Setting Up an International Bank in the Bahamas
Christian Reeves

Setting Up an International Bank in the Bahamas

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In this post, I’ll look at the requirements to set up an international bank in the Bahamas. This jurisdiction is looking to make a comeback after the FTX mess and needs one or two big time successes as soon as possible in the international banking industry. 

When I talk about an international banking license, or an offshore banking license, I mean a stand-alone bank that offers services to persons and companies outside of the Bahamas. Of course, there are many big banks with licenses in the Bahamas, but these are typically booking centers for tax efficiency and not fully operational banks.

In the following on setting up an international bank in the Bahamas, I’ll first pontificate on the industry in general and then some history of the island. I will end with my thoughts about setting up a bank in the Bahamas, including capital and other considerations. 

Banking Industry in Bahamas

The offshore or international banking industry in The Bahamas is an important part of the country’s financial sector. Here’s an overview of the industry. There are links to the Central Bank’s website below if you would like to do your own research..

The Bahamas has a long history of being a prominent offshore banking hub. Its popularity is partly due to its political stability, strategic location, and favorable regulatory environment. The country has also made efforts to comply with international standards on transparency and information exchange.

The banking sector in The Bahamas is regulated by the Central Bank of The Bahamas. The regulations are designed to conform with international best practices while also encouraging growth in the sector. The Bahamas has worked to align its regulatory practices with international standards, including the requirements set out by the Basel Committee on Banking Supervision and the Financial Action Task Force (FATF).

Banks in The Bahamas can be categorized into two main types:

  • Domestic Banks: These provide banking services to residents and are involved in the domestic economy.
  • International Banks: These mainly serve non-residents and are often referred to as offshore banks. They can be further subdivided into Restricted and Unrestricted Licensees. Restricted banks typically serve a small client base, while unrestricted banks offer full banking services to international clients.

There are dozens of international banks licensed in The Bahamas. It is still relatively small compared to Puerto Rico with 60 international banks operating on the island. The Central Bank of The Bahamas regularly publishes a list of licensed financial institutions on its website, and this would be the best source for the most current information.

The offshore banking industry in The Bahamas has faced challenges in recent years due to increased international scrutiny, demands for transparency, and pressure to comply with international tax and anti-money laundering regulations. However, the country’s commitment to maintaining a reputable and compliant jurisdiction has led to opportunities to attract legitimate business.

The Bahamas remains a significant player in the international banking industry, with a favorable regulatory environment and a strategic location. The industry’s success depends on its ability to balance growth with compliance with international standards and regulations. For the most accurate and up-to-date information, it would be advisable to consult the Central Bank of The Bahamas or other authoritative sources.

History of the Bahamas

The history of The Bahamas is rich and complex, shaped by its indigenous cultures, colonization, slavery, and its development as a modern nation. Here’s an overview of the major periods in Bahamian history:

Pre-Columbian Period

The Bahamas was originally inhabited by the Lucayan, a branch of the Taino people who migrated north from Hispaniola. The Lucayan civilization was present in The Bahamas for centuries before the arrival of Europeans, living primarily through fishing, farming, and trading.

European Discovery and Colonization

Christopher Columbus made his first landfall in the New World on an island in The Bahamas, which he named San Salvador, in 1492. Following his arrival, the Spanish began enslaving the Lucayan people, and within 25 years, the indigenous population had been effectively wiped out.

In 1648, English Puritans known as the Eleutheran Adventurers established the first European settlement in The Bahamas. The islands became a haven for pirates in the late 17th and early 18th centuries, with the infamous pirate Blackbeard once calling Nassau home.

British Rule

The Bahamas became a British Crown colony in 1718, which led to the suppression of piracy. The islands became part of the British Empire’s slave trade, with plantations developing around the cultivation of cotton and other crops. After the American Revolution, many British Loyalists moved to The Bahamas, bringing enslaved Africans with them.

Slavery was abolished throughout the British Empire in 1834, leading to a transition in the Bahamian economy. The Bahamas continued as a British colony, with the economy shifting towards sponging, fishing, and later tourism.

Path to Independence

The movement towards self-government began to gain momentum in the mid-20th century. In 1964, The Bahamas achieved internal self-governance, with Britain retaining control over foreign affairs and defense.

The Progressive Liberal Party (PLP), led by Sir Lynden Pindling, played a significant role in leading the country towards full independence. On July 10, 1973, The Bahamas became an independent nation within the Commonwealth, with Pindling serving as the first Prime Minister.

Modern Era

Since independence, The Bahamas has developed into a prosperous country, largely thanks to its tourism industry, which is one of the main pillars of the economy. The country’s strategic location and favorable tax laws have also made it a significant financial hub.

Challenges in the modern era include managing economic dependencies, environmental sustainability, and addressing issues related to inequality and social development.

Setting Up an International Bank in the Bahamas

Building a new international bank in the Bahamas would be an amazing opportunity. It would require negotiating with the government and regulators on banking, restoring Bahama’s reputation, and building a bank that is “too big to fail.” The montra from regulators at the new players such as BVI and Bermuda is, don’t fail like Bahamas did with FTX. 

Here are my thoughts on banking jurisdictions today: Banking Jurisdictions 

One note on banking licenses: When I refer to an international bank license, I mean a bank that is doing business with persons and companies outside of its licensing jurisdiction. Also, I do not include international licenses that are owned by large banks which operate them as booking centers. Finally, I do not include restricted licenses, otherwise referred to as Class B international or Captive Bank licenses.

  • You can see the list of banks here. The vast majority are not international banks operating from the Bahamas. 

With all of that said, Bahamas needs a new international license to launch that will be a success. They need one that has excellent management, a big time core system, respected compliance programs, and one which is very well capitalized. Short term success from a jurisdictional perspective would then be defined as securing a quality correspondent banking relationship and operating within the Basal III requirements for 2 years. This would go a long way in repairing prior reputational damage.

  – Here is my post on banking core systems: Core Systems 2023

When I say, “too big to fail,” I mean that the Bahama’s need a new bank that will be successful as defined above. If the next new bank fails, the jurisdiction’s reputational damage will be significant. Even though I hype Bermuda, this is the concern on that island… the fact that Jewel Bank has not yet launched and competitors like FV in Puerto Rico and XAPO in Gibraltar are doing very well.  

This also means that, while we’re building the bank, we would need to do CPR in the press for the financial industry in the Bahamas. We need as many articles talking about the launch of the new bank and how Bahamas is making a compliance and regulatory comeback as possible. The purpose for us would be to help our future correspondent bank requests and preemptively answer questions that regulators and bankers will have. 

I note that Bahamas is operating under Basel III and is as close to a European banking standard as you will find in the Caribbean. You can see their operating capital requirements here (primarily Tier 2 capital data). 

The Basel III standards, which were phased in through 2021, include a minimum total capital ratio of 8.0% of risk-weighted assets, a tier 1 capital ratio of 6.0%, and a common equity tier 1 ratio of 4.5%, but this can vary by the type of license. Most of these regulations were updated in 2022.

