Insights

The UAE's Payment Token Services Regulation and Sandbox Conditions Regulation

The United Arab Emirates (“UAE”) is introducing two key regulations by the Central Bank of the UAE (“CBUAE”): the Payment Token Services Regulation under Circular 2/2024 (“PTS Regulation”) and the Sandbox Conditions Regulation on June 25, 2024 (“Sandbox Regulation”). The PTS Regulation establishes a framework for licensing and regulating Payment Token service providers across the Emirates, while the Sandbox Conditions Regulation creates a controlled environment for testing financial services and products.

As is usual with these kinds of regulations, while they aim to encourage innovation, they often end up causing more problems than they solve. Centrium has ample experience in the region and would be happy to help you decide whether the UAE is right for you and your projects.

Defining Payment Tokens

The PTS Regulation defines ‘Payment Tokens’ as virtual assets designed to maintain a stable value by referencing either a specific fiat currency or another Payment Token denominated in a specific fiat currency. The PTS Regulation governs Payment Tokens denominated in Dirham (“Dirham Payment Tokens”) as well as in foreign currencies (“Foreign Payment Tokens”).

Defining Payment Token Services

The PTS Regulation categorizes Payment Token services into three main areas:

1.       Payment Token Issuance (“Issuing”): Involves the initial sale or transfer of Payment Tokens. Notably, issuing Dirham Payment Tokens requires a license from the CBUAE, ensuring regulatory oversight and consumer protection.

2.       Payment Token Conversion (“Conversion”): Facilitates the buying and selling of Payment Tokens for remuneration, crucial for liquidity and market operations.

3.       Payment Token Custody and Transfer (“Custody and Transfer”): Includes safeguarding, administering, and transferring Payment Tokens on behalf of clients, akin to custodial services for traditional virtual assets.

Licensing Requirements

Entities incorporated in the UAE, including free zones (excluding DIFC and ADGM), can apply for licenses to provide Payment Token services. Foreign entities (including DIFC and ADGM) may apply for registration as a foreign payment token issuer. Registration is crucial for foreign entities whose Foreign Payment Tokens are used as a payment method in the UAE, as there are limitations on Virtual Asset Service Providers (VASP) and licensing entities on the transfer and promotion of Foreign Payment Tokens not issued by registered issuers.

Limits and Prohibitions

The PTS Regulation prohibits services involving algorithmic stablecoins and privacy tokens, with strict controls on the promotion and use of Foreign Payment Tokens. These barriers narrow the scope for businesses to offer diverse products and may stifle innovation. Interestingly, while the regulation requires payments to be made with Dirham Payment Tokens or registered Foreign Payment Tokens, there are currently no licensed Dirham Payment Tokens or registered Foreign Payment Tokens available. The lack of currently licensed Dirham or Foreign Payment Tokens creates a regulatory void, leaving businesses in limbo as they attempt to navigate the rules without the necessary infrastructure in place.

It should be noted that that the UAE has never permitted direct crypto payments. Instead, the practice of converting crypto to cash via local OTC desks is common and well-established, allowing individuals to indirectly use crypto assets without regulatory conflict. Despite the well-established practice of using local OTC desks to convert crypto to cash, the regulatory stance creates inconsistencies that must be carefully navigated to avoid contravening UAE regulations.

Overview of the Sandbox Regulation

The CBUAE introduced the Sandbox Regulation to foster innovation in the financial services sector by establishing a regulatory sandbox. This sandbox provides a controlled environment where companies, including those in financial free zones, can test new business models, products, and services. The Sandbox Regulation aims to encourage innovation while maintaining strict regulatory oversight to protect consumers and ensure financial stability.

Requirements for the Sandbox

Participation in the sandbox is open to various entities, provided they do not engage in activities like deposit-taking, insurance, or acting as principals in certain financial products. The participants must demonstrate a genuine need for testing, a readiness for market deployment, and the ability to meet regulatory requirements. The Sandbox Regulation sets guidelines to ensure participants adhere to robust compliance measures, such as effective complaint handling, dispute resolution, and measures to prevent money laundering and terrorist financing. Throughout the sandbox period, participants will also work closely with the CBUAE, adhering to strict reporting and supervision standards to maintain transparency and compliance.

These requirements are an attempt by UAE regulators to balance innovation with the critical aspects of regulatory compliance and consumer protection. The heavy regulatory burden, combined with a limited testing of six to twelve months, may prove insufficient for businesses developing complex financial products or services, hindering their ability to fully test and scale their offerings before facing more stringent licensing requirements. If you are planning on participating in the sandbox in the UAE, it is important to be prepared to meet regulatory requirements from the beginning due to the limited period for businesses participate in the sandbox.

