Professional Documents
Culture Documents
Cryptocurrency
& blockchain
2018
In this issue…
03 Cryptocurrencies and blockchain move
centre stage
By Beverly Chandler
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Cryptocurrencies
and blockchain move
centre stage
By Beverly Chandler
It’s a true sign of the times. The two top Traditional fund managers may hate the
performing hedge funds of 2018, according to sector but investors love it. Warren Buffett
data providers Preqin, are both focused on has been steadfastly ‘bashing bitcoin’ for a
cryptocurrencies and blockchain. number of years. During his recent Berkshire
Silver 8 Capital – read about them further Hathaway annual shareholder meeting, Buffett
on in this report – managed the highest referred to bitcoin as ‘rat poison squared’.
returning hedge fund last year focusing The crypto industry has responded with
on financial technology, with a particular typical vigour with a billboard response from
focus on blockchain and the crypto world, Genesis Mining and a huge bet from an
returning 770.74 per cent, while Global Aussie crypto expert that bitcoin’s price will
Advisors’ Bitcoin Investment Fund came in beat the Berkshire Hathaway share price by
second with returns of 330.08, according 2023. But all of this is just the theatricals and
to Preqin. pantomime that surrounds an extraordinary
Further evidence comes from HFR, whose new investment phenomenon that can no
Cryptocurrency Index was up 155.70 per cent longer be easily dismissed.
for the last 12 months to end June, while its A quick summary of the cryptocurrency
Blockchain Index was up 142.07 per cent for industry, for those who have not yet been
the same period. exposed, reveals that bitcoin is the best
Investing in
transformative
technology
By Manuel Anguita
How did Silver 8 come to invest in that, in our opinion, will be transformational
crypto assets in 2015? for trade, finance and commerce. With
Much of the credit must go to my business this thesis in mind, we designed a flexible
partner and Silver 8’s other co-founder, Jose investment strategy that enables us to
Suarez, who is responsible for the vision. express our views via three different
Jose has been a serial entrepreneur and asset classes: digital assets (aka crypto-
tech investor for the best part of 25 years, currencies), venture capital, and financial
experiencing first-hand the development technology related equities, all under the
of the internet. I have a very different same investment vehicle. These three asset
background as I’m a financial markets classes allow us to get exposure to early,
professional, mainly in the hedge fund arena. Manuel Anguita, Co-Founder growth and more mature stages of the
We met 20 years ago when I was starting of Silver 8 technology development cycle.
my career with Goldman Sachs in New In terms of the risk profile, we started
York and Jose was heading Walker Digital, the fund with a very high conviction that
Jay Walker’s (founder of priceline.com) blockchain-based digital assets were going
innovation lab. I moved back to Europe, but to develop rapidly. Therefore, our fund had
we remained friends since. a bias towards early stage technology
Back in 2014, Jose asked me to take a exposure, on the higher end of the risk
serious look at bitcoin and the technology spectrum. Although we remain primarily
behind it. I was initially very sceptical as I invested in blockchain related assets, we now
really did not understand what the purpose also have exposure to other fintech areas.
of this new technology was, but Jose was We are primarily a research-oriented firm;
persistent and encouraged me to read we spend time understanding technologies
the materials he sent across. I followed and companies that can have a material
his advice and soon became hooked in impact that we can monetise for our
an intellectual capacity. I left everything I investors. Having said that, in most of our
was doing and challenged myself to really positions we have an investment horizon
understand how an open blockchain could of one to three years; we are not extremely
function as an alternative source of trust to long term oriented. In addition, a smaller
the traditional financial system. It took us portion of the book is dedicated to short
almost a year to develop a conviction, but term trading, given that digital assets
we finally invested the first dollar of our own markets are still imperfect and offer beautiful
capital in the summer of 2015. trading opportunities. We also have some
venture capital positions that will likely
What is your investment approach? take several years to realise. Therefore,
Although we initially focused on blockchain our investment strategy is a base layer of
technology, the overall investment aim of fundamental convictions on top of which
Silver 8 is to achieve outsized returns by we keep degrees of freedom to be nimble
providing exposure to different technologies when necessary.