I expect that Initial paid-in capital will be $10m, even though the applicable law, issued in 2005 and revised in 2013, says $5m. Then I expect the startup budget to be at least $1m. Therefore, your startup capital will be at least $11m to apply for a new international banking license in the Bahamas. 

In general, the requirements to apply for an international banking license in The Bahamas are as follows:

  1. Minimum capital: The minimum capital requirement for an international bank is USD 10 million.
  2. Fit and proper: The Central Bank of The Bahamas will assess the fitness and propriety of the applicant’s directors, senior management, and shareholders.
  3. Business plan: The applicant must submit a business plan that outlines the bank’s proposed business activities, risk management framework, and compliance procedures.
  4. Governance: The applicant must establish a sound corporate governance structure that includes a board of directors, a risk management committee, and an audit committee.
  5. Compliance: The applicant must comply with all applicable laws and regulations, including the Anti-Money Laundering and Counter-Terrorism Financing Act.
  6. The Central Bank of The Bahamas may also require the applicant to meet other requirements, such as having a physical presence in The Bahamas and having a certain number of employees.

For more information on the requirements to apply for an international banking license in The Bahamas, please refer to the following documents on the Central Bank’s website:

  • The Banks and Trust Companies Regulation Act, 2000
  • The Central Bank of The Bahamas Act, 2000
  • General Information and Guidelines for Licence Applications for Banks and/or Trust Companies

Note that you would be applying for a Stand Alone Public License to operate as a Bank under the Bahama’s parlance. 

If the above is of interest, you can contact me at info@premieroffshore.com for more information and a quote to set up a new international bank in the Bahamas. 

The IRS is Targeting Puerto Rico Act 20, 22 and 60
Christian Reeves

The IRS is Targeting Puerto Rico Act 20, 22 and 60

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The IRS is targeting individuals who have taken advantage of tax incentives under Puerto Rico Act 20, 22 and 60, which exempts from taxation certain business and investment income of recently relocated Puerto Rican residents. The IRS has intensified its focus on individuals who may be erroneously reporting US source income as Puerto Rico source income to evade US taxation.

Act 20 and 22 became Act 60 in Puerto Rico on July 1, 2019. It was part of a larger bill that consolidated several tax incentive programs into a single law, known as the Puerto Rico Incentives Code 60.

Act 20 was originally enacted in 2012, and it offered tax breaks to businesses that exported services from Puerto Rico. Act 60 expanded the scope of Act 20 to include individuals who relocate to Puerto Rico and become bona fide residents. These individuals are now eligible for a variety of tax breaks, including exemptions from federal and local income taxes on certain types of income.

Act 22, also known as the Individual Investors Act, is a Puerto Rican law that provides tax breaks to individuals who relocate to Puerto Rico and become bona fide residents. The law exempts these individuals from Puerto Rico income taxes on all passive income realized or accrued after they become residents. Passive income includes interest, dividends, rental income, and capital gains.

To qualify for Act 22, individuals must meet certain requirements, including:

  • They must be U.S. citizens or lawful permanent residents.
  • They must not have been residents of Puerto Rico for the 10 years preceding their move.
  • They must spend at least 183 days per year in Puerto Rico.
  • They must make a minimum investment of $100,000 in Puerto Rico.
  • Act 22 has been controversial since it was enacted in 2012. Some people argue that the law benefits the wealthy at the expense of the poor, while others believe that it has helped to boost the island’s economy.

Here are some of the benefits of Act 22:

  • 0% tax on interest, dividends, rental income, and capital gains.
  • No property taxes on primary residences.
  • Reduced corporate income tax rates.
  • Reduced capital gains tax rates.
  • No inheritance tax.

The passage of Act 60 was seen as a way to attract businesses and individuals to Puerto Rico, and it has been credited with helping to boost the island’s economy. 

The IRS has also been investigating individuals who have used Puerto Rico’s Act 22 as a tax saving tool for cryptocurrency trading and other activities. In January 2021, the IRS launched a campaign targeting such taxpayers.

The IRS’s focus on Puerto Rico tax incentives is part of a broader effort to crack down on tax evasion and increase revenues. The IRS has also been targeting individuals who have used other US territories, such as the US Virgin Islands, to reduce their US tax bills.

Here are some key takeaways from a recent Bloomberg article. Also, here is a summary from Cointelegraph.

  • The IRS is targeting individuals who have taken advantage of tax incentives under Puerto Rico Act 20, 22 and 60.
  • The IRS is also investigating individuals who have used Puerto Rico as a tax haven for cryptocurrency trading and other activities.
  • The IRS’s focus on Puerto Rico tax incentives is part of a broader effort to crack down on tax evasion.
  • Individuals who are considering taking advantage of tax incentives in Puerto Rico or other US territories should be aware of the potential legal risks associated with non-compliance.
  • It is essential to seek professional advice to ensure compliance with tax laws and regulations.

Individuals who are considering taking advantage of tax incentives in Puerto Rico or other US territories should be aware of the potential legal risks associated with non-compliance. It is essential to seek professional advice to ensure compliance with tax laws and regulations, which so many have failed to do.

Here are some ways that taxpayers might abuse Act 22/60:

  • Claiming to be a resident of Puerto Rico but not fully relocating. This could involve spending less than the required 183 days per year in Puerto Rico, or maintaining a home and other ties to the mainland United States.
  • Claiming they purchased the asset/crypto after they moved to the island when they bought it before they moved. This could involve claiming that a stock or other investment was purchased after the taxpayer moved to Puerto Rico, when it was actually purchased before the move.
  • Setting up shell companies or other entities in Puerto Rico to funnel income through. This could involve creating a company in Puerto Rico that is owned by a taxpayer who is not a resident of Puerto Rico, or using a Puerto Rican trust to hold assets that are not actually located in Puerto Rico.
  • Using Act 22 to avoid paying taxes on income that is not actually passive. This could involve claiming that income from a business is passive when it is actually active, or claiming that income from a sale of property is capital gains when it is actually ordinary income.

The bottom line is that the tax benefits of moving to Puerto Rico are excellent and perfectly legal. But, shockingly, people have found ways to abuse the system. They want to live in the US but not pay US taxes. This is a road to trouble. If you want the tax benefits of Puerto Rico you must commit to living on the island. 

In closing, I am often asked why Puerto Rico is allowed to make its own tax laws which superseded US Federal tax law. Here’s the reason: 

Why Americans Should Consider Moving Their Cryptocurrency Offshore
Christian Reeves

The IRS Targets Crypto Investors – Why Americans Should Consider Moving Their Cryptocurrency Offshore

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In a recent legal development, a federal court has ordered the cryptocurrency exchange, Kraken, to turn over account and transaction information to the Internal Revenue Service (IRS). This move by the IRS is intended to uncover whether any of Kraken’s users underreported their taxes, highlighting an increasingly intrusive regulatory environment for cryptocurrency holders in the United States​1​.

The IRS petitioned the court in the Northern District of California to issue this order, following Kraken’s settlement of charges related to a violation of securities law. The tax agency alleged that it issued a summons to Kraken in 2021, which the exchange failed to comply with, sparking the IRS’s interest in investigating the tax liabilities of users who transacted in crypto from 2016 to 2020​1​.

