May 31, 2024

Investor’s Guide to Crypto Funds and Trusts

Investors can access markets and digital assets through crypto funds and trusts with no need for direct ownership. Managed by specialized companies, these investment vehicles focus on diversification to maximize returns while minimizing risks for participants. Each investment approach comes with its own unique benefits and distinct features.ё

Криптофонды и трасты

Funds and trusts in the crypto investment sector

Crypto funds are specialized investment vehicles that channel resources directly into various digital assets:

  • coins
  • virtual currencies
  • NFT. 

They are characterized by a management structure and legal framework that is typically less complex than that of traditional investment funds. Designed for the long-term safeguarding of assets, crypto trusts offer their owners a consistent income over extended periods. In contrast, crypto funds seek to generate substantial returns through proactive portfolio management, which may involve more adventurous investment strategies.

To establish a thriving crypto fund or trust, you should adhere to the following requirements:

  • meet the jurisdiction’s regulatory standards
  • develop an adequate investment plan
  • execute thorough risk management measures. 

Adaptability to economic and legislative fluctuations is a key factor in the successful operation of a crypto fund or trust. Investors prioritize the security of their investments, making transparency and trust foundational to the establishment of these financial vehicles.

Focused on crafting financial regulatory tools, this industry still holds potential. Despite a slight slow-down, the momentum for growth remains strong. 

Crypto funds: forms and types

In response to societal demand, crypto funds are developing and their number is growing. Operating across multiple formats, they offer a variety of investment approaches to digital assets.

Open-ended crypto funds

These funds allow investors to buy or sell shares at any time based on the current asset value. In their turn, participants are free to join or leave the fund as they wish. 

Open-ended crypto funds cater to a wide range of investors, ensuring easy entry and adaptable investment management. By investing in them, you receive the opportunity to diversify your portfolio through digital assets that are bought and sold by the managing company in line with an established investment strategy.

Closed-end crypto funds

Closed-end crypto funds come with a limited number of shares you can invest in. Following the initial placement period, these funds close to new investors. The managing company holds a one-time fundraising event. Typically, the shares are not available for redemption or purchase by new investors thereafter.

Fund of funds

Funds of funds are investment entities that direct resources into other funds instead of directly purchasing single assets. The goal is to achieve asset diversification by capitalizing on constituent funds’ diverse strategies.

High-frequency trading funds

High-frequency trading funds, or HFT funds, use cutting-edge technology to implement risk strategies. They employ computer algorithms to execute numerous trades in a short period, targeting profits from minor price differences and arbitrage opportunities.

DeFi and NFT-focused funds

DeFi and NFT-focused funds invest in projects and assets in the fields of decentralized finance and non-fungible tokens. This strategy allows for portfolio diversification through thorough research and analysis to assess the potential and risks of specific investments.

Capitalizing on the increasing interest in DeFi and NFTs, these funds pinpoint promising opportunities in the digital asset sphere. Successful investments in these sectors require a deep understanding of blockchain technologies and their technical aspects.

Key features of crypto trusts

Crypto trusts adopt stringent investment strategies and comply with all the corresponding regulatory requirements. They grant market access and offer expert portfolio management, investment distribution, and risk evaluation services, guaranteeing the secure handling of your assets.

These are the goals that the establishment of a crypto trust primarily pursues:

  • ensure regulated access to assets for beneficiaries
  • minimize tax liabilities during fund transfers
  • store family wealth.

Designed to reliably protect personal data and investments, crypto trusts offer strong defense against multiple instabilities, e.g., social, political, and economic changes. 

These are the trusts you may come across in the crypto sector:

  • Crypto Storage Trusts: These trusts specialize in the secure custody of digital assets.
  • Investment Trusts: Their focus is on managing asset portfolios and optimizing returns for investors. For that purpose, investment trusts purchase cryptocurrencies and digital assets.
  • Decentralized Trusts: Built on blockchain technology, these trusts allow for direct control over funds with no need for intermediaries.

Setting up a crypto fund: jurisdiction selection

When establishing a crypto fund, be sure to conduct a thorough preparation in the selected country:

  • evaluate the local regulatory environment for crypto assets
  • understand any potential tax implications
  • check whether the required financial services are accessible.

Below, we will look into several reputable European jurisdictions with the most favorable business environments.

Republic of Malta

In the Republic of Malta, cryptocurrency transactions have been subject to legal regulation since 2018. To establish a crypto business in this jurisdiction, you must obtain a license from the Malta Financial Services Authority.

Malta remains a favored place for international businesses, notwithstanding the legislative modifications. Funds are commonly set up to form collective investment schemes (CIS), which are not subject to the constraints of Directive 2014/65/EU.

Estonia

In Estonia, investment funds’ activities are governed by the corresponding legislation, namely European Parliament’s Directive 2011/61/EU. The nation’s advanced financial and IT infrastructure, along with its welcoming immigration policies, makes it an attractive destination for a growing number of businesses.

Switzerland

Crypto funds in Switzerland are meant for professional investors only. The same stringent regulations apply to them as to conventional financial instruments. The sector is regulated under the Collective Investment Schemes Act (CISA).

Republic of Lithuania

The Central Bank of Lithuania, Lietuvos Bankas, updated its virtual asset regulations in 2019. In this jurisdiction, the establishment of crypto funds is predominantly the domain of professional investors. While banks make transactions solely in fiat currency, the integration of third-party platforms now permits the conversion of cryptocurrency payments into euros.

