How to Choose a Crypto-Friendly Country for Issuing Tokens

May 10, 2022
TABLE OF CONTENTS

How to Choose a Crypto-Friendly Country for Issuing Tokens

May 10, 2022

Many businesses today consider issuing tokens. Tokens are another form of cryptocurrency and they positively affect the involvement of customers, partners, and investors by introducing a highly-liquid value, a token, into the product line.

Why companies issue tokens

Companies usually issue tokens for two reasons:

  • to incentivise a more active usage of a company's products, recommending them to friends, etc., achieved by staking and airdrops;
  • to grant voting rights – to decide on the development and operation of a project–to tokenholders, achieved by implementing decentralized governance and turning a project into a DAO.

📚 Read more: Token types, their legal status and choosing the best jurisdiction for token issuance.

Consider your company type: traditional vs crypto

All prospective token-issuing companies fall into one of the following categories: traditional venture-backed startups (SaaS, marketplaces, social networks, messengers, etc.) or blockchain/crypto businesses. 

When issuing tokens, traditional startups have to pay special attention to introducing a token-issuing company into their existing corporate structure, which often already has investors and allocated option pools. This is vital for correctly organizing token distribution amongst existing investors and prospective tokenholders.

The second category comprises businesses such as crypto exchanges and wallets, NFTs, DeFis, play-to-earn games, Web3 funds, and more. These companies are planning to issue tokens early on in their operation. Because of these plans, these businesses need to choose a jurisdiction where it is possible to attract both equity and token-based funding.

Are you going to issue governance tokens?

Before deciding on the organizational form for a legal entity and picking a crypto-friendly jurisdiction to incorporate it, founders have to consider whether they plan to turn their project into a DAO sometime in the future. The criterion for making this decision is a simple one; you have to decide whether issued tokens will vest voting rights into your token holders. In other words, are you going to issue governance tokens?

If you choose to issue governance tokens, registration of a DAO Legal Wrapper has to be included in the project’s legal roadmap. Suppose the issue of tokens involves issuing tokens without voting rights, such as utility tokens, payment tokens, NFTs, or asset-backed tokens. In those cases, founders should proceed with incorporating a legal entity with share capital in a country with legislation specific to each type of token as well as to obtain a Token Legal Opinion.

Consider Virtual Asset Provider Regime

Nowadays, businesses operating with virtual assets are considered Virtual Asset Service Providers (VASP). Operations with virtual assets can take many forms, such as issuance, storage, and exchange of virtual assets, facilitation of trades or auctions, and granting crypto-based loans.

Because issuers of tokens would qualify as Virtual Asset Providers, a special regulatory regime for VASP in a jurisdiction of incorporation is a deciding factor in choosing a country for a token-issuing company.

Jurisdictions with VASP regimes for issuing tokens

Currently, there are several jurisdictions with special regulatory regimes for VASPs including Switzerland, Lichtenstein, Gibraltar, the Cayman Islands, Hong Kong, and Singapore. Some countries have adopted specific laws including Lichtenstein, the Cayman Islands, Singapore, and Gibraltar whereas others have issued relevant regulatory clarifications like Switzerland and Hong Kong.

Sometimes, teams have no plans to turn their project into a DAO and instead prefer to retain leadership via centralized governance. It is possible to incorporate an issuing entity as a regular limited liability company, for example, an AG in Switzerland or an LTD in the Cayman Islands.

Jurisdictions without special regulation for virtual assets

Alternatively, it is possible to set up a token-issuing company in a jurisdiction where the regulator has adopted a “wait-and-see” approach and no token-specific legislation has been issued. Amongst those are the British Virgin Islands and Panama. 

The advantages of setting up a token-issuing company in BVI or Panama are that the virtual asset activity isn't overly regulated in these countries and often doesn't imply additional obligations for authorisation, licensing, KYC/AML implementation etc. 

At the same time, special regulation for virtual assets can always be introduced in the future. This exposes a company to a rather high degree of risk due to uncertainty of newly-adopted regulations.

Do you need DAO Legal Wrapper along with registering a token issuer company?

Many founders make the initial offering of tokens without considering decentralizing their project by giving their tokenholders voting rights in the future. However, those plans can be birthed when they consider revamping their “centralized” limited company into a “decentralized” organization (DAO).

From this moment on, a project turns into a DAO, and its team has to start thinking about forming a DAO Legal Wrapper. It requires incorporating a new, ownership-free legal entity in the form of a foundation or an LLC.

Fundraising with tokens 

Most token-issuing companies issue tokens for fundraising purposes. The fundraising method usually depends on the Web3 project’s development stage. It can happen via a SAFT/SAFTE (a conversion instrument, according to which the token will be issued to an investor in the future) and a Token Sale Agreement (used when a project is already mature and does additional emissions via a smart contract). 

Correctly developing a legal model for a Web3 project will help founders to pass through due diligence smoothly during fundraising from Web3 funds. It will also assist with implementation of relevant compliance procedures to avoid violations of AML regulation or unwanted tax consequences during token sales.

📚 Read more: How to prepare a Web3 startup for fundraising.

Discover how to issue tokens in your company via a consultation with our crypto-legal experts

We hope this article has helped you understand the nuances of choosing a country for token issuance. If you’re looking for further help with choosing the best jurisdictions for your Web3 project, you can book a call with our legal experts. During the call, we’ll provide a consultation on which jurisdictions would work best for your token launch and how to structure this process legally.

A session will include an intro to crypto-friendly countries, an intro to token legal design and a checklist of how to structure your token issuing company.

Disclaimer: the information in this article is provided for informational purposes only. You should not construe any such information as legal, tax, investment, trading, financial, or other advice.

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Nestor is a Co-founder & Head of Web3 Legal at Legal Nodes. Having over seven years of legal consulting experience, Nestor loves working with innovative startups and Web3 projects, helping them navigate the regulations and scale on global markets.

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