Exit Routes from the Sandbox

There are two exit routes from the sandbox, the first being the expiry of testing period and the second being the discontinuation of the testing period. The testing period within the sandbox generally lasts between six and twelve months, after which the participant must submit a final report. The CBUAE will then evaluate whether the participant can proceed to obtaining a full license for broader market deployment. The CBUAE also has the power to discontinue the testing period if after monitoring the project, the CBUAE concludes that the project fails to meet its objectives or poses excessive risk.

Conclusion

The introduction of the PTS Regulation and Sandbox Regulation by the CBUAE is somewhat encouraging, but still falls short of the ideal. While these regulations have the appearance of creating a supportive environment for digital assets, it still is not fit for purpose, as it expects projects to fit within a fairly rigid set of requirements and thereby stifles innovation.

As the regulatory environment evolves, navigating these changes and considering whether the benefits of the regulatory regime outweigh the issues with respect to your specific project is crucial for business success. Our firm specializes in helping projects weigh the various issues and, if deemed productive, to obtain licenses and help with corporate governance, record keeping, compliance etc all in a manner that leaves you free to pursue the growth aspects of your business. For more information or to discuss how these regulations may impact your business, please reach out to our team at info@centriumadvisory.com for more information.

Ripple's Legal Battle with the SEC: A Pivotal Moment in Cryptocurrency Regulation

In a landmark decision, Ripple Labs has been ordered to pay a $125 million fine after a prolonged legal battle with the U.S. Securities and Exchange Commission (SEC). The case, which began in 2020, revolved around allegations that Ripple's sale of XRP tokens to institutional investors violated federal securities laws. Although the SEC initially sought a much larger penalty, $1 billion fine for disgorgement and prejudgment interest and $900 million in civil penalties, the final ruling represents a significant win for Ripple and the broader cryptocurrency industry.

Ripple’s Legal Journey

The legal saga between Ripple and the SEC has been one of the most closely watched cases in the crypto world. It began in November 2020 when the SEC accused Ripple of raising $1.3 billion through unregistered securities sales via XRP tokens. The case quickly became a litmus test for how regulators would treat cryptocurrencies in relation to securities laws.

On 13 July 2023, District Judge Analisa Torres of the Southern District of New York made a crucial distinction in the case. She ruled that while Ripple's institutional sales of XRP did indeed violate federal securities laws, the company's programmatic sales of XRP to retail customers through exchanges did not. This distinction significantly shaped the final judgment and laid the groundwork for the reduced penalty.

Please refer to our earlier commentary here for a more detailed examination of why the sale of XRP to retail investors did not violate securities laws.

The Final Ruling

On August 7, 2024, Judge Torres imposed a $125 million fine on Ripple, a fraction of the almost $2 billion that the SEC had initially sought. The fine specifically targeted Ripple’s 1,278 institutional sales of XRP, which the court found to have violated securities laws. Despite the hefty fine, Ripple emerged from the ruling in a strong position, with its CEO Brad Garlinghouse and Chief Legal Officer Stuart Alderoty hailing the outcome as a victory for the company and the cryptocurrency industry.

The court's ruling also included an injunction against Ripple to prevent any future violations of federal securities laws. Judge Torres expressed concern that Ripple might "cross the line" again in its "liquidity-on-demand" offerings, underscoring the need for stricter oversight in the future. Ripple must now file a registration statement before selling any securities, signaling a new era of regulatory compliance for the company and, of course, new expectations for the industry.

Market Reaction and Ripple’s Future

The immediate market reaction to the ruling was positive for Ripple. Following the announcement, XRP's price surged by approximately 24%, rising from $0.50 to $0.62. This price jump reflected investor confidence in Ripple's ability to navigate its legal challenges and continue growing its business.

Ripple’s leadership has framed the court’s decision as a broader victory for the cryptocurrency sector. Chief legal officer Stuart Alderoty emphasized that the ruling confirmed XRP’s status as not being a security, providing much-needed clarity for the industry. This outcome could pave the way for Ripple to expand its operations both in the U.S. and internationally, with potential new ventures like an XRP exchange-traded fund (ETF) on the horizon.

Conclusion

Ripple’s legal battle with the SEC has not only shaped the future of the company but has also set a precedent for how cryptocurrencies are regulated in the U.S. For Ripple, the $125 million fine, while substantial, is indeed a victory.

