-HKLA-2020-E-Programme-Guide/viewer/desktop/index.html?doc=0D2A39CED978968988D4084E8CE25ACC.
Centrium’s Sandra Wu Speaks at a Dutch Chamber of Commerce Webinar
Centrium’s Sandra Wu Speaks at a Dutch Chamber of Commerce Webinar - ‘How to Brace for Change and Manage your Finances During Uncertain Times’
PREVIOUS: CENTRIUm presents at the 19th annual ALb hong kong law awards
NEXT: Cayman Islands virtual Asset (service Providers law), 2020
We are delighted to share that our Co-Founder and Managing Director, Sandra Wu, on December 1, 2020, spoke as a panelist on a webinar presented by the Dutch Chamber of Commerce on the topic of ‘How to Brace for Change and Manage your Finances During Uncertain Times’. With a panel of HR and financial experts, Sandra and the other panelists shared their thoughts and views on how to handle redundancy plans and manage financial flexibility during uncertain times. The presentation was concluded with an interactive Q&A session moderated by Sandra.
Please find more information about the event at https://dutchchamhk.glueup.com/event/how-to-brace-for-change-and-manage-your-finances-during-uncertain-times-29767/home.html.
Cayman Islands Virtual Asset (Service Providers) Law, 2020
Cayman Islands Virtual Asset (Service Providers) Law, 2020
PREVIOUS: CENTRIUM’S SANDRA WU SPEAKS AT A DUTCH CHAMBER OF COMMERCE WEBINAR
NEXT: CENTRIUM’s Erika Evasdottir speaks at Deacons’ virtual in-house corporate counsel forum 2021
In October 2020, the Cayman Islands government introduced the Virtual Asset (Service Providers) Law, 2020 (as amended) (“VASP Law”) that now provides a registration and licensing regime for any person carrying on a “virtual asset service” in the course of a business using a Cayman Islands entity or otherwise from within the Cayman Islands (“VASP”).
The VASP Law is the result of and driven by AML/KYC concerns raised by FATF and the EU and tax avoidance concerns. AML/KYC concerns are key drivers and all VASPs (and indeed, most if not all Cayman companies of whatever form) must have AML/KYC officers and procedures and processes in place.
Note that as a part of this update of relevant laws, the Cayman Islands has increased their AML/KYC requirements which have become quite sophisticated. For example, they now require information to authenticate and verify identity such as IP address with associated time stamp; geo-location data; device identifiers; white lists (and comparisons against blacklists of known addresses associated with malicious individuals or activities, including mixers).
Please see end of update for the impact on each different VASP (exchange/platform; token issuers; custodians; and crypto funds).
VASP LAW
Definition of Virtual Assets
The VASP Law defines virtual assets as “a digital representation of value that can be digitally traded or transferred and can be used for payment or investment purposes but does not include a digital representation of fiat currencies”. This will include all cryptocurrencies, security tokens, utility tokens or other digital assets that are tradeable or transferable, with the exception of government-issued virtual currencies.
Virtual Asset Services
Under the VASP Law, virtual asset services are defined as the issuance of virtual assets or the business of providing one or more of the following services or operations for or on behalf of a natural or legal person or legal arrangement:
Virtual asset exchange (whether to or from fiat or other virtual assets);
Transfers of virtual assets (catches exchange platforms and OTP Desks);
Custody services; or
Participation in, and provision of, financial services related to a virtual asset issuance or the sale of a virtual asset (catches ICOs).
Registration and Licensing Requirements
Generally, a provider of virtual asset custody services or a virtual asset trading platform (“VATP”) operator will need to be licensed under the VASP Law. Other VASPs will generally be required to be registered. However, it is open to the Cayman Islands Monetary Authority (“CIMA”) to direct that any VASP be licensed or apply for a sandbox licence. Having said that, it is important to note that the licensing regime is currently not in effect (and is expected in June 2021).
Depending on the type of virtual asset service a VASP is engaged in, VASPs that are currently conducting a virtual asset service must:
Continue to comply with the Cayman Islands money laundering, countering the financing of terrorism, countering proliferation financing and sanctions regimes. This includes appointing natural persons to act as the VASP’s anti-money laundering compliance officer, money laundering reporting officer and deputy money laundering reporting officer;
Either register with or notify CIMA (if already a licensee under other regulatory laws) through the CIMA online REEFS portal; and
Pay a non-refundable assessment fee of approximately US$1,220 (the non-refundable assessment fee is paid on the initial filing and then a further application fee will be payable if the registration application is approved).
Key Dates
Cayman entities wishing to perform virtual asset services for the first time after October 31, 2020 must be registered with CIMA before they can provide such services. (Licensing will happen in Phase 2, expected June 2021).
Cayman entities already providing virtual asset services before October 31, 2020 may continue to provide such services provided that they are registered before February 1, 2021.
NOTE: CIMA have stated that applications received after December 12, 2020 may not be processed before January 31, 2021 so it is important for all VASPs to proceed with their registration with CIMA as soon as possible. In other words, if you do not catch the December 12, 2020 date, you will have to stop performing any activities until you are registered.