What are your thoughts on 2018’s retracement the US and a number of ETF and other products are
and the current status of the blockchain space? awaiting regulatory approval.
What are the main potential triggers that could Setting aside the noise and volatility, we strongly
turn the market? believe this is a market that is here to stay. Purely from
Digital assets experienced a phenomenal rally a portfolio management perspective, digital assets offer
that started in 2016 and accelerated in 2017 to a a unique combination of liquidity and exposure to the
level that, quite honestly, nobody expected. In fact, asymmetrical pattern of returns of early stage technology.
according to industry publications, Silver 8 was the In our opinion, no other asset class offers this profile.
top performing technology hedge fund in both years, Certainly, early stage technology is very risky in absolute
and the overall top performing hedge fund across all terms, but it is also driven by return factors unrelated
strategies in 2017. to the economic cycle; therefore, digital assets and
Behind this prolonged and outstanding rally there traditional assets returns remain uncorrelated.
were a number of reasons, some of them firmly based
on strong fundamentals and others that were derived Does Silver 8 have any institutional investors?
from excessive speculation. In 2018, the market has Who is the largest investor?
corrected considerably from the previous indiscriminate We have a number of institutional investors that include
excess. At the time of writing, the overall digital asset insurance companies, funds of funds, investment
market has a total capitalisation of around USD300 advisors and foundations. These currently make up
billion, down from the USD800 billion peak reached in about 40 per cent of the fund. The principals remain the
early January. largest investors with more than 25 per cent of the fund,
In our view, blockchain technology remains in the and the balance comprises Family Offices and HWNIs.
realms of early stage development, so we believe many The majority of our investors are US-based, followed by
of the consumer-oriented projects being launched are South-East Asia and Europe.
just a few years too early. We remain convinced that this
technology is going to provide an alternative financial What sets Silver 8 apart from other funds in the
architecture, primarily for developing regions of the world, crypto realm?
but it is still going to take several years until we see a When we started investing in crypto back in 2015, there
consumer facing working deployment. We are still in were only a handful of funds with exposure to the
the phase of developing a blockchain protocol standard, space. Now, there are more than 300, the majority having
for which a number of projects are competing. As a been established from mid-2017 onwards. Being early
consequence, we are quite selective on the exposures participants has allowed us to develop deep expertise,
we take. especially in the operational complexities of this new
When dealing with assets with 100 per cent realised asset class. With one of the longest track records in
volatility, making short term predictions is a fool’s game, the industry, we’ve directly experienced its tremendous
at least from our perspective. We would rather focus development, and we’ve had to adapt our procedures to
on technological developments, adoption metrics and all of its operational and technical idiosyncrasies.
market technicals (not so much technical analysis, Secondly, we’ve made every effort in assembling
but more understanding overall money flows). On the a product that is as institutionally inviting and friendly
technology side, we are seeing promising projects and as is currently possible. From our documentation, to
a very healthy growing number of start-ups and young service providers, to legal & compliance, etc, everything
engineers building up the necessary expertise. From has been prepared with this objective in mind. We
an adoption perspective, the space is experiencing want to offer a sensible approach to exposure within
hype and doom cycles that reach higher bottoms after blockchain and wider financial technologies that is of
corrections (measured in terms of overall awareness of institutional ilk.
the technology). However, the technology is still lagging Finally, Silver 8 relies on the combination of 50+ years
behind in terms of actual users, due to high barriers of professional investing experience of our principals
to adoption, primarily in terms of usability, security and and the rest of the team. The length of tenure, combined
regulatory clarity. with the mix of backgrounds, has allowed us to apply
In terms of market flows, digital assets remain the standards of a professional hedge fund management
mainly a retail phenomenon, larger outside US and approach to a new asset class with a strong technology
Europe. Nevertheless, the market structure is rapidly component. We leave you with a thought that many
evolving, and we believe it is a question of time before funds have either a technology savvy leadership team or
institutional-grade products are developed. There are one that has financial markets experience; Silver 8 is one
already several contracts for bitcoin futures listed in of the lucky few to have both sides of the coin. n
Veridium offers
carbon offsets
Interview with Todd Lemons
A brand-new social impact offset token has by institutional investors who want to
come out of a 25-year history of creating understand their exposure to the emissions
sustainable solutions for corporations, liabilities of their portfolio companies.
