Crypto fund

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Unregistered fund manager who wants to start a crypto fund. How should I structure this?

Understanding crypto fund management

A digital asset is intangible and is stored in a digital format. It includes cryptocurrency and crypto tokens, such as Bitcoin and Ethereum, NFTs etc. Recently there is a trend in which influencers and celebrities create and sell NFTs, contributing over 10,000 different cryptocurrencies worldwide. As a result, this creates new investment opportunities for investors. As crypto-assets’ values are not related to any economic fundamentals, they are eminently volatile as compared to shares and bonds. This is noticeably in Bitcoin which fluctuated 17.94% in the past 6 months. In order to raise public awareness of the risks of investing in crypto-assets, MAS has issued numerous consumer advisories.

One of the main reasons why crypto-assets are gaining popularity around the world is that their fees are relatively low, which makes it easy to buy on a crypto exchange. Not only that, crypto-assets are not associated with world governments which makes them attractive to investors. Investors see the potential for profit in the long run.

With the growing popularity in crypto-assets, it is vital to entrust a trusted crypto asset management to manage and diversify investment portfolio. Unlike the conventional asset management, Crypto asset management is a new trend of monitoring, trading digital assets on blockchain technology. It is constantly evolving with the goal to effectively optimize the value of crypto investments. Leveraging on crypto asset management’s knowledge and expertise, both quantitative and qualitative aspects are deliberately taken into account in portfolio diversification and risk management. Support is provided to tackle the constant revision of MAS rules.

What do I need to do to set up a “crypto fund” in Singapore?

Step 1: Incorporation of a Singapore Legal Entity

A popular fund structure would be the Variable Capital Company for the “crypto-focused fund”. The Legal Entity could be a Variable Capital Company, Unit Trust, Limited Partnership and Limited Liability Company.

Step 2: Obtain the relevant licences

Fund Management Licence

For an overview on fund management licences, entities engaged in fund management activities must hold either a Capital Market Services (CMS) licence for fund management as a Licensed Fund Management (LFMC) or a Venture Capital Fund Manager (VCFM), be registered as a Registered Fund Management Company (RFMC) or be expressly exempted from holding a CMS Licence, in the case of the Single Family Office (SFO).

The licence required would depend on the investor restrictions and quantum of assets under management which the fund intends to market and manage. Note that in Singapore, crypto funds are not authorised for sale to retail investors.

The entity should satisfy MAS that its shareholders, directors, representatives and employees, as well as the FMC itself, are fit and proper, in accordance with the Guidelines on Fit and Proper Criteria issued by MAS.

Payment Services Licence (if applicable)

If the crypto fund intends to operate a platform an exchange to offer crypto and digital token/fiat exchange related services, this may constitute as providing a "Digital Payment Token" service under the Payment Services Act. Hence, a Payment Institution License (PIL) is required and certain requirements must be met in order to apply for the PIL.

Financial Adviser Licence (if applicable)

Where the crypto fund manager offers financial advice in respect of digital tokens as an investment product, a financial adviser's licence must be obtained, unless exempted, under the Financial Advisers Act (Cap. 110).

Step 3: Prepare the fund documentation

To carry out the crypto fund's business activities, the rights and obligations of the relevant parties should be set out in writing. Such documents include but are not limited to subscription agreement, private placement/information memorandum, investment management agreement, administration agreement and custodian agreement.

Are there tax incentives to set up a crypto fund in Singapore?

"No. in Singapore, “specified income” derived from “designated investments” is exempt from tax. Under the current tax regime in Singapore, digital currencies and other digital assets do not fall within the list of “designated investments”, and are therefore likely to be subject to tax at the prevailing rate."

Source: Deloitte, last revised on 15 September 2021