United Kingdom

The United Kingdom is a trustworthy jurisdiction to form crypto funds. Its adaptable legislation allows you to use different company forms to establish funds. Under certain circumstances, the tax system offers exemptions from corporate taxes for these structures.

Principality of Liechtenstein

Thanks to its forward-thinking regulatory policies and adaptable licensing procedures, setting up a crypto fund is an appealing prospect in the Principality of Liechtenstein. The jurisdiction is also known for its active encouragement of blockchain technology’s growth and practical application.

European jurisdictions: benefits for crypto fund setups

  • Stable legal environment

European nations boast well-established legal systems that provide a secure and protective setting for both crypto fund investors and managers.

  • Regulatory clarity and oversight

The clear legal guidelines and rigorous regulations in Europe help prevent fraudulent activities, ensuring transactions that are both trustworthy and secure.

  • Attractive tax benefits

Crypto funds benefit from the advantageous tax policies in many European states. NB: Potential corporate tax exemptions boost the appeal of crypto investments there.

  • Developed infrastructure and financial service market

Advanced financial systems in Europe grant businesses comprehensive access to banking, legal, and consulting services.

  • Esteemed reputation

Countries like the United Kingdom and Switzerland are world-famous for their financial stability and market efficiency, which fosters confidence among investors.

  • Access to the European market

By launching a crypto fund in Europe, your firm will gain entry to the broader international market, which can lead to better investment prospects and higher capital inflow.

Selecting a country to set up a crypto trust: criteria

Here’s what you should take into account when picking a country to set up a crypto trust:

  • laws that govern the crypto sector
  • prevailing tax regime
  • quality of the financial infrastructure
  • jurisdiction’s global reputation.

Trust founders commonly prefer offshore jurisdictions for their favorable conditions. Let’s explore the most sought-after states and the advantages they offer.

Saint Kitts and Nevis

Since 1995, the International Exempt Trust Ordinance has been comprehensively governing trust establishment and management in Nevis. The jurisdiction is known for its favorable tax environment, adaptable legal system, and stringent confidentiality measures.

Cook Islands

The Cook Islands have had legislation governing international trusts since 1984 (International Trusts Act). This law regulates the creation and management of trusts, provides flexible mechanisms for asset control and transfer to beneficiaries, and guarantees a high level of confidentiality and data protection.

Malta

Malta regulates the formation of trusts under the Trusts and Trustees Act of 2004. Establishing a crypto trust in Malta comes with numerous possibilities to manage and protect assets. With them, you can successfully cope with tax planning, inheritance protection, and family wealth management.

Turkish Republic of Northern Cyprus 

In the Turkish Republic of Northern Cyprus (TRNC), trust setup is influenced by the region’s unique political status. For founders, it means appealing tax benefits, versatile management choices, and a significant degree of privacy.

British Virgin Islands

The British Virgin Islands (BVI) boast an optimal environment for Private Trust Company (PTC) registration. Founders must ensure that their registered agent has a first-class trust license. 

Selecting a suitable company name is of utmost importance. The said name must represent the company’s status, scope of business, and other pertinent information. In the BVI, a private company is eligible to act as a trustee for single or multiple trusts, with the share capital requirement being as low as USD 50,000.

Establishing a crypto fund

In the era of digital assets, setting up a crypto fund has become a favored approach for investment management. The sector maintains substantial investment volumes, with projections suggesting that by 2030, the capitalization could surpass USD 4 billion.

The Offshore Pro team recommends that founders aiming for success in this domain consult experts well-versed in the establishment and management of crypto businesses. These are our suggestions for boosting the fund’s profitability:

  • Develop an efficient growth strategy that differentiates the fund from its competitors.
  • Establish a detailed security infrastructure to ensure the protection of assets and the confidentiality of investor data.
  • Adopt algorithmic trading methods for fast transactions in digital currencies.
  • Diversify into emerging areas like cryptocurrency farming on gaming platforms and AI integration.
  • Distribute assets in line with the chosen strategy.

Collecting documents

To set up a crypto fund, founders must prepare documents that comply with the set legal and regulatory standards. The following documents are critical for this process:

  • Articles of Association: This document contains vital details as to the fund and its structure.
  • Memorandum of Association: It establishes the fund’s primary goals and operational guidelines.
  • Fund Regulations: The document elaborates on the investment approach, the distribution of profits, associated risks, and the fund’s operational costs.
  • Management Agreement: It specifies the obligations and roles of the fund and the management company.
  • Custodian Agreement: This contract is with the entity tasked with safeguarding the fund’s assets, and it ensures both their security and regulatory compliance.
  • Investor Agreements: These agreements executed by investors define investment terms and the responsibilities of all the parties involved.

Depending on the unique circumstances of the fund’s creation, additional documents may be necessary.

Setting up a crypto fund: procedure to follow

The steps to establish a crypto fund are outlined below:

  1. Selecting a jurisdiction that aligns with the fund’s needs, with due regard to local laws and tax implications.
  2. Securing the necessary licenses and permits from the financial authorities in the selected jurisdiction.
  3. Gathering the documents necessary for the crypto fund to be fully functional.

Setting up funds and trusts to manage crypto assets is a profitable option. For investors, it comes with new ways to diversify and protect their money. With the fast-paced changes in the cryptocurrency market and the growing body of law, picking the best structure and jurisdiction for these funds and trusts is extremely important. 

To find the solutions that will work best in your situation, get in touch with the Offshore Pro team! Skillful handling of your crypto funds and trusts is the key to financial prosperity in the long term. Start this journey today to discover new opportunities and grow your wealth!