Under the court’s order, Kraken is required to provide the IRS with comprehensive data about users who transacted more than $20,000 in a calendar year. This data includes the user’s name, birthdate, taxpayer identification number, address, phone number, email address, and more. Additionally, Kraken must provide blockchain addresses and transaction hashes that are part of the transaction data, and it may also produce raw data for the IRS​1​.

While this order might appear to be a necessary step in ensuring tax compliance, it has raised concerns about the extent of privacy cryptocurrency users can expect. Despite the court’s denial of several IRS requests, such as receiving employment information and source of wealth from Kraken, this decision underscores the broad power the government can exert over cryptocurrency exchanges and their customers in the name of tax enforcement​1​.

In light of these developments, American cryptocurrency holders should consider moving their assets into cold storage or onto an international exchange. Cold storage, a method of holding cryptocurrency offline, would allow holders to maintain their privacy and control over their crypto assets. International exchanges, particularly those in jurisdictions with more favorable cryptocurrency regulations, offer an alternative to U.S.-based exchanges like Kraken. While these options come with their own considerations, such as the need for robust security measures in the case of cold storage or the implications of international tax law, they represent potential paths for those seeking to maintain greater privacy and control over their cryptocurrency investments.

In conclusion, while tax compliance is unquestionably important, the recent court order involving Kraken serves as a reminder of the potential privacy trade-offs involved in using domestic cryptocurrency exchanges. By considering alternatives like cold storage or international exchanges, American cryptocurrency holders can take steps to protect their privacy and control over their assets in an increasingly regulated U.S. crypto landscape.

It’s Time to Move Your Crypto Business out of the United States
Christian Reeves

It’s Time to Move Your Crypto Business out of the United States

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Setting up a cryptocurrency exchange or an Exchange-Traded Fund (ETF) in the United States can be challenging due to the regulatory environment. The U.S. Securities and Exchange Commission (SEC) has been reluctant to approve Bitcoin ETFs and has called recent applications inadequate. 

They believe that these applications have not been specific enough about how they will manage a “surveillance-sharing agreement,” which is meant to deter fraud and manipulation by ensuring the fund issuer is monitoring market trading activity, clearing activity, and customer identity. The SEC has stated that all Bitcoin ETF applications have fallen short in this regard. Additionally, the SEC has concerns about the price of Bitcoin being open to manipulation, which is one of the main reasons they have been hesitant to approve a spot Bitcoin ETF​.

Bermuda, on the other hand, has been striving since 2018 to be a FinTech hub for regulated digital asset businesses. The island has established and clear regulatory frameworks for investment funds and digital asset businesses, making it an attractive location to set up a digital asset or blockchain fund. Some of the benefits of Bermuda include a world-class financial center, innovative and flexible structures with a robust legal and regulatory compliance framework, quality and expertise of service providers, ease of doing business, and a stable political climate​.

Bermuda offers a variety of fund structures, including private funds, professional class A and B funds, and standard funds. Depending on the investment strategy and investor type, different structures may be more optimal. Importantly, all funds are required to seek permission from the Bermuda Monetary Authority (BMA), and directors and service providers need to be ‘fit and proper’. There’s no requirement for directors to be registered with the BMA. If the equity interests of the fund are to be tokenized, the BMA would still consider the fund to be offering equity interests, requiring BMA registration​​.

Service providers that your fund may need to engage include a registered office provider, an administrator and custodian, an auditor, independent directors, and individuals to handle FATCA and Anti-Money Laundering and Anti-Terrorist Financing Requirements. Bermuda has legislation in place to accommodate these needs​.

Bermuda was a pioneer in the digital asset sector and implemented its digital asset legislation in 2018, which established the foundation for a comprehensive legislative and regulatory framework designed to support growth in the financial technology (Fintech) Sector. The Digital Asset Business Act 2018 (“DABA”) and the Digital Asset Issuance Act 2019 (“DAIA”) regulate ‘digital asset business’ activities conducted in or from within Bermuda. However, funds pursuing a digital asset and/or blockchain-focused strategy would not be subject to DABA or DAIA unless such an investment fund conducts a public sale of its tokenized equity interests​​.

Employee Requirements

There is a requirement to have employees in Bermuda if you operate a digital asset business or crypto business in Bermuda. The Bermuda Monetary Authority (BMA) requires all licensed digital asset businesses to have a senior representative who is resident in Bermuda. The senior representative must be knowledgeable in digital asset business and related Bermuda laws and regulations. They must also be able to report to the BMA on the activities of the licensed business.

In addition to the senior representative, the BMA also requires licensed digital asset businesses to have a minimum of two other employees who are resident in Bermuda. These employees must be responsible for the day-to-day operations of the licensed business.

The BMA’s requirement for employees in Bermuda is designed to ensure that licensed digital asset businesses have a physical presence in the country and that they are subject to the BMA’s supervision. This helps to protect investors and ensure that licensed digital asset businesses are operating in a compliant manner.

There are some exceptions to the BMA’s requirement for employees in Bermuda. For example, the BMA may allow a licensed digital asset business to have a senior representative who is resident outside of Bermuda if the business can demonstrate that it has adequate controls in place to ensure compliance with Bermuda’s laws and regulations.

Capital Requirements

The capital requirements for setting up a digital asset business or cryptocurrency exchange in Bermuda vary depending on the type of business. However, the Bermuda Monetary Authority (BMA) typically requires businesses to have a minimum of $100,000 in paid-up capital.

The following are the capital requirements for different types of digital asset businesses in Bermuda:

  • Digital Asset Custodian: $100,000
  • Virtual Currency Exchange: $100,000
  • Digital Asset Dealer: $100,000
  • Digital Asset Platform Operator: $100,000
  • Digital Asset Market Maker: $100,000

The BMA may require additional capital for businesses that are considered to be higher risk. For example, the BMA may require a business that is involved in margin trading to have a higher level of capital.

The BMA also requires businesses to maintain a certain level of capital throughout their operations. This means that businesses must maintain a minimum level of capital in their accounts and must be able to demonstrate that they have the ability to meet their financial obligations.

The capital requirements for digital asset businesses in Bermuda are designed to ensure that businesses have the financial resources to operate in a compliant manner and to protect investors. If you are considering setting up a digital asset business or cryptocurrency exchange in Bermuda, you should contact the BMA to discuss your specific requirements.

Conclusion 

Please contact me at info@premieroffshore.com for more information on setting up a cryptocurrency exchange or digital asset business. Keep in mind that only the best applicants will receive a license as Bermuda fights to ensure it doesn’t become the next Bahamas. 