explains Todd Lemons, chairman of the Consequently, risk managers at
Veridium Foundation. institutional funds are pressuring firms to
Veridium is a collaborative initiative measure and mitigate (offset) their carbon
between a coalition of industry leaders footprints. The motivations are not just
including IBM, Stellar, Brian Kelly Capital altruistic, but also because the market has
Management, EnVision Corporation, and become aware that failing to recognise
IDEAcarbon (a division of IDEAglobal), these liabilities will increasingly have a
Some 10 years ago, InfiniteEARTH Todd Lemons, chairman of the financial impact on the bottom line. There
(also part of the EnVision group of Veridium Foundation is mounting evidence that there is a strong
companies), authored the first forest carbon correlation between high ESG (Environmental
accounting methodology, now known as & Social Governance) ratings and financial
REDD+ (reducing emissions from avoided performance.
deforestation and degradation), which is now Challenging as it may be, companies are
embodied in the Paris agreement. attempting to map their carbon footprint
The company developed the first throughout the entire supply chain and
internationally recognised REDD+ project then understand the arcane word of carbon
known as Rimba Raya, which consists of markets. Company CFOs must then buy
65,000 hectares of tropical forest on the carbon offset credits at the corporate level
island of Borneo in Indonesia. Rimba Raya in order to offset their carbon liabilities,
was the first REDD+ project to be validated but then turn around and allocate those
under the VCS standard and the first to expenses back up stream to specific
receive a Triple Gold rating under the CCBA operational units.
standard. Today, InfiniteEARTH’s Rimba Raya The stakes are higher and the problem
project is still one of the largest carbon credit is even more complex when trying to hedge
suppliers, as well as the largest privately against future carbon liabilities, Lemons
funded orangutan reserve in the world. explains. “Companies lack the necessary
The firm sells those carbon credits to tools to mitigate future carbon liabilities risks”.
a dozen Fortune 500 companies. These There are two classes of carbon credits:
companies face huge challenges in accurately one that trades on the European Carbon
and efficiently accounting for their carbon Exchanges, which are liquid and can be held
footprint. No two manufacturing processes as assets, but typically expire within one or
are alike, and measuring the carbon two years so don’t offer a long-term hedge
emissions liabilities on hundreds of inputs in solution. The second type, such as those
the complex global supply chain for a single offered by REDD+, have long expiration dates
product, is a resource intensive process. and have even broader environmental offset
“To compound the problem, that level capacity, including biodiversity and water
of granularity doesn’t necessarily lead to conservation and positive social impact
accuracy,” Lemons says. value. But, these credits are traded OTC, so
Pressure is coming from governments cannot be listed as assets since they have
and NGOs, but is primarily being driven no public price indicator.
“We have struggled with our clients to manual arbitration and reconciliation. With
help find solutions to simplify and automate blockchain, the record is preserved in an
the whole process,” Lemons says. “As open and immutable ledger on a thousand
blockchain emerged as a viable technology different servers or nodes. This means that
and companies began to explore using it for conflicting data on one is treated as an
supply chain management platforms, such as anomaly and disregarded because there is
IBM’s Hyperledger Fabric, we found that the ‘consensus’ among the other 999.
technology could facilitate solutions to these “This consensus model is also what
carbon accounting and offsetting challenges. makes blockchain so secure,” Lemons days.
“First, we can tokenise the higher quality “A hacker accomplishes nothing by hacking
environmental assets such as REDD+ credits, and modifying the record on a single server
making them liquid, making them liquid and or node. They would have to hack all of
therefore able to be classified on the balance them, which is virtually impossible”.
sheet as an asset. This makes them the To deliver its solution to market, Veridium
ideal long-term hedge vehicle for mitigating has tokenised the underlying carbon credits
future carbon liabilities. as the CARBON token and tokenised the
“Secondly, we have developed a completely utility token as VERDE. The VERDE token
unique accounting approach that looks at the grants access to the EcoSmart-Protocol, the
problem differently through the creation of a accounting software that calculates carbon
library of carbon density per dollar coefficients liability, and then automatically instructs the
based on a fixed set of industry sectors. By purchase of CARBON tokens. The tokens are
assigning a carbon footprint per dollar of then ‘burned’ (taken out of circulation) and
transaction value in a given industry sector, the underlying carbon credits are ‘retired’
we are able to provide an accounting tool (also removed from circulation).