However, the resolution of this case serves as an important reminder to new entrants into the market that the way that they sell their tokens, particularly how they market and the words they use in their marketing materials, will have an outsized impact on the way the SEC will review their case for potential violations. It is essential for crypto projects to maintain a consistent and thoughtful approach in how they present themselves and their products across social media, emails, recorded calls, and pitchbooks, ensuring they convey the right message and avoid any inadvertent missteps that may have negative impacts on things such as fundraising and licensing.

Since the days of flying by the seat of your pants and characterizing your product in whatever way you think will best speak to the market are definitively over, we urge you to rethink the way you are using social media. Centrium specializes in shaping and refining the message for your product, guiding you and your teams to an optimal balance of business success and regulatory compliance. Please reach out to our team at info@centriumadvisory.com for more information.

Gambling on Roblox: Sweetening or Poisoning the Pot?

There is a growing discourse about whether video games have evolved to the point where player incentives are akin to gambling. The social elements and exciting reward mechanisms are blurring the distinction between enhancing the gameplay experience and illegal unregulated gambling.

Given the murky situation, how does a Web2 or Web3 gaming company avoid becoming an illegal gambling enterprise?

In this article, we take a look at the most recent court commentary on Roblox to analyze what takeaways a project should keep in mind when looking to design the next big game.

About Roblox

For those unfamiliar with Roblox, it is a social gaming platform that allows a user to play a wide catalogue of games created by the Roblox community or develop a new game as part of that community. Roblox is free to play but has premium content reserved for paying users.

Roblox seeks to be a virtual universe in which users can play and make contributions. Underpinning this ecosystem is the “Robux”, the in-game currency of the Roblox platform. As Roblox explains it, there are only a few ways to obtain Robux, mainly using fiat to buy it from Roblox (as the exclusive vendor) or as a reward/payment for content produced for or other contributions made to the Roblox universe. For qualifying developers, Robux can be exchanged for fiat under its Developer Exchange program.

The Gambling Controversy

In August 2023, a class action suit (“Colvin v. Roblox”) was launched against Roblox and several third party gambling sites (“Gambling Website Defendants”) claiming, amongst other things, that Roblox had engaged in unlawful conduct under California’s Unfair Competition Law (i.e. participating in illegal gambling activity) and was generally negligent in creating a risk of harm on its platform (i.e. by forming an illegal gambling ring exploiting Roblox users, many of whom are minors).

Roblox’s attempts to dismiss the case were shot down in March 2024. Around the same time, another class action suit (“Gentry v. Roblox”), which effectively mirrors Colvin v. Roblox, was commenced.

Colvin v. Roblox provides a helpful summary (at paragraphs 18 to 22 and echoed in Gentry v. Roblox) of how the alleged illegal gambling activities took place:

18. Here is how the process works: Roblox’s minor users first purchase Robux through the Roblox website, using either their own money, a parent’s credit card, or gift cards they possess. Next, the minor user navigates to one of the Gambling Website Defendants’ virtual casinos that exist outside the Roblox ecosystem. Then, the user links their Robux wallet on Roblox’s website to the gambling website. And finally, once the minor-user’s wallet is linked, the gambling website converts the minor user’s Robux into credits that can only be wagered in their virtual casinos. Throughout this process, Roblox keeps track of all of these electronic transfers and has knowledge of each transfer that occurs in its ecosystem.

 19. Importantly, while a minor user must navigate off Roblox’s website to access the online casino and their new digital gambling credits, in reality the minor user’s Robux have not been converted to another currency and they never leave Roblox’s website. Instead, the Gambling Website Defendant merely take control of the Robux, while providing a corresponding number of “credits” (which are also called Robux) on their third-party gambling websites.

 20. Further, because the exchange of Robux must occur within the Roblox website, Roblox allows the Gambling Website Defendants to establish a Robux exchange within the Roblox ecosystem.

 21. If a user happens to win at Defendants’ casino games, thereby increasing their total credits, the Gambling Website Defendants transfer back to the user the additional value in Robux.  If, as is more likely and common, a minor user loses their credits in the Gambling Website Defendants’ virtual casino, those Defendants retain the user’s Robux. The gambling credits function just like chips in a brick and mortar casino; users “buy in” using their Robux, obtain chips, gamble until they lose their money or wish to cash out, and, if they increase their credits, they cash those credits out in exchange for Robux.

