Introduction
Blockchain and Cryptocurrency bring revolutionary impacts towards the world. This is an area that many entrepreneurs are eager to explore and develop their next big things. Establishing and finding a crypto friendly jurisdiction to set up a legal entity is an important next step to formally launch the business.
Jurisdictions such as Cayman Islands and BVI are often discussed as they allows to start a blockchain business with some favorable benefits. In this article, we will explore two jurisdictions that you can consider when establishing your crypto businesses.
| TLDR: Blockchain and Cryptocurrencies bring significant impacts on the world’s economy and business environment. For a blooming business, traditional jurisdiction found it hard to adapt to the new form of decentralized business nature, but many jurisdictions like the BVI and Cayman Islands provide favorable benefits for entrepreneurs to enter this new market. |
The topics to be covered in this guide includes:
Introduction of Blockchain and Cryptocurrencies
What is Blockchain
Blockchain is a chain of blocks that contains information so each block contains some data, the hash of the block and the hash of the previous block.
Blockchain is also known as a distributed database so once some data has been recorded inside a blockchain, it becomes very difficult to change it hence why hashes are useful when you want to detect changes in blocks. Once you change or tamper the block, it no longer becomes the same block and it makes the following blocks invalid because they no longer store a valid hash of the previous block.
To help prevent tampering of the block, blockchains have something called the proof of work which is a mechanism that slows down the creation of new blocks so if you tamper with one block, you will need to recalculate the proof of work for all the following blocks as well. Another way blockchains secure themselves is by being distributed via a Peer2Peer network (P2P network) so if you create a new block, the block is sent to everyone on the network and each node needs to verify the block to confirm that it hasn’t been tampered with. Once all the nodes, in the network, agree that the block is valid then each node adds the block to their own blockchain.
What is Cryptocurrency
Cryptocurrency is a digital currency that works on blockchain technology and is secured by cryptography, which makes it nearly impossible to counterfeit or double spend. It’s used as a medium online to buy goods and make payments and it’s different from other payment options because it’s free from any third party interference aka it’s not controlled by any government authorities or banks.
| Pros | Cons |
|---|---|
| 1. Bitcoin has user autonomy so the prices aren’t linked to specific government policies and the owners are in control of their money | 1. Transactions in most cryptocurrencies are anonymous and some of them can be untraceable so this can be easier for hackers to make payments without being noticed |
| 2. Transactions are conducted on a peer to peer basis so the transactions don’t require approval from an external source or authority | 2. If you lose your password then you could lose all your money |
| 3. Transaction don’t incur banking fees | 3. Large amounts of transactions can’t be processed quickly |
| 4. Cross Border Payments where an individual in one country can send coins to someone in a different country without any added difficulty | 4. They aren’t largely accepted as a form of payment |
Types of cryptocurrency
There are different kinds of cryptocurrencies available these days but these 9 are among some of the more well known currencies.
- Bitcoin (BTC)
- Ethereum (ETH)
- Bitcoin Cash (BCH)
- Litecoin (LTC)
- Ethereum Classic (ETC)
- Zcash (ZEC)
- Stellar Lumen (XLM)
- Bitcoin Satoshi’s Vision (BSV)
- Chainlink (LINK)
Key Challenges facing Cryptocurrency investments
Changing Regulations on hosting state
As Cryptocurrencies are gaining momentum globally, the government’s attempt to put regulations to govern them is also being made. There are hundreds of countries in the world and each one of them has its own legislative standpoint towards cryptocurrencies and what you can do with them. We can look into two countries’ regulations as a comparison example.
A country that accepts cryptocurrencies is Japan where crypto exchanges are required to be registered and comply with the traditional obligations. The gains on cryptocurrencies should be categorized as miscellaneous income and investors are taxed accordingly.
A country that doesn’t accept cryptocurrencies in China. The country is strict with its currency control regulations on the majority of foreign currencies and believes public financing without approval is illegal.
There are no current regulatory framework for cryptocurrencies and no government-backed cryptocurrencies in Cayman Island and British Virgin Island.
Complicated Tax Filing/ High Tax Rate
Each country has its own taxation structures and monitoring mechanism on cryptocurrencies that can make the tax filing complicated, they also have different tax rates.
For example in the US, cryptocurrency is viewed as a type of property so if you buy cryptocurrency, there’s no taxation involved but if you used the cryptocurrency by exchanging or buying goods and services then you will owe taxes if the value is greater than the price at which you acquired the cryptocurrency aka capital gain.
There is a short-term capital gains tax if you hold the security for one year or less and a long-term capital gains tax if it’s held for longer than a year. The tax rate on the capital gains varies between 0-37% if you sell them within a year and a 0-15% tax rate if it’s kept for more than a year. Any losses from the sales can be used to offset income tax up to $3,000 USD in total.
Currently, in the Cayman Islands and the British Virgin Islands, there are no specific taxes levied against cryptocurrencies and they don’t have any withholding tax, capital gain taxes, income tax, or corporate taxes for cryptocurrencies.