that is more efficient, by several orders of “With regard to offsetting, the distinction
magnitude, than the current process. most people don’t understand is that you
“We know from credible sources that are not just letting polluters pollute,” Lemons
certain sectors are responsible for X per cent says. Carbon taxes and ‘allowances’ issued
of total global emissions and we know what by governments are ‘permissions to pollute’,
the total revenues for those sectors are. with little assurance that the revenues are ever
This unique tool, known as the EcoSmart- contributed to actual emissions reductions.
Protocol, allows us, with a fairly high degree “Offsets, on the other hand, pay for direct
of certainty, to calculate the carbon liabilities emissions reduction in arrears. It takes a
for each dollar of transaction value at very carbon offset project like Rimba Raya a year
precise points along the value chain.” to complete its annual audit. So, we are
Increasingly companies are using currently selling 2016 carbon credits, which are
blockchain for supply chain management, independently verified emissions reductions
which provides a platform to execute these that occurred in 2016. So, emissions reduction
calculations in an open and immutable is guaranteed since it already occurred,
accounting ledger, which then simplifies versus a promise to produce an unquantified
auditing. emissions reduction in the future.
“In the old world, databases didn’t speak “We have prevented 130 million tonnes
to each other very well, even in same of emissions from ever happening by
organisations or among trading partners. preventing the conversion of the Rimba Raya
Although we live in a global connected forest to palm oil. That’s the equivalent of
world, there is still a tremendous amount of removing four million cars from the roads
manual reconciliation.” every year for 30 years”, Lemons says.
Blockchain links everything together and, “In the case of Rimba Raya, carbon
as the chain builds, it preserves that history credits are a crucial funding mechanism
in an immutable, open record. for forest conservation. Veridium and
The ‘consensus’ model of blockchain blockchain technology make that product
technology also reduces disputes. In the past, more digestible for corporate users, which
when the records of the same transaction on means we can now effect real environmental
two different databases disagreed, it required change at scale”. n
Pre ICO
September 1, 2018
Dutch auction sale
100,000 tokens
Seed round
UP TO 40% OFF NAV
This is not an offer for Security Tokens
kryptoin.io
donnie@kryptoin.io
KRYPTOIN
Kryptoin launches
first crypto ETF
Interview with Donnie Kim
The first crypto blockchain ETF to be listed on the index. The path to launching the ETF lies
digital exchanges by Kryptoin ETF Systems, through the ICO of the KRP token, a process
is on its way, having launched its Blockchain that Kim is confident will be completed in
10 Index in November of last year. Kryptoin a few months. Kryptoin is seeking USD50
CEO Donnie Kim explains that the Kryptoin million, mostly to purchase underlying assets
Cryptocurrency Blockchain ETF systems (95 per cent) while the balance will go to
is a patent pending platform upon which marketing & operations and development &
ETF tokens can be created to track and system upgrades.
encapsulate indices formulated to represent “Once the ICO is completed, it will be
the evolving digital currency markets. launched on the major digital exchanges
“We started off by identifying two big Donnie Kim, CEO of Kryptoin just like a regular ETF does on an equity
megatrends,” Kim explains. “We had been exchange,” Kim says. “There has to be
developing fintech applications for four years a mechanism to direct exchange trade
and saw a huge trend in the usage of ETFs. digital currencies so there may be a way to
The assets that were going into them had integrate fiat currencies in the future.
been increasing for 18 years straight and “We have lots of interest from people who
then we saw another megatrend, with the think that this is the future and see a lot of
increase in market capitalisation of bitcoin. money waiting to invest in an index of the
When we started we didn’t know it would cryptocurrency market through a single coin.”
take off to this extent but we realised that The Kryptoin platform is able to calculate
people would need access to the crypto the NAV of the token and that NAV is the
market in the form of ETFs.” value of the underlying.