 22. This entire exchange of Robux occurs on the Roblox platform with Roblox’s knowledge and active support, and Robux never leave the Roblox ecosystem unless and until they are cashed out for fiat currency.

If you are wondering why Roblox was actively supporting such activities, it was because Roblox charged a 30% fee whenever the Gambling Website Defendants converted Robux retained from users into cash on the Roblox platform.

Takeaways

The Roblox cases do not involve crypto directly because Robux are akin to airline points and not tokens themselves. However, both Web 2.0 and Web 3.0 gaming projects should pay attention to the reasoning of the US District Court of the Northern District of California (“Court”) because the Court’s position would only be strengthened if tokens are issued, since the “value” question (as discussed below) only becomes more obvious.

We distill from the Court’s recent order on 26 March 2024 denying the attempt by Roblux to dismiss the relevant claims in Colvin v. Roblox certain key takeaways that gaming projects will do well to keep in mind.

Takeaways:

1. In-game currency can be used for gambling because it has economic value (regardless of whether it can be redeemed for fiat money (or, for that matter, cryptocurrencies)

   Generally, the law requires 3 fundamental elements to be established for an act or game to constitute gambling: payment of a “thing of value”, for a prize, determined by chance.

   Roblox attempted to argue that there was no gambling because no “thing of value” was given up. According to Roblox, users knew they were exchanging (and in effect, giving up) money for Robux (a fictitious currency that could not be redeemed) to play games in the Roblox universe. Regardless of whether users won or lost at the games, they had received what they bargained for (which was, in Roblox’s argument, access and entertainment rather than winning).

   The Court disagreed with Roblox. Picking up on Roblox’s characterization of Robux as tickets to an amusement park, the Court observed that the ticket itself has value for what it represents (and can be used for) after money changed hands. After all, a holder who had a ticket stolen or misplaced would be financially worse off (since a new ticket needs to be purchased to enjoy the same entertainment), not to mention very upset. As a result, the Court came to the initial view that were sufficient facts in place to support a finding that the alleged gambling had taken place.

   Takeaway: If you are going to design a reward mechanism that overlaps with (or may be perceived to be overlapping with) some form of gambling activity, you cannot say that in-game currency (whether in the form of a game point or token) carries no value because you are either not permitting it to be redeemed for fiat money (or other crypto). Focus instead on reducing the charge of gambling by ensuring rewards are earned through skill rather than chance. The occasional randomized aspects to spice up gameplay may be permitted but that will have to be carefully considered in the specific context of each case, particularly dependent on your jurisdiction and nationality of your user base.

2.  Outsourcing to 3rd parties does not by itself get you off the hook

   Roblox mounted an alternate argument that even if there was gambling, Roblox was not engaged in it since the gambling activity was carried out through third parties, namely the Gambling Website Defendants’ websites.

   Rejecting this argument, the Court reminded Roblox that the allegations in question were not that Roblox operated gambling activities, but that Roblox had “facilitated” and “knowingly profited from” the gambling activities.

   It is interesting to consider whether Roblox would have a stronger argument if two key facts were changed: (1) if Roblox did not control and keep tabs on the Robux and gambling activities engaged in with Robux on the third party sites; and (2) if Roblox were not taking fees from the third party websites (or took lower fees that could be more appropriately characterized as referral fees). 

   Takeaway: Outsourcing arrangements need to be meticulously organized and disciplined in approach. Specific administrative and operational details of the arrangement will have significant ramifications. It is crucial to flesh out the entire system with legal and compliance operations in mind before implementation and to ensure all relevant personnel are on the same page and understand why the structure has been created so that they do not inadvertently torpedo the project by their day to day actions.

3. Lowering age restrictions increases your risks

   The Court was clearly motivated in its decision-making by the fact that minors were intentionally targeted by the illegal gambling activities (and Roblox was letting that happen).

   As the Court put it:

   “Moreover, the online casinos were outside of the realm of the games that the Robux were purchased for. And the parents whose money purchased the Robux allege that they had no idea this virtual currency could be used off-platform for gambling. Thus, this is less like a parent buying their child tickets for an amusement park, knowing that there are games of chance available, and letting their child run free to play those games because of their entertainment value. It is more like a casino setting up shop outside an amusement park and luring a child away to wager and lose the tickets to an illegal gambling operation—tickets that the casino can then exchange for cash. The parents did not consent to this deprivation of their child’s ability to play in the amusement park, and the child was not legally capable of doing so.”