Christian Reeves

How to Set Up a Crypto Exchange in Bermuda

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Bermuda has quickly emerged as a leading jurisdiction for digital asset businesses and cryptocurrency exchanges. The island has a number of advantages that make it an attractive destination for these businesses, including:

  • A comprehensive regulatory framework: Bermuda has a comprehensive regulatory framework for digital assets, which is designed to promote innovation while also protecting investors and consumers. The Bermuda Monetary Authority (BMA) is the primary regulator of digital asset businesses in Bermuda.
  • A stable political and economic environment: Bermuda has a stable political and economic environment, which provides businesses with the certainty they need to operate successfully.
  • A skilled workforce: Bermuda has a skilled workforce with experience in the financial services industry. This makes it easier for digital asset businesses to find qualified employees.
  • A favorable tax regime: Bermuda has a favorable tax regime for digital asset businesses. This can help businesses to reduce their tax liability.
  • A supportive government: The Bermuda government is supportive of the digital asset industry. The government has taken steps to promote the growth of the industry, such as establishing a regulatory sandbox for digital asset businesses.

These advantages have made Bermuda an attractive destination for a number of leading digital asset businesses and cryptocurrency exchanges. In recent months, Coinbase, the world’s largest cryptocurrency exchange, has moved its international headquarters to Bermuda. Jewel, a crypto-friendly bank, is also headquartered in Bermuda.

If you are considering setting up a digital asset business or cryptocurrency exchange, Bermuda is a jurisdiction that you should seriously consider. The island has a number of advantages that can make it the best place to do business.

Why Setup a Crypto Exchange in Bermuda

Here are some specific reasons why Bermuda is a good jurisdiction for digital asset businesses and cryptocurrency exchanges:

  • The BMA is a forward-thinking regulator: The BMA has been proactive in developing a regulatory framework for digital assets. The BMA’s Digital Asset Business Act 2018 is one of the most comprehensive and progressive digital asset regulations in the world.
  • Bermuda has a strong track record in financial services: Bermuda is a well-established international financial center with a long history of providing financial services. This gives digital asset businesses and cryptocurrency exchanges access to a mature and sophisticated financial market.
  • Bermuda is a stable and secure jurisdiction: Bermuda is a stable and secure jurisdiction with a strong rule of law. This provides digital asset businesses and cryptocurrency exchanges with the confidence they need to operate successfully.
  • Bermuda has a skilled workforce: Bermuda has a skilled workforce with experience in the financial services industry. This makes it easier for digital asset businesses and cryptocurrency exchanges to find qualified employees.
  • Bermuda has a favorable tax regime: Bermuda has a favorable tax regime for digital asset businesses and cryptocurrency exchanges. This can help businesses to reduce their tax liability.

Overall, Bermuda is a good jurisdiction for digital asset businesses and cryptocurrency exchanges. The island has a number of advantages that can make it the best place to do business.

Existing Digital Asset Businesses in Bermuda

As of March 2023, there are 23 licensed digital asset businesses in Bermuda. These businesses offer a variety of services, including:

  • Digital asset trading
  • Digital asset custody
  • Digital asset issuance
  • Digital asset advisory services

The majority of these businesses are located in Hamilton, the capital of Bermuda. However, there are also a number of businesses located in other parts of the island. I also note that many were set up prior to the tightening of regulations. These days, you need more capital, more compliance systems, better management, and a top quality business plan to be approved.

Here are some of the digital asset businesses that are licensed in Bermuda:

  • Coinbase
  • Coinfloor
  • EQONEX
  • Genesis Global Trading
  • iFinex (Bitfinex)
  • LedgerPrime
  • Omniex
  • Paxos
  • SFOX
  • Tether

Requirements to Build a Crypto Exchange in Bermuda

The Bermuda Monetary Authority (BMA) is the primary regulator of digital asset businesses in Bermuda. The BMA has a number of requirements that digital asset businesses must meet in order to be licensed. These requirements include:

  • Having a sound business plan
  • Having adequate risk management procedures in place
  • Providing clear and accurate information to customers
  • Maintaining adequate records

The BMA has been actively promoting Bermuda as a jurisdiction for digital asset businesses. The BMA has a number of initiatives in place to support the growth of the digital asset industry in Bermuda. These initiatives include:

  • A regulatory sandbox for digital asset businesses
  • A mentorship program for digital asset businesses
  • A training program for digital asset professionals

The BMA is committed to creating a regulatory environment that is conducive to the growth of the digital asset industry in Bermuda. The BMA believes that Bermuda has the potential to become a leading jurisdiction for digital asset businesses.

Capital Requirements and Costs to Open a Crypto Exchange in Bermuda

Here are the capital requirements and filing fees for setting up a crypto exchange or digital asset business in Bermuda:

  • Capital requirements: The capital requirements for a digital asset business license in Bermuda vary depending on the type of license. For the Test license, the minimum capital requirement is $50,000. For the Modified license, the minimum capital requirement is $100,000. For the Full license, the minimum capital requirement is $250,000.
  • Filing fees: The filing fees for a digital asset business license in Bermuda also vary depending on the type of license. For the Test license, the filing fee is $1,000. For the Modified license, the filing fee is:
    • $15,000 if estimated client receipts are less than $500,000
    • $30,000 if estimated client receipts are between $500,000 and $1 million
    • $45,000 if estimated client receipts are greater than $1 million
  • Estimated client receipts: The estimated client receipts are the gross revenue earned in the year preceding the year of assessment arising from digital asset business services provided or product sales to clients by a licensed undertaking.

For example, if you are applying for a Full (F) License and your estimated client receipts are $1 million, the filing fee would be $200,000.

The filing fee is payable upon submission of the application. The BMA will not review your application until the filing fee has been paid.

In addition to the capital requirements and filing fees, there are other costs associated with setting up a crypto exchange or digital asset business in Bermuda. These costs include:

  • Legal fees (typically $250,000)
  • Background Reports on all Shareholders (typically $5,000 to $10,000 per person)
  • Accounting fees and audit fees (preparing your personal or corporate financial statements and converting them to GAAP, if applicable)
  • Office, employees, and other G&A startup expenses.

The total cost of setting up a crypto exchange or digital asset business in Bermuda will vary depending on the size and complexity of the business. However, the capital requirements, legal fees, background reports, and filing fees are the most significant costs.

Conclusion
I hope you’ve found this post on building a crypto exchange in Bermuda to be helpful. If you would like more information, including a detailed quote, please contact me at info@premieroffshore.com. I will be happy to assist you to build your digital asset business in Bermuda.

Setting up a Swiss Crypto Exchange or Fintech Business
Christian Reeves

Setting up a Swiss Crypto Exchange or Fintech Business

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In this post, I’ll look at setting up a Swiss Crypto Exchange or fintech business using a fintech license or as a Qualified Intermediary. It is also possible to operate as a full bank in this capacity, but this is beyond the scope of this article. 

Introduction

Operating a cryptocurrency exchange in Switzerland involves dealing with financial transactions and requires a thorough understanding of the Swiss regulatory environment.