Existing, and, so far, unsuccessful attempts “When we started, the NAV was USD20
to create bitcoin ETFs are dismissed by Kim and when bitcoin hit 19,000 it went to
because they are attempting buy the value of USD150 and now it’s down to USD51. It’s
bitcoin through equity exchanges. less volatile than buying individual coins.
“Our ETF is totally different,” he says. When the cryptocurrency market is really
“We are creating units and indexes from roaring it can get volatile but it is a basket so
cryptocurrencies and offering access to less volatile than any single one coin.
those ETFs on digital exchanges.” “The market cap of the crypto market at
Amongst the team of eight at Kryptoin is a the moment is about USD400 billion and that
specialist ETF adviser, Jason Toussaint, former is projected to increase to USD10 trillion in
CEO of SPDR GLD ETF, the largest Gold ETF the next three years, so we project that the
in the industry. November 2017 saw the firm’s NAV will go to USD2,200.”
first crypto Blockchain 10 index composed Kim reports that his firm is getting a lot
of the top 10 coins by market capitalisation of interest from people in the ETF industry.
and, since then, the firm has observed “There is a natural interest to see the
that the potential ETF closely mimics the progression of what is going on in the
cryptocurrency market capitalisation. market and we are early and the first firm to
“We have an app that enables the have created something like this.”
exchange trading creation and redemption of Only 100,000 tokens will be sold in the
the underlying,” Kim says. Currently bitcoin, Pre-ICO in a Dutch Auction Format on
ethereum, ripple and bitcoin cash dominate September 1, 2018. n
protecting the purchasers /investors as well enormous discount. Tokens are a crucially
as the client company and its directors.” important way to raise money and I can only
Cayman is not a retail fund environment imagine that the use of them as a way to
and Lawton-Smith says that his priorities raise capital will continue to grow.”
when looking at token offerings or other “In an age where it’s difficult to borrow
cryptocurrency schemes include ensuring money from banks, ICOs and token offerings
that the scheme is only open to qualified are an important financing option for
investors who have the means and business; it’s very important that they are
experience to make their own investigations allowed to take place although we all need
as well there being a solid law firm and clear there to be safeguards.”
disclosures about the offering or investment. One of Lawton-Smith’s concerns is
Lawton-Smith observes that a lot of token that anonymity lies at the heart of the
schemes originate from a team in the US cryptocurrency and blockchain world and
(often with Silicon Valley connections) who that this does not fit well with the need for
seeks to raise money internationally. Apart any participant in the institutional finance
from Cayman’s reputation for funds and industry (internationally) to know who they’re
the high quality and number of its resident dealing with and be satisfied that currency
professionals, the trusted court system (fiat or crypto) is from an acceptable source.
attracts businesses to Cayman where there “Anonymity is attractive from a ‘privacy
are concerns about patent trolls and other for honest people’ perspective but it’s
frivolous litigation risks. no use to us in a regulated services
“Patent trolls send out volumes of environment. Blockchain, the distributed
baseless lawsuits which an innocent client ledger, is revolutionary but it doesn’t include
has to either settle (if cheaper) or engage a counterparty identification so there is no
law firm to deal with. It would be very difficult reference as to who is the buyer and who is
for patent trolls to make these attempts the seller.”
economic where the legal situs for the claim “If we are going to make full use of the
is a Cayman court.” enormous potential of blockchain/distributed
A second strength of Cayman for the token ledger technology, it must be fit for purpose
offering and cryptocurrency industry, Lawton- in a compliant setting – how else do we
Smith says, is that it is the default investment know we’re keeping the bad guys out of
jurisdiction for businesses from the US the system and make the smart contract
generally, being in the same or adjacent time revolution possible?”
zone as well as being compliant with US and Lawton-Smith and others in the sector are
international standards of financial regulation aware of initiatives (including some based in
and reporting. Cayman) that will enable private data, fit for
“If a capital raise is taking place outside KYC / AML purposes to be secured on the
the US on behalf of entrepreneurs based blockchain or other distributed ledger system
in the United States, the requirements are so that the person who is the subject of the
different to a domestic, US capital raise data will be able to choose to release it to
and so the default is to come to Cayman. defined counterparties for defined periods of
Apart from US anti-money laundering laws, time and that this will be a much more efficient
US lawyers in related sectors increasingly way to exchange the required information.