   Takeaway: Be extra cautious when you open up your games to minors. Implement and rigorously enforce age restrictions with respect to your game (or certain aspects of your games) if there is even a chance that minors might get into trouble (e.g. gambling or explicit content). Consider supplementing age restrictions with additional safeguards (e.g. limits on in-game purchases based on quantum and/or time intervals).

4. Walk the walk, talk the talk: pay close attention to your marketing and T&Cs

   In addition to commenting on how Roblox had positioned itself to a certain demographic and how online casinos were outside this realm  (see point 3 above), the Court also noted the parents’ claims that Roblox had misrepresented itself as being free of gambling. In doing so, the Court mentioned a sentence from Roblox’s terms of service, which stated that:

   “…experiences that include simulated gambling, including playing with virtual chips, simulated betting, or exchanging real money, Robux, or in-experience items of value are not allowed.”

   The Court did not consider this allegation in greater detail because it found that the allegations on this point lacked the clarity and particularity required for establishing misrepresentation under consumer protection law so it remains to be seen if this issue will be revisited or further pursued in Colvin v. Roblox, Gentry v. Roblox or any subsequent actions.

   Notwithstanding this finding by the Court, the misrepresentation allegations in Colvin v. Roblox and Gentry v. Roblox, combined of course with the same issues in the FTX case(s), are reminders that all projects must be conscious of how the marketing and T&Cs of their games align with reality. The slightest oversight, sometimes by merely forgetting to update the T&Cs when something changes, can certainly erode a project’s credibility before the Court but depending on severity may lead to allegations of fraud and/or misrepresentation.

   Takeaway: Have proper procedures in place to ensure that all marketing decisions and T&Cs are thoroughly screened for possible risk exposure. This effort must begin immediately at project launch, ut also at regular intervals going forward. Similar to the takeaway for point 2 above, screening is not just limited to the eyes of legal and compliance. It is crucial for the operational (dev, sales etc) team to be involved so that there are no empty promises or misguided statements or impermissible changes to the structure over time.

If you have questions about the cases above or want us to take a closer look at your project mechanics (whether Web 2.0 or Web 3.0 projects) to help you navigate the entertainment vs gambling frontier, feel free to reach out to us.

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:

1. 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.

2. 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. 

3. 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). 

4. 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

Singapore Capital Markets Services Licence

Next: Inland Revenue Department’s New Guidance on Profits Tax with respect to Digital Assets

1. 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

2. What are the CMSL's application requirements?

   1. 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.

   2. 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.

   3. Financial Requirements

Quick Links

The UAE’s Payment Token Services Regulation and Sandbox Conditions Regulation

Ripple’s Legal Battle with the SEC: A Pivotal Moment in Cryptocurrency Regulation

Gambling on Roblox: Sweetening or Poisoning the Pot?

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

Centrium’s Erika Evasdottir is interviewed by Block-Sol following her presentation on “Investor Readiness for Start-Ups” at Blockchain Fest 2023

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: How to Handle Due Diligence and How to Impress Investors with Compliance and Governance

Cyberport Venture Capital Forum 2020: Update

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?

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

Innovative Approaches to Compliance Training

The Association of Corporate Counsel’s Summer Boat Party

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

Inland Revenue Department’s New Guidance on Profits Tax with respect to Digital Assets

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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

1. 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.

2. 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

1. 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.

2. 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.

3. 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.

4. 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.

5. 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:

1. an ICO issuer;

2. conducting a business involving Digital Assets;

3. Receiving renumeration in the form of Digital Assets; or

4. Having questions about profits tax with respect to Digital Assets

Please reach out to CASL so that we can help you:

1. conduct a gap analysis on your current setup;

2. assist with compliance with the IRD’s new guidance notes on profits tax with respect to Digital Assets; and/or

3. connect you with a suitable service provider for your profits tax planning.

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:

1. 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;

2. 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

3. 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:

1. Register with CIMA, which shall entail providing details of the fund, its structure and its service providers;

2. Have at least two (2) directors appointed in respect of a general partner or corporate director of a Private Fund;

3. 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:

1. an existing section 4(4) fund;

2. an existing private fund; or

3. planning to setup a section 4(4) fund or private fund;

Please reach out so that we can:

1. conduct a gap analysis on your current section 4(4) fund or private fund setup;

2. assist with compliance with the MFL and/or PFL; and/or

3. connect you with a suitable service provider for your fund and budget.

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

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 Form 2020: Update

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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: 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’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

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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 - ‘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

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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 - ‘Innovative Approaches to Compliance Training’

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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.

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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.

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/.