Here are some considerations about licensing:

  1. Banking License: If your exchange operates in a way that it accepts public deposits (which may occur if you hold customers’ fiat currencies or cryptocurrencies), you might need a banking license from the Swiss Financial Market Supervisory Authority (FINMA). However, obtaining a full banking license can be a lengthy and expensive process.
  2. FinTech License: To cater to the needs of the growing fintech industry, including cryptocurrency businesses, FINMA introduced a new regulatory category in 2019 called the “FinTech” license, or “banking license light”. This license allows institutions to accept public deposits of up to CHF 100 million, provided they do not invest these deposits and do not pay any interest on them.
  3. Securities Dealer License: If your exchange is dealing with security tokens, it might need a securities dealer license.
  4. AML Regulations: Independent of the license type, any cryptocurrency exchange operating in Switzerland is required to comply with the Anti-Money Laundering (AML) Act. They must either join a self-regulatory organization (SRO) for AML purposes or be directly supervised by FINMA.

However, the specific licenses required can vary depending on the exact nature of your business, including the types of assets you’re dealing with (cryptocurrencies, security tokens, etc.), the services you offer, and the way your business operates. Furthermore, Switzerland has a highly decentralized political system, and there may be additional cantonal requirements to consider.

Setting up a Crypto Exchange in Switzerland

Here are the general steps you’d need to follow to open a cryptocurrency exchange in Switzerland. These steps may change over time as legislation evolves, so always consult with a local legal expert for the most up-to-date information.

1. Set Up a Swiss Company: In general, a crypto exchange must be registered as a Swiss company, which typically takes the form of a public limited company (AG) or a limited liability company (GmbH). The company must have a registered office in Switzerland. See Aged Swiss Trust below.

2. Membership in a Self-Regulatory Organization (SRO): Switzerland operates a dual system of financial market regulation, composed of federal regulation by the Swiss Financial Market Supervisory Authority (FINMA) and self-regulation by SROs. Depending on the type of financial service offered, crypto businesses must either become members of an SRO or be directly supervised by FINMA.

3. Apply for Necessary Licenses: If the exchange intends to accept public deposits, it will usually need a banking license. Additionally, if the exchange also operates as a securities dealer, it will need a securities dealer’s license. These licenses are granted by FINMA. Crypto exchange businesses might also be subject to the Swiss Anti-Money Laundering (AML) Act, which would require a FINMA license under the AML Act.

Switzerland has introduced a new licensing category called the “FinTech” license, or “banking license light”. This new regulatory category allows institutions to accept public deposits of up to CHF 100 million, provided they do not invest these deposits and do not pay any interest on them. These new FinTech licenses are less expensive and less complicated to obtain than a full banking license.

The requirements for the FinTech license are:

  • Having the necessary organization, qualified staff, and appropriate infrastructure.
  • Complying with the Anti-Money Laundering Act.
  • Keeping customer deposits fully segregated from the business’s operating capital.
  • Ensuring a minimum capital of 3% of the accepted public funds, but no less than CHF 300,000.
  • Compliance with Local Laws: Compliance with local laws and regulations is essential, especially regarding money laundering and securities regulations. Companies may also need to comply with other rules related to taxation, data protection, and consumer protection.

4. Secure Necessary Funding: Operating a crypto exchange can be capital-intensive. Aside from regulatory capital requirements, businesses will need enough funding to build their platform, employ staff, and cover operational costs.

5. Build Relationships with Banks: Crypto exchanges typically need relationships with banks to handle customer deposits and withdrawals. In Switzerland, finding a bank that will work with a crypto business can sometimes be a challenge.

6. Build and Test Your Platform: Before launching, you’ll need to build and thoroughly test your exchange platform. This typically involves software development and cybersecurity considerations.

7. Launch and Market Your Exchange: Once all legal and technical requirements have been met, you can launch your exchange. Ongoing marketing will likely be necessary to attract users to your platform.

Qualified Financial Intermediaries

As per the Anti-Money Laundering Act (AMLA) of Switzerland, a Qualified Financial Intermediary (QFI) is a financial intermediary that either is directly supervised by the Swiss Financial Market Supervisory Authority (FINMA), or is a member of a self-regulatory organization (SRO) recognized by FINMA for the purpose of money laundering supervision.

The term “financial intermediaries” is broadly defined and can include not only banks, insurance institutions, and securities dealers, but also entities such as asset managers, collective investment schemes, and even certain types of fintech companies. These intermediaries need to comply with the Swiss AMLA.

As per Paragraph 2, Section 3 of the AMLA, a financial intermediary is obliged to join a self-regulatory organization (SRO) or to submit to direct supervision by FINMA.

In practical terms, financial intermediaries supervised under AMLA have to comply with duties such as:

  1. Due diligence obligations: They are obliged to verify the identity of their contracting party and, where necessary, establish the identity of the beneficial owner.
  2. Record-keeping: They have to keep records that fully reflect all transactions in such a way that third parties can understand them within a reasonable period of time.
  3. Clarification obligations: In the case of business relationships or transactions which appear unusual or in the case of suspicions of money laundering, a financial intermediary must clarify the economic background and the purpose of these transactions or relationships and document the results.

The licenses are used to enable financial intermediaries to conduct their business within the legal framework of Switzerland. Once a company is classified as a QFI, it is authorized to perform activities like accepting and holding deposits, lending, securities dealing, asset management, and more, depending on the specifics of the license. However, the company is obliged to comply with AMLA and other relevant regulations.

Using an Aged Swiss Trust for a Crypto Exchange or Fintech Business

Establishing a cryptocurrency exchange or a fintech business under an aged Swiss trust or “shelf corporation” can have several advantages:

  1. Established History: An aged corporation is a company that has been around for a while, which can make it appear more credible to customers, business partners, and banks. This is particularly beneficial in the fintech and crypto space, where trust is crucial.
  2. Business Relationships: Existing corporations may already have established relationships with banks, suppliers, and other business partners. These relationships can be leveraged when launching new services, like a crypto exchange.
  3. Speed of Setup: Aged corporations are already registered and have fulfilled all necessary legal requirements, so they can be faster to set up compared to starting a new company from scratch. This can help your business get to market more quickly.
  4. Easier Access to Credit and Investment: Some banks and investors see older corporations as less risky, which can make it easier to obtain credit or attract investment.
  5. Regulatory Approval: Regulatory bodies may view older corporations more favorably, which could potentially facilitate the process of obtaining necessary licenses.
  6. Corporate Image: As you mentioned, the age of a company can help improve the business’s image with customers and with business partners, systems providers, and correspondent banking partners. It can provide a sense of stability and reliability.

However, it’s important to keep in mind that there are also potential drawbacks to using an aged corporation. For example, you may inherit liabilities from the previous operation of the company, or there may be additional due diligence required to ensure the company’s previous operations were in good standing. Additionally, an aged corporation may be more expensive to purchase than setting up a new corporation.

Moreover, regardless of the age of the company, compliance with local regulations, including obtaining the necessary licenses and ensuring adherence to anti-money laundering (AML) regulations, is still required.

Conclusion

In conclusion, setting up a cryptocurrency exchange in Switzerland can be a complex process that requires thorough preparation and a deep understanding of the regulatory landscape. However, with the right approach and guidance, it’s possible to navigate this process and establish a successful business.

It’s strongly recommended to seek advice from legal experts and professionals who are familiar with Swiss fintech regulations and the process of setting up a business in Switzerland. This way, you can ensure that your business is fully compliant with all relevant laws and regulations, and set up for success in the long term.