Impact on Certain VASPs:
Exchanges/trading platforms:
Currently, existing law in Cayman forbids any exchanges save for the Cayman Island Stock Exchange. An amendment has been proposed to allow digital exchanges. Once exchanges are permitted, they will need a license, thus it is unlikely that they will be allowed prior to the beginning of the licensing regime in June 2021.
Trading platforms (VATP) require a license unless it (a) only provides a forum where sellers and buyers may post bids and offers or a forum where the parties trade in a separate platform or in a peer-to-peer manner and (b) does not provide custody (e.g. P2P, OTC). Note, however, that the VATPs that are exempt from licensing must nevertheless be registered.
OTC Desks with derivatives: may need to register as a VATP and register as a broker dealer under the Securities Investment Business Law of the Cayman Islands (“SIB Law”). This odd doubling up of regulatory regimes is because the two activities are different.
Businesses that exchange, trade or transfer virtual assets for and on behalf of themselves for their own benefit are not caught by the VASP Law.
Token issuers/ICOs:
Public issuances are explicitly caught by the VASP Law. To undertake a public issuance, the entity must be registered. After February 1, 2021, if raising over US$1.2 million, needs to be done as an IEO on a licensed VATP; if under US$1.2 million approval must be sought and received prior to issuance.
Private issuances are not caught by the VASP Law. To define “private”, please remember that the VASP Law is concerned with AML/KYC. Therefore, limited private sales to owners, affiliates and employees (all fully known and have undergone AML/KYC) are not likely to be within scope of the meaning of a virtual asset issuance. Airdrops and bonus issues for no consideration may also be permissible.
Custodians:
Custodians of virtual assets must be licensed. A custodian includes anyone (including virtual wallet providers) that hold or have access to, for and on behalf of other persons, the private keys (or similar) that can control a virtual asset.
Advisors/Providers of Financial Services:
If your business provides “financial services” to virtual asset issuances or sales, it is recommended that you register or apply for an exemption. It is unclear what financial services actually means, so caution is recommended.
Investment Funds:
Most fund entities registered under the Mutual Funds Law (“MF Law”) are out of scope. Note that many crypto funds undertake self-custody, but since that is not a business, it is not caught by the VASP Law.
However, funds that are open-ended and issue redeemable tokens instead of shares or other equity interests are now covered by changes to the MF Law – which means they must register (or be licensed, if they deal in retail investors) under the MF Law.
Investment Managers of crypto funds are in-scope, but it is currently unclear whether they must register with VASP (or apply for an exemption) since most of them if not all should already be registered under the SIB Law. The situation is subject to change as clarifications are being sought with the Cayman authorities as to how Investment Managers should respond.
Please reach out to your Centrium contact or info@centriumadvisory.com.
Please find more information at: https://www.cima.ky/upimages/commonfiles/1580934234GuidanceNotesAmendments-VirtualAssetServiceProvider_1580934234.pdf and http://gazettes.gov.ky/portal/pls/portal/docs/1/13022563.PDF.
Centrium’s Erika Evasdottir Speaks at Deacons’ Virtual In-House Corporate Counsel Forum 2021
Centrium’s Erika Evasdottir Speaks at Deacons’ Virtual In-House Corporate Counsel Forum 2021 - ‘Innovative Approaches to Compliance Training’
Previous: Cayman islands virtual asset (service providers) law, 2020
NEXT: Innovative Approaches to Compliance Training
Please join our Co-Founder and Managing Director, Erika Evasdottir, at Deacons’ Virtual In-House Corporate Counsel Forum 2021 on March 24, 2021 at 13:45 to 14:45 (Hong Kong time). With extensive experience from working in law firms and in-house on corporate and fund transactions in Asia, Erika will be sharing her insights with respect to how to conduct compliance training in a fun and human-centred way as well as leverage compliance training as a marketing tool.
Please find more information about the event at https://communications.deacons.com/18/1938/march-2021/invitation--in-house-corporate-counsel-forum-2021-(one-column---w-speakers)(13).asp?sid=49e9a3f0-96dc-4abc-bd08-3c101ab6081f.
Innovative Approaches to Compliance Training
PREVIOUS: Centrium’s erika evasdottir speaks at deacons’ virtual in-house corporate counsel forum 2021
NEXT: The Association of Corporate Counsel’s Summer Boat Party
We are delighted to share that our Co-Founder and Managing Director, Erika Evasdottir, on March 24, 2021, spoke as a panelist at Deacons’ Virtual In-House Corporate Counsel Forum 2021. Erika and the other panelists shared their thoughts and insights with respect to how to conduct compliance training in a fun and human-centred way as well as leverage compliance training as a marketing tool.
The commentary on the panel has been published in the July edition of the Hong Kong Lawyer. Please find more information with respect to the commentary at http://www.hk-lawyer.org/sites/default/files/e-magazines/HKL-JUL-2021/viewer/desktop/index.html?doc=D568CA627DA8B65E549B79EA98A9DC17#page/90.
The Association of Corporate Counsel’s Summer Boat Party
PREVIOUS: Innovative approaches to compliance training
On August 19, 2021, Erika Evasdottir, in her capacity as a director of The Association of Corporate Counsel, appeared and mingled with guests at The Association of Corporate Counsel’s summer boat party.
Please find more information with respect to the event at https://law.asia/acc-hk-summer-boat-party/.