An offshore company as an option to manage Cryptocurrency investments
Utilizing an offshore company for crypto trading, especially in crypto-friendly jurisdictions, has become an attractive option. There is no regulatory framework that prohibits cryptocurrency or blockchain business in both the British Virgin Islands (BVI) and the Cayman Islands so currently, you can incorporate your company by…..
- Filing the incorporation of an International Business Company “IBC” at the Registry of the respective jurisdiction.
- Appointing at least one director either a legal entity or an individual.
- Appointing a minimum of one shareholder either a legal entity or an individual.
- Appointing a registered agent with a registered office in the respective jurisdiction. The registered agent shall maintain the corporate documents.
What you should consider when incorporating an offshore company for cryptocurrency business?
There are still some factors you should look into when choosing the right country on offshore company formation for crypto trading. Some key factors to keep in are….
Tax Rate
Both capital gain tax and VAT have to be taken into consideration. Other taxes such as withholding tax on remittance and dividend distribution tax should also be taken into consideration.
Costs of incorporation
Offshore crypto companies have incorporation costs and costs to obtain various licenses for trade-in crypto in a majority of countries if you are involved in the crypto trade on behalf of others.
Compliance requirements and costs associated with them
Crypto havens, like tax havens, are bound by several international compliance standards. This compliance may require you to disclose your crypto holdings and trade details affecting the privacy of the crypto trade. Offshore company formation for crypto trading attracts CFC rules (declare your foreign earnings in your tax return) thus both the offshore company countries and home country have to be considered.
Political stability
There are a lot of extreme opinions about cryptocurrencies and their advantages and disadvantages among countries. Some countries accept cryptocurrencies while others have banned them and made them illegal thus political stability in the country has a huge role when deciding which country you should choose.
How many options do we have here?
For cryptocurrencies, there are three infrastructures needed. Firstly you will need a wallet for your cryptocurrencies so any tokens or coins will have a place to be stored. Wallets are encrypted online bank accounts, essentially, with a unique address that allows you to send and receive tokens securely. Secondly, we will need mining software to download and use. For popular cryptocurrencies like bitcoin, you’ll find that there are multiple types of software that can be used. Lastly, we will need a powerful computer, perhaps even one specifically designed for mining. Some of these computers and the associated equipment, like graphics cards, can cost upward of $15,000 USD.
Common jurisdiction for crypto countries
British Virgin Islands (BVI)
The BVI’s Financial Service Commission approves the Financial Action Task Force’s definition of a virtual asset which is defined as a digital representation of value that can be digitally traded or transferred and be used for payment or investment reasons. Cryptocurrencies do not represent fiat currencies.
Where the Virtual asset product or service provides a right beyond a medium of exchange, it may be subjected to Securities and Investment Business Act (SIBA), 2010. Here is one example of a regulation governed by the SIBA regarding cryptocurrencies activities.
In Paragraph 1, Schedule 1 defines shares, interests in a partnership or fund interests, etc. as any of the following –
- shares in, and stock in the share capital of, a company;
- interests in a partnership;
- a fund interest in a mutual fund that does not fall within paragraph (a) or (b)
- Coins like Bitcoin, do not typically grant the holder rights synonymous with shares.
However, there have been instances where the manner in which the coin or token is used, and the rights attached thereto would grant the holder a share or equity interest. Where a token is therefore issued in this manner and confers such rights, the activity would be considered an investment as prescribed by schedule 1 of SIBA.
The Cayman Islands
The Virtual Asset Service Provider (VASP) establishes the legitimacy of cryptocurrencies and regulates businesses providing virtual assets services. If the virtual assets are used for their own purposes then there will be no specific regulation subjected to them.
Cryptocurrencies and other digital asset businesses are not subjected to any regulations in the Cayman Islands. VASPs are an entity that’s registered in the Cayman Islands, which provides a virtual asset service as a business and they are required to be registered or licensed with the Chartered Institute of Management Accountants (CIMA), obtain a waiver or hold a sandbox license.
Hong Kong
While cryptocurrencies are not considered as securities, the Securities and Futures Ordinance (SFC) has imposed regulatory requirements on fund managers and managers of investment portfolios, which invest in cryptocurrencies. Incorporating in Hong Kong and operating cryptocurrency exchanges are only required to be licensed in one of the cryptocurrencies is security.
Cryptocurrencies are not regulated by other financial regulators such as the Hong Kong Monetary Authority (HKMA) which has said that ‘’it doesn’t regulate cryptocurrencies since it is regarded as a virtual commodity and not a legal tender or a form of payment or money.’’ The country’s banking laws and regulations do not apply to companies accepting or dealing in cryptocurrencies.
Benefits of offshore company formation for cryptocurrency
More companies have been using an offshore company for cryptocurrency transactions due to its advantages and it’s easy nature to set up in another country like Hong Kong, the BVI, Singapore, etc.
