May 8, 2024

Issuing Tokens: How to Choose the Best Country, Set Up Your Legal Strategy and Get It Right


If you’re reading this article, you’re probably either considering issuing tokens in your company or are about to, and so the question that’s on your mind is: what’s the best way to do it? On top of that, how can I do this so it’s legally sound, and won’t create problems in the future? 

Right now, there’s no single regulatory approach on how to issue tokens (in fact, there’s no single regulatory approach on digital assets in general). The existing regulations are changing all the time, with new ones popping up all over the place. It’s no surprise that the legal side of the digital asset business, including token issuance, has become a bit of a minefield to navigate. 

This is why we’ve created this guide. We want to help Web3 founders and builders in this space understand how to approach token issuance from a legal point of view. What factors should you take into account? What options of token-friendly countries are there? If you’re not sure, this guide should hopefully help you. 

We’re going to cover the following:

  • How decentralized or centralized ways of token issuance influence the legal structure of the project
  • What a Token SPV is, and why it’s needed for token issuance structuring
  • What a VASP regime is, and how it affects the selection process when choosing jurisdictions for token issuance
  • Which crypto-friendly countries have VASP regimes 
  • What to consider when issuing tokens for fundraising

🏴  NEW: Before you dive into this article, you might want to check out our latest playbook: How to Build a Legal Strategy for a Token Project in 2024. It's a great starting point for any token project, as it explores the key criteria that determine if your token distribution is centralized or decentralized, and outlines the legal implications of each route.

This guide is brought to you by the team at Legal Nodes, including co-founder Nestor Dubnevych. Legal Nodes is a platform for tech companies operating globally and helps startups establish and maintain legal structures in 20+ countries.

Please note: none of this information should be considered as legal, tax, or investment advice. Whilst we’ve done our best to make sure this information is accurate at the time of publishing, laws and practices may change. For help with the legal structuring of your project, speak to us.

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 often plan to issue tokens early on in their operation. Because of these plans, these businesses need to choose a jurisdiction that will enable them to attract both equity and token-based funding. We’ll look at examples of these jurisdictions further in this article. 

Consider your token minting strategy: centralized vs decentralized

In order to decide on the right strategy for setting up your token issuance legal structure, it’s important to answer the following questions:

  • Who will run the token minting protocol? Will it be the project team or the validators of the blockchain network?
  • Who will control the initial token minting, the additional release, the burning? Will it be  the project team or a DAO?
  • Who will carry out the initial distribution of the pre-minted tokens? Will it be the project team or a smart contract?
  • Who will own and manage the treasury of tokens that will remain undistributed after the initial distribution? Will it be the project team or a DAO?

If any of your answers include validators, smart contracts or a DAO, then it can be assumed that the minting and initial distribution of tokens will be structured in a decentralized manner. As a result, the project team—or, in the future, the DAO—might need to consider an option of registering the Token Foundation for partial distribution of tokens in the future.

An analysis of the blockchain network in which the tokens will be issued will also help to answer the questions described above. For example, the Cosmos blockchain works in a way that tokens are issued in a decentralized manner, while in Ethereum and Cardano, token issuance is often a centralized process.

This article focuses specifically on cases where the project team will be responsible for the initial minting and distribution of tokens. We will discuss how to legally structure this process to protect the team from the risks of regulatory uncertainty.

Issuing tokens legally implies registering a Token SPV

For teams planning a centralized issue of tokens, it is important to think about liability protection, which can protect them from the risks of regulatory uncertainty surrounding tokens. Building a liability protection usually includes the following steps:

  1. Choosing a jurisdiction for registering a token-issuing company (a Token SPV). This typically also requires teams to obtain a Token Legal Opinion from local lawyers to understand how the token will be qualified in the chosen jurisdiction (either as a utility, security, payment token) and to understand the regulatory requirements for its issuance and sale.
  2. Obtaining regulatory authorization or permission for the issuance of tokens (via a VASP).
  3. Incorporating compliance procedures (verification of the accreditation of token buyers, KYC, AML).
  4. Analysis of the tax consequences associated with the sale of tokens.