highlight the potential for US federal wire fraud “Some liken the meeting of the crypto
charges if enough care is not taken – making & token concepts with the international
sure the right checks are done is essential” financial services sector to dragging the
Lawton-Smith observes that token Wild West into the regulated world – or at
issuances are a fast and relatively informal least the elements of it that are needed
way to raise money: “You might be funding a to do business. There’s still some way to
business that is yet to be built, subject to the go before we have a really efficient and
nature of the tokens you have purchased; compliant investment process but it is
should the company be successfully important that we get there and that good
launched, participation may allow you to quality ICOs / token offerings are able to
buy services for delivery in the future at an flourish efficiently.” n
auditors get fully comfortable with the self- Compliance – investment manager CCOs
custody mechanisms and controls. The funds will have their hands full thinking through
will rely heavily on the administrator during the myriad new compliance issues and
audit so it will be essential that the auditor regulatory requirements that will arise
and administrator have a good existing over the next 12-18 months. Investment
relationship or prove that they will able to managers should ensure that they engage
work together seamlessly. appropriate compliance experience to avoid
a serious regulatory nightmare. To keep
Administrator – administrators will be an open dialogue for good actors, DMS is
doing some of the heavy lifting of ensuring in active conversations with Cayman, US
investor and accounting records are and EU regulators either directly or through
accurately tracked. When selecting an representation on industry working groups
administrator, crypto funds should ensure
that the technology and blockchain/crypto Governance – while there are many
experience of the administrator matches the governance similarities between a traditional
structure and investment strategy of the fund. alternative asset fund and crypto fund,
Also, ensuring that the administrator has a engaging independent directors with the
comprehensive AML/KYC programme that knowledge of crypto assets are essential
satisfies regulatory requirement in applicable for crypto funds given the highly specialised
jurisdictions will be highly essential. Funds nature of this investment strategy. DMS has
should strongly consider avoiding in-kind been in the business of governance for over
subscriptions/redemption (opting for fiat in/fiat 17 years and can provide a comprehensive
out instead) to avoid complex AML issues at governance solution with the appropriate
least in the current early days of the industry. knowledge of the crypto industry and
breadth of relevant crypto industry contacts.
Legal counsel – Law firms have embraced
the crypto trend and are rapidly getting Summary – thoughts on the way
up to speed. It is imperative that a fund forward
select domestic and offshore legal counsels With all the unknowns, one has two options:
that are at the forefront of cryptocurrency 1) wait for regulatory clarity OR: 2) make a
regulatory developments, market trends, and good faith effort. We have outlined some
technology developments. Ensuring sufficient options that address option two:
investment and risk disclosures in a fund’s • Selection of the most suitable jurisdiction
foundational and offering documents are to incorporate.
going to be a crucial safeguard against any • Carrying out in depth due diligence on the
future action against a fund. One should trading exchanges is pivotal as is ensuring
be cautious, however, as legal support all necessary document is in place.
in establishing a crypto is not an implicit • Start with a simple approach of first
endorsement that the strategy or that the ensuring acceptance of fiat currency for
structure will withstand future regulatory subscriptions and redemptions.
scrutiny. Everyone here, including lawyers, • Avoid crypto in-kind capital transactions.
are in speculative mode at this point. • Clearly document all research and trading
processes.
Tax advisor – identifying and engaging • Identify the most suitable key service
a knowledgeable tax advisor will be providers.
important to assist a fund in navigating • Clearly understand taxation responsibilities
the cryptocurrency space full of legal and ensure correct documentation of
uncertainties. A fund should amongst them. Provide sufficient oversight and
other matters adopt a well-advised policy governance.
on calculation of capital gains, in-kind We hope this informational to be useful as
transactions and related party transactions. you navigate through this uncharted industry.
Funds that have an open and transparent If you would like to discuss any of the topics
approach towards tax will be less likely to in more detail, please feel free to please
draw in regulatory scrutiny. contact us. n