In this article, we’ll give a brief overview of how each type of crypto business is currently regulated in different countries around the world and tell you which legal matters you should be aware of when launching a blockchain business.
Regulators qualify all the businesses we cover here as Virtual Asset Service Providers (VASPs). VASPs include crypto exchanges, wallets, DeFi (decentralized finance), NFT (non-fungible token) marketplaces, play-to-earn games, and other crypto businesses. Certain regulators have already developed special regulatory modes for VASP.
The most crypto-friendly countries to register a new crypto business in 2022
%2520inforgraphic-min.jpeg)
📚 Read more: Discover some of the most tax-friendly countries for tech startups
How to choose a crypto-friendly country for crypto exchanges and DeFi
All cryptocurrency exchanges can be divided into centralized and decentralized ones. Centralized exchanges store users' virtual assets centrally and administer the cryptocurrency trading process on their platforms. Decentralized exchanges are those based on a smart contract that does not provide for centralized storage of cryptocurrencies but instead independently changes one cryptocurrency to another under the rules laid down in the smart contract and following the trading orders that users create.
In most countries, the operation of centralized exchanges requires obtaining special licenses or authorizations. Such licenses can be divided into two categories: general fintech and special cryptocurrency licenses. General fintech licenses include:
- the Money Transmitter License in the United States
- the EMI (Electronic Money Institution) License in England and Lithuania
Special cryptocurrency licenses include:
- A DLT (Distributed Ledger Technology) license in Gibraltar
- Registration in the IDGM zone in the UAE
- Obtaining authorization from financial monitoring authorities in Canada and Estonia
Obtaining a general fintech and a special crypto license requires several steps, including preparing a business plan, conducting a technical audit of the system that will store users' assets, and implementing proper financial, AML (anti-money laundering), and privacy compliance.
In countries such as the United States, DEXs (decentralized exchanges) were recognized as financial companies and, in their legal status, were equated with centralized crypto exchanges. DeFi projects (staking, yield farming, crypto lending platforms, etc.), which regulators recognized as financial services, also fall under the same qualification.
That is why today most DEX with DeFi elements are registered in countries where there is no regulation of this type of service (for example, in the British Virgin Islands and in Bermuda) or are launched in the form of DAOs with appropriate legal wrappers (for example, a Cayman Islands foundation or a Marshall Islands LLC for DAOs).
📚 Read more: How to Legally Structure Cryptocurrency Exchanges (CEX & DEX)
Registering crypto wallets: what you need to know
Crypto wallets are divided into custodial and non-custodial wallets, depending on the principle of operation. Custodial wallets are those whose providers store users' virtual assets in their wallets, controlling the private keys to these wallets. Non-custodial wallets allow users to independently generate a private key and fully control their virtual assets on the wallet.
Because the providers of such wallets fully control users' virtual assets stored on custodial wallets, such providers in most countries are required to obtain special authorizations from financial monitoring authorities (for example, the Financial Intelligence Unit in Estonia, the FinTRAC in Canada, and the Bureau of Fraud Investigation in Ireland).
Registration of a custodial wallet with a financial monitoring authority requires the wallet provider to appoint an AML officer in the company, implement KYC (know your client) procedures for clients, and enable AML analysis of transactions that pass through wallets for their affiliation with sub-sanctioned blockchain wallets (darknet wallets, crypto mixers, etc.).
As for non-custodial wallets, there are currently no separate regulatory requirements. Some of the providers of these wallets have introduced the possibility of the token swap—the ability to automatically exchange one token for another. You need to be careful with this function, as regulators of certain countries can recognize it as providing services to exchange some virtual assets for others. Therefore, if the team plans to launch a wallet with a token swap function, this function must be properly legally structured and described in the Terms & Conditions of the crypto wallet.
📚 Read more: A Legal Guide to Custodial and Non-custodial Wallets
Choosing a country for NFT marketplace registration
Today, in most countries, NFTs are qualified as digital goods, and their "non-interchangeability" property allows them to equate their legal status with collectible goods.
The main criteria for choosing a jurisdiction to register an NFT marketplace is its business model. If the marketplace's operation involves an auction format (commission business model), you will need to obtain an auction license/authorization to operate in the country of registration.
Suppose the NFT marketplace receives IP-related income (earns royalties at the time of resale of the NFT). In that case, it's essential to choose an IP-friendly jurisdiction that has special tax regimes for IP-related income. It is worth considering Switzerland, the Netherlands, and Cyprus, among other countries.
📚 Read more: Types of NFT Marketplaces and How to Legally Structure Them
What to consider when launching play-to-earn games
At the time of the introduction of NFT and DAO, many game developers began to think about how implementing tokenomics in-game mechanics could help increase player engagement and motivate them to spend more time in games. As a result, play-to-earn games started to appear.
The business model of such games usually consists of two parts: minting of NFT and earning in-game currency, for which in-game purchases are possible. The legal aspects that arise in connection with the minting of NFT in play-to-earn games and their subsequent sale on the gaming marketplace are the same as for NFT marketplaces.
A slightly more complicated situation is with in-game currency. Suppose the game developers plan to give in-game currency liquidity outside the game (for example, make it possible to trade it on 3rd party platforms) and equate the currency's value to the dollar (or other fiat currency). This in-game currency could be recognized in some countries as electronic money and therefore require a special license.
To choose a jurisdiction for a play-to-earn game, you should take into account two criteria:
- Whether you need to have the ability to accept payments in cryptocurrency. Countries that have regulated this include Switzerland, Singapore, Hong Kong, and the Cayman Islands.
- Whether you need to have the ability to issue your own token. You can learn more about how to choose a country for launching your token here.
📚 Read more: 3 Best countries for play-to-earn games registration
Get started by choosing the right country
Today, new types of crypto businesses are appearing all the time, around the world. The business models for these crypto businesses affect—and therefore must be aware of—financial laws, securities laws, consumer protection laws, and even VASP-specific legislation already passed in some countries.
To launch a VASP without risking a law violation, it is necessary to acknowledge the legal aspects of the business model, take care of any required licenses/authorizations, and implement compliance procedures.
We hope that this article has helped you better understand what legal aspects you should consider when launching a crypto business. If you need help with registering yours, start by requesting a demo with Legal Nodes. We'll be happy to speak to you about your crypto business and show you how we can help with legal structuring for your project. Legal Nodes has been providing legal support for crypto companies for the last 7 years.
This article was first published in May 2022, and so some of these best practices may have changed. For more guidance, search the Legal Nodes Resource Center.
Structure your blockchain project legally
Nestor is a Co-founder & Head of Web3 Legal at Legal Nodes. Having over eight years of legal consulting experience, Nestor loves working with innovative startups and Web3 projects, helping them navigate the regulations and scale on global markets.