📚 Read more: Discover the top tax-friendly jurisdictions and 6 important tax-related questions founders should always ask

The token issuing company is a separate legal entity in the project’s legal structure and also called a Token SPV (or a TokenCo). SPV stands for Special Purpose Vehicle and will:

Consider the 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.

In some jurisdictions token issuers might be qualified as Virtual Asset Service Providers, so a special regulatory regime for VASP will be needed. This is a critical deciding factor when choosing a country for incorporation of your Token SPV. There are jurisdictions with established VASP regimes that might be suitable. Additionally, there are some jurisdictions that don’t have a special regime but can be considered as an option for token issuance.

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, Singapore and the British Virgin Islands. 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. This is common for Web3 projects that don’t develop in a decentralized way, for example: custodial wallets, exchanges, and NFT marketplaces. 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.

The main advantage of having a Token SPV registered in a country with a VASP regime is the regulatory clarity of the token issuance process. This will also influence the price of the legal works for the issuance as founders will need to obtain approvals/licenses from local regulators and implement KYC/AML compliance measures.

Examples of these cases include:

  1. The NYM token authorized in Switzerland;
  2. The NMRK token registered in Liechtenstein;
  3. Digital Payment Tokens in Singapore.

Jurisdictions without special regulation for virtual assets

Alternatively, it is possible to set up a Token SPV in a jurisdiction where the regulator has adopted a “wait-and-see” approach and no token-specific legislation has been issued. Examples of jurisdictions that fit this category are Panama, Seychelles and some other isle-based jurisdictions. 

The advantages of setting up a Token SPV in Panama or Seychelles are that the virtual asset activity isn't overly regulated and often doesn't imply additional obligations for authorization, licensing, and KYC/AML implementation, etc. 

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

Fundraising with tokens: key considerations

Most projects use Token SPVs to issue tokens for fundraising purposes. The fundraising method usually depends on the Web3 project’s development stage. It can happen via a simple agreement for future tokens (SAFT), which is a conversion instrument, according to which the token will be issued to an investor in the future. It could also happen with help of a token sale agreement, which is used when a project is already mature and does additional emissions via a smart contract. 

If you’re planning to fundraise via a SAFT or a token sale agreement, check out templates of these documents prepared by Legal Nodes in accordance with industry standards and the latest best practices:

Correctly developing a legal model for a Web3 project and choosing the right country for token issuance will help founders to pass through due diligence processes smoothly whilst fundraising from Web3 VC funds. It will also assist with implementation of relevant compliance procedures to avoid violations of AML regulation or unwanted tax consequences during token sales. Therefore, when evaluating different jurisdictional options, founders should also consider jurisdictions where there are defined rules for taxation of token-sale transactions (like Switzerland, Liechtenstein, the Cayman Islands, the BVI, and a few others).

Get started with your token issuance process

Choosing the best country for token issuance is one of the most important early steps founders should take in order to prepare for a successful token launch.

As we discussed here, it’s important to consider:

  • What type of token is going to be issued (utility, payment, security, etc.)
  • Whether founders prefer a country with a VASP regime and with more regulatory clarity with regards to token issuance 
  • Whether tokens are issued for fundraising purposes as it will influence what types of fundraising instruments (SAFT, token sale agreement) founders will use and what due diligence procedures and compliance requirements (AML, KYC) will need to be undertaken 

In order to go through this process smoothly, Legal Nodes helps founders of Web3 projects by: 

  • Providing legal sessions to determine the best country and best legal structure for the token issuance
  • Structuring this process into clear legal tasks and engaging local legal professionals who help with obtaining Token Legal Opinion, registering a company, getting licenses/approvals, and preparing KYC/AML documentation.

We have a vast network of legal professionals in the top 20 crypto-friendly countries. In the last few years, we’ve helped more than 300 founders create international legal structures for their Web3 ventures. 

Fill out a form to get started and one of our team members will get in touch with you about how Legal Nodes could help you. 

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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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