Better privacy
One of the cryptocurrencies’ known features is their anonymous nature hence privacy is a desired feature that strives businesses to go offshore because when converting cryptocurrency to fiat currency or filing tax returns, the anonymity is lost. Devices that can be used for crypto trade can be traced by tracking methods hence affecting the privacy of traders which is why using an offshore company for different purposes of cryptocurrencies is a good solution as using multiple entities incorporated in different crypto-friendly countries can give more layers of protection and make tracing the crypto trade back to you more difficult.
Greater asset protection
Investors may use organizations in foreign jurisdictions in order to safeguard their assets since domestic taxes, reporting requirements and other potential sources of liabilities can be counteracted by managing assets outside of your native country. This also makes a clear distinction between your own personal assets and crypto assets so each asset doesn’t get affected due to the other one and considering how risky crypto trading can be, it’s best to establish a crypto company and safeguard your own personal assets.
Tax advantage
Different countries have different tax rules regarding cryptocurrencies because some countries treat them as financial assets subject to capital gains tax while others treat them as commodities. Some countries have zero or low capital gains taxes on cryptocurrencies while others have high capital gain taxes depending on the amount and duration of the security kept as we mentioned above hence the tax rules depend on the jurisdiction you wish to incorporate your offshore company.
There are also different rules for cryptocurrencies activities regarding an individual vs a business in different counties. An example is Belarus where a new law was released in March 2018 that stated legalized cryptocurrency activities exempted individuals and businesses involved in them from taxes until 2023 and mining and investing in cryptocurrencies were deemed as personal investments and so exempt from income tax and capital gains tax. In Hong Kong, if cryptocurrencies are bought for long-term investment purposes, any profits from them wouldn’t be charged for profits tax but for corporations, their Hong Kong sourced profits from cryptocurrency business activities are still chargeable for tax.
Challenges of setting up an offshore company for a cryptocurrency
Cryptocurrencies are still a new idea in the financial system and not many people are involved with it. Government laws around the world are still trying to figure out and come to a common rule for cryptocurrencies and many banks are still wary of the crypto operation regarding it as volatile and risky. Moving a crypto-based company offshore also comes along with challenges that are worth mentioning.
Cryptocurrency still cannot be replaced by fiat money
Regular currencies are still required to make regular payments so far since very few organizations accept payments in forms of cryptocurrencies for transactions. When utilizing an offshore company for crypto trading, it also has incorporation costs and also need to obtain various types of licenses to trade in crypto in majority of the countries if they are involved in crypto trade on behalf of others hence there will be additional costs of both time and extra costs for obtaining all the necessary licenses. Cryptocurrencies are also not allowed as a form of payment to pay for monthly salaries and make payments. In some occasions, payments can only go through via specific forms of platforms, such as Revolut. While there is great potential, there is still a long way to go for cryptocurrencies to be a practical solution in purchasing goods and services.
Few banks of choice
Due to cryptocurrency being classified as a high-risk business and the lack of regulations regarding it, lots of traditional financial institutions refuse to get involved with it hence making it impossible for individuals and organizations to open a bank account or utilize large banks for crypto-related activities. Many traders have solved this issue by using a cryptocurrency platform or bank.
High risk of volatility
Cryptocurrencies are considered risky assets since there is no government surveillance and there is price volatility that may go up and down so suddenly. An incident that showcased how volatile cryptocurrency can be was back in 2017, Bitcoin reached its peak of around $20,000 USD per bitcoin but just 4 months later, it plummeted down to $7,000 USD. Without any safety, cryptocurrency traders can experience potential losses.
Licensing and regulation on cryptocurrency of an offshore company
There are still many jurisdictions in the stage of figuring out how cryptocurrencies should be treated including obtaining necessary licenses and regulating crypto-related activities. What types of licenses are required for cryptocurrency businesses really depends on each jurisdiction however a typical rule is no license is needed for personal reasons but a license is needed for professional reasons. Popular types of licenses are cryptocurrency exchange license, broker’s license, financial services license, and money management license.
Controlled foreign corporations (CFC) refer to corporate entities owned and controlled by a resident of a particular country but are registered and carrying out their business outside of that country. The main purpose of CFC is to prevent tax evasion and they have a set of rules as to how taxpayers can declare their foreign earnings.
Both Cayman Islands and British Virgin Island are countries that allow cryptocurrencies for personal funds.
How can FastLane help
Fastlane Group is expert in helping SMEs and businesses. Our combination of extensive experiences and expert knowledge can help with your business plan to set up in an offshore company by providing market entry services, legal, tax, auditing, accounting, and banking support to ensure that once your company is set up, you will have all the appropriate support for your ongoing business needs. By leaving the complicated stuff to us, you can be at ease and spend more time focusing on your business.
Both the British Virgin Islands and Cayman Islands are part of the jurisdictions where we can assist you in offshoring your company.