For more information on acquiring an aged Swiss Trust and building an exchange or fintech in Switzerland, please contact us at info@premieroffshore.com 

Selling Bitcoin for Cash in Canada
Christian Reeves

Selling Bitcoin for Cash in Canada

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In this post, I will look at selling Bitcoin for cash in Canada. The bottom line is that it’s legal to sell Bitcoin for cash in Canada so long as you watch out for cash buyers with illegal businesses looking to launder their drug proceeds (for example). We don’t want to get involved with any buyer that could be a target of law enforcement.

Introduction: 

There is no law in Canada that specifically prohibits the sale of Bitcoin for cash. However, there are some laws that could apply to this activity. For example, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) require businesses that deal in cash to report suspicious transactions to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). This means that if you sell a large amount of Bitcoin for cash, you may be required to report the transaction to FINTRAC.

Cash Transactions Over the Limit

In addition to the PCMLTFA, there are also some provincial and territorial laws that restrict cash transactions. For example, in Ontario, cash transactions over $10,000 are required to be reported to the Ministry of Finance. In British Columbia, cash transactions over $5,000 are required to be reported to the Financial Institutions Commission of British Columbia.

What to Do If You Are Selling Bitcoin for Cash

If you are selling Bitcoin for cash, it is important to be aware of the laws that apply to this activity. You should also be prepared to report any suspicious transactions to FINTRAC. If you are unsure about the laws that apply to your situation, you should consult with an attorney.

Here are some tips for staying compliant with the law when selling Bitcoin for cash:

  • Keep good records of all cash transactions. This includes the date, time, amount, and identity of the person who sold you the Bitcoin.
  • Report any suspicious transactions to FINTRAC. This includes transactions that are large, unusual, or appear to be related to criminal activity.
  • Be aware of the provincial and territorial laws that restrict cash transactions.
  • Consult with an attorney if you have any questions about the laws that apply to your situation.

By following these tips, you can help to ensure that you are staying compliant with the law when selling Bitcoin for cash.

Review:

As the world becomes more digitally inclined, Bitcoin and other cryptocurrencies have grown in popularity and usage. This shift has resulted in governments worldwide, including Canada, taking steps to regulate this emerging financial landscape. In this article, we will explore the legal nuances around selling Bitcoin for cash and the implications of cash transactions that exceed established limits in Canada.

Regulations Around Selling Bitcoin for Cash

Selling Bitcoin for cash is legal in Canada. However, certain regulations govern this process to ensure transparency, prevent fraud, and curb money laundering. Bitcoin is generally considered a commodity by the Canadian government and is thus subject to the barter transaction rules under the Income Tax Act.

Those involved in Bitcoin transactions are also subject to regulations stipulated by the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). As part of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA), businesses dealing with cryptocurrencies, including Bitcoin, must register with FINTRAC. This registration requires the implementation of certain protocols, such as verifying the identities of those involved in transactions, maintaining detailed transaction records, and reporting any suspicious transactions to the authorities.

Cash Transaction Limits

Cash transaction limits are another crucial factor in the legal landscape surrounding Bitcoin sales for cash. In Canada, any business that receives $10,000 or more in cash in a single transaction, or two or more transactions that total $10,000 or more within a 24-hour period, is legally obligated to report such transactions to FINTRAC. This rule applies to both Bitcoin-cash exchanges and traditional cash transactions.

These businesses must also keep detailed records of cash transactions exceeding this threshold. The information usually includes the identities of those involved, details of the transaction, and any suspicious activities. Non-compliance with these requirements can lead to severe penalties, including hefty fines and criminal charges.

Implications and Considerations

While the regulatory framework in Canada allows for Bitcoin transactions and sales, it is crucial to understand that this landscape can be complex. The government has clear guidelines to prevent illicit activities such as money laundering and fraud. For individuals or businesses involved in selling Bitcoin for cash, it is advisable to keep abreast of the latest developments in the law and maintain transparency in all dealings.

Additionally, as Bitcoin transactions fall under the umbrella of barter transactions, they are subject to taxation. Thus, all Bitcoin transactions should be duly reported in income tax filings.

It’s important to note that legal regulations and guidelines may have changed beyond this information, last updated in September 2021. Therefore, it’s recommended to seek professional financial or legal advice for the most accurate and current information.

In conclusion, the sale of Bitcoin for cash in Canada is generally permissible, provided that all transactions adhere to the country’s legal and financial regulations. Complying with these rules helps maintain a transparent and robust financial system that can leverage the potential of cryptocurrencies like Bitcoin while mitigating associated risks.

doing business in mexico
Christian Reeves

An Inside Look at the Business Climate in Mexico for FinTech and Crypto Businesses

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The dynamic business landscape in Mexico is offering fertile ground for both FinTech and crypto businesses. Driven by a potent mix of regulatory evolution, market potential, and consumer demand, Mexico has emerged as one of Latin America’s hotspots for these disruptive technologies. Here’s a look at the vibrant business climate in Mexico for FinTech and crypto enterprises.

Mexico’s Favorable Regulatory Landscape

In 2018, Mexico established itself as a regional pioneer by enacting the first FinTech Law in Latin America. This comprehensive legislation provides a regulatory framework for companies in the FinTech space, including crypto businesses, ensuring their operations’ safety, security, and transparency.

Under the law, FinTech companies can operate as Financial Technology Institutions (ITFs), while crypto-related businesses must be authorized by the Mexican Central Bank (Banxico). The law paves the way for increased consumer protection, fosters competition, and encourages financial inclusion.

While there are still aspects of the law that require further clarification, its presence symbolizes the government’s commitment to fostering an environment conducive to FinTech and crypto innovation.

Untapped Market Potential

Despite significant strides in financial inclusion, a substantial portion of Mexico’s population remains unbanked or underbanked. These individuals and businesses, underserved by traditional financial institutions, represent a considerable untapped market for FinTech and crypto businesses.

FinTech solutions, including digital wallets, peer-to-peer lending platforms, and microfinance services, offer a potential route to financial inclusion. Simultaneously, cryptocurrencies, by their decentralized nature, can provide an accessible alternative for individuals who struggle to access traditional banking services.

Consumer Demand

Mexico’s digital economy is growing, with increasing internet and smartphone penetration. The demand for digital financial solutions, from online banking and digital payments to investment platforms, is on the rise.

Furthermore, the younger demographics of Mexico are more open to adopting these new technologies, creating a vast user base for FinTech and crypto businesses. Crypto, in particular, is gaining popularity among millennials and Generation Z due to its potential for quick returns and its decentralized, global nature.

Crypto Climate

Despite regulatory uncertainty in many countries, Mexico’s attitude towards crypto has been mostly positive. While Banxico does not consider cryptocurrencies as legal tender, it acknowledges their use as a medium of exchange, unit of account, and store of value.

Mexico’s crypto market is rapidly growing, with several crypto exchanges operating in the country. Mexicans use cryptocurrencies for various purposes, including remittances, a sector where cryptocurrencies can offer quicker and cheaper cross-border transfers.

However, it’s important to note that crypto businesses must adhere to strict regulations, particularly concerning money laundering and customer protection. Crypto businesses planning to launch in Mexico should prepare for rigorous compliance procedures, including getting authorization from Banxico and implementing robust KYC (Know Your Customer) protocols.

Market Demand for Fintech and Crypto Businesses

The market for FinTech companies in Mexico has grown significantly in recent years, fueled by a convergence of economic, technological, and demographic factors. As of 2021, Mexico is considered the leader in the FinTech ecosystem in Latin America, boasting the largest number of FinTech startups in the region. This has primarily been spurred by the demand for digital financial services, which are more inclusive, efficient, and user-friendly compared to traditional banking methods.

Market Landscape

Mexico’s FinTech market is diverse, with companies specializing in a wide array of services such as digital banking, payments and remittances, insurance (InsurTech), personal finance, crowdfunding, and blockchain technology. Each of these sectors caters to different user needs, from offering unbanked populations access to financial services to providing small businesses with efficient and cost-effective banking solutions.

Significant progress has been made in regulations too, making Mexico an attractive location for FinTech innovation. In 2018, Mexico became the first country in Latin America to enact a FinTech law, aimed at promoting financial stability and defending against money laundering, while also nurturing innovation and competition in the financial sector.

Demand Drivers

A critical demand driver for FinTech companies in Mexico is financial inclusion. A sizable proportion of Mexico’s population remains unbanked or underbanked. Traditional banks often have stringent requirements or high fees that many citizens can’t meet. FinTech companies, with their flexible and accessible solutions, present an opportunity to address this issue by offering services such as mobile banking, microloans, and digital wallets.

Digital remittances have also emerged as a significant market, with Mexico being one of the largest remittance-receiving countries in the world. FinTech solutions for quick, cost-effective cross-border transfers are in high demand, opening up opportunities for startups in this field.

In addition, Mexico’s thriving e-commerce market is driving demand for digital payments solutions. Consumers are increasingly turning to online shopping, necessitating secure, efficient payment systems that traditional banking often fails to deliver.

Finally, Mexico’s young, tech-savvy population contributes to the increasing demand. With one of the youngest demographics in Latin America and high smartphone penetration, Mexico’s population is well-positioned to adopt digital financial services.

Conclusion

The combination of a growing need for financial inclusion, increasing digitalization, a thriving e-commerce sector, and a young, tech-oriented population sets the stage for substantial growth in Mexico’s FinTech market. As traditional banks struggle to meet evolving consumer needs, FinTech companies can step in to fill the gaps, leveraging technology to provide more accessible, affordable, and efficient financial solutions. Given these conditions, Mexico’s FinTech market presents considerable opportunities for existing companies and new entrants alike.

Mexico’s burgeoning FinTech and crypto sectors reflect the country’s broader commitment to embracing digital transformation and promoting financial inclusion. The favorable regulatory landscape, coupled with untapped market potential and increasing consumer demand, creates a fertile environment for FinTech and crypto businesses.

While challenges remain, including refining the regulatory framework and improving digital infrastructure, the momentum is clearly with FinTech and crypto. As these sectors continue to evolve, Mexico is well-positioned to be a leader in the FinTech and crypto revolution in Latin America.

For more information on where I recommend you set up a Fintech, financial services, or crypto business in Mexico, please have a read through Where to do Business in Mexico as a Fintech, Financial Services, or Crypto Company. For more on the suggested structure, see Incorporating a Financial Services Company in Mexico – the Mexican SOFOM.I hope you’ve found this article helpful. For more information on setting up a business in Mexico, and on forming a SOFOM, please contact me at info@premieroffshore.com

where to do business in Mexico
Christian Reeves

Where to do Business in Mexico as a Fintech, Financial Services, or Crypto Company

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In this post, I’ll explain why I believe Tijuana is the best business city in Mexico in which to set up a fintech, financial services, or crypto business. I’ve traveled and done business throughout Mexico for over 20 years and can say without a doubt that Tijuana is the most efficient option for setting up a fintech business. Here’s why. 

Mexico’s burgeoning FinTech landscape is diverse, innovative, and geographically rich, with Tijuana emerging as the city of choice for setting up a FinTech business. Here, a confluence of strategic location, global business acceptance, linguistic proficiency, cost efficiency, and regulatory allowances merge to create an environment that is uniquely supportive of FinTech growth. Let’s dissect why Tijuana is the best city in Mexico for FinTech enterprises.

Proximity to the U.S. Borde

Tijuana’s strategic location, sitting just across the border from the United States, renders it a natural nexus between two significant economies. This proximity is not just geographical but also deeply intertwined within the fabric of business and culture in the region, offering enormous benefits to the FinTech sector.

Being adjacent to the United States, Tijuana is ideal for businesses targeting a cross-border audience. With easy access to the U.S. market, FinTech companies in Tijuana can exploit the advantages of both countries, navigating market trends, consumer behaviors, and regulatory landscapes with ease. Furthermore, the proximity enables a seamless flow of knowledge, technology, and talent between the two nations, thereby fostering innovation and growth.

Accepting of International Businesses and Investors

Tijuana’s open-door policy towards international businesses makes it a hotbed for globalization. The city’s economic policies are geared towards attracting foreign investment, boosting its global competitiveness, and enhancing its status as a cosmopolitan city. For FinTech businesses, this translates into a supportive, innovation-driven environment that fosters both domestic and international success.

Moreover, Tijuana is home to numerous international tech conferences and events, encouraging networking and collaboration. Such gatherings generate opportunities for FinTech startups to forge partnerships, secure investments, and enhance their global visibility.

Ease of Finding English-Speaking Workers

With a large percentage of its population bilingual in English and Spanish, Tijuana offers a considerable advantage for FinTech companies. English proficiency is a critical factor in the global FinTech landscape, and having access to a skilled, English-speaking workforce is crucial for businesses that wish to operate on an international level.

Why are there so many English speakers in Tijuana compared to other large cities in Mexico? First, many of the people deported from the Western United States end up in Tijuana. They need jobs and have excellent English skills. Second, many in Tijuana middle class have US visas and families in America. They learned English from a young age and travel to San Diego frequently. 

Cost of Labor Compared to the U.S.

Labor costs in Tijuana are significantly lower than in the United States, even though the level of skills and expertise can be comparable. This cost advantage makes Tijuana an attractive location for FinTech startups looking to operate lean while maintaining high-quality services. By reducing the labor cost burden, companies can invest more in product development, marketing, and other critical areas to boost their competitiveness and growth.

Ability to set up a SOFOM (Sociedad Financiera de Objeto Múltiple)

In Mexico, FinTech companies have the option to establish themselves as a SOFOM – a non-bank financial entity that can operate in Baja and the rest of Mexico. This legal entity, dedicated to providing loans and credit, offers the opportunity to conduct financial operations without the need for a traditional banking license.

Setting up a SOFOM in Tijuana means your FinTech business can operate across Baja California and Mexico as a whole, delivering financial services and innovative solutions to a broad and diverse market. Additionally, the ability to set up a SOFOM underscores the flexibility and supportiveness of Mexico’s regulatory landscape towards the FinTech sector.

About Tijuana

Tijuana, an eclectic border city that melds Mexican culture with a dynamic international influence, is a bustling metropolis that attracts people from across the globe. Known for its vibrant cultural scene and burgeoning economic potential, Tijuana is a fascinating city that holds promise for the future. Here’s an overview of Tijuana’s size, population, and demographics.

Size and Location

Tijuana is situated in the Baja California Peninsula, the second-longest peninsula in the world, right at Mexico’s border with the United States. It is the largest city in the state of Baja California and covers an area of around 637 square kilometers.

The city’s strategic location on the U.S.-Mexico border plays a significant role in shaping its economic, cultural, and demographic makeup. Its proximity to San Diego, with which it forms an international metropolitan area, gives it a unique cross-border characteristic.

Population

As of 2023, the estimated population of Tijuana is over 1.8 million people, making it the sixth-largest city in Mexico. The population has seen substantial growth over the past few decades, largely fueled by internal migration from other parts of Mexico and an influx of international immigrants, particularly from the U.S., China, and the rest of Latin America.

The city has a high population density due to its role as a regional hub for employment, culture, and commerce. It also serves as a magnet for individuals and families seeking opportunities in the bustling border economy.

Demographics

Tijuana boasts a diverse demographic makeup, contributing to its rich cultural fabric. The majority of Tijuana’s inhabitants are of Mexican descent, but there’s a significant presence of residents with international roots, primarily from the United States, China, and other Latin American countries.

The age distribution of Tijuana tends to skew younger, aligning with the general trend in Mexico. The city’s median age is in the late twenties, a testament to the youthful energy that drives Tijuana’s economic and cultural dynamism. This young demographic is critical to the city’s labor force and its potential for innovation and growth.

Given its border location, a significant proportion of Tijuana’s population is bilingual, with proficiency in both Spanish and English. This linguistic capability is a valuable asset, particularly in the business and service sectors, fostering cross-border commerce and cultural exchange.

In terms of socioeconomic status, Tijuana exhibits a broad spectrum. The city houses affluent neighborhoods with high-income households, alongside areas characterized by lower income levels. Over the years, economic development efforts have been aimed at addressing these disparities and promoting inclusive growth.

The Bottom Line

Tijuana’s unique blend of size, population, and demographics creates a lively and dynamic city that serves as a nexus of cultures, economies, and opportunities. With its strategic border location, youthful population, and rich cultural diversity, Tijuana offers a vibrant environment ripe for economic growth and international collaboration. As Mexico continues to progress, the city of Tijuana is poised to play a significant role in the nation’s journey toward a prosperous future.

Conclusion

Tijuana’s strategic location, supportive environment for international business, English-speaking talent, competitive labor costs, and legal flexibility make it an ideal setting for a thriving FinTech business. By harnessing these attributes, FinTech entrepreneurs in Tijuana are well-positioned to drive innovation, foster growth, and pave the way for a robust, future-proof financial landscape in Mexico.


I hope you’ve found this article helpful. For more on setting up a fintech, financial services business, or crypto company in Tijuana, or on incorporating a SOFOM, please contact me at info@banklicense.pro

Bermuda
Christian Reeves

Setting Up an International Bank in Bermuda

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In this post, I’ll explain why I believe Bermuda is the best jurisdiction for an international bank in 2024 and what’s required to build an international bank in Bermuda. This is a relatively new jurisdiction, with only one completed case as of this writing. But, I expect big things from Bermuda and for them to compete with Puerto Rico for the top spot in international bank licenses. 

Bermuda Poised to Become Significant Financial Center with Coinbase and Jewel Bank

Bermuda is poised to become a significant financial center in the wake of the announcement that Coinbase, the largest cryptocurrency exchange in the world, is setting up a new office in the island nation. Coinbase’s decision to establish a presence in Bermuda is a major vote of confidence in the jurisdiction’s regulatory framework and its commitment to innovation.

In addition to Coinbase, Bermuda is also home to Jewel Bank, an international crypto bank that is licensed by the Bermuda Monetary Authority (BMA). Jewel Bank’s presence in Bermuda provides a safe and secure platform for institutional investors to access the cryptocurrency market.

The combination of Coinbase and Jewel Bank in Bermuda is a major development for the island nation and its financial services sector. These two companies represent the cutting edge of the cryptocurrency industry, and their presence in Bermuda will help to position the jurisdiction as a leading global hub for crypto finance.

Coinbase

Coinbase is a cryptocurrency exchange that was founded in 2012. The company is headquartered in San Francisco, California, and it has over 56 million users worldwide. Coinbase offers a variety of services, including the purchase, sale, and storage of cryptocurrencies.

In January 2023, Coinbase announced that it would be opening a new office in Bermuda and received the license in April of 2023. The office will be staffed by a team of engineers, compliance professionals, and customer support staff. Coinbase’s decision to establish a presence in Bermuda is a major vote of confidence in the jurisdiction’s regulatory framework and its commitment to innovation.

Jewel Bank

Jewel Bank is an international crypto bank that was founded in 2018. The company is headquartered in Bermuda, and it is licensed by the BMA. Jewel Bank offers a variety of services, including the custody of cryptocurrencies, the issuance of crypto-backed loans, and the provision of crypto-related investment products.

Jewel Bank’s presence in Bermuda provides a safe and secure platform for institutional investors to access the cryptocurrency market. The company’s custody services are regulated by the BMA, and its crypto-backed loans are backed by physical gold. Jewel Bank’s investment products are designed to provide exposure to the cryptocurrency market without the need to hold cryptocurrencies directly.

The Future of Finance in Bermuda

The combination of Coinbase and Jewel Bank in Bermuda is a major development for the island nation and its financial services sector. These two companies represent the cutting edge of the cryptocurrency industry, and their presence in Bermuda will help to position the jurisdiction as a leading global hub for crypto finance.

Bermuda has a number of advantages that make it an attractive destination for crypto businesses. The jurisdiction has a stable political environment, a strong legal system, and a well-developed financial infrastructure. Bermuda is also a member of the Financial Action Task Force (FATF), which is an international organization that sets standards for combating money laundering and terrorist financing.

The arrival of Coinbase and Jewel Bank in Bermuda is a major step forward for the jurisdiction’s financial services sector. These two companies will help to attract other crypto businesses to Bermuda, and they will help to position the jurisdiction as a leading global hub for crypto finance.

Bermuda: An Excellent Jurisdiction to Set Up an International Bank

Bermuda is a British Overseas Territory located in the Atlantic Ocean. It is a popular destination for international businesses, including banks. The Bermuda Monetary Authority (BMA) is the regulatory body for banks in Bermuda.

There are several reasons why Bermuda is an excellent jurisdiction to set up an international bank. These include:

  • Stable and politically independent jurisdiction

Bermuda is a stable and politically independent jurisdiction. It has a long history of democracy and rule of law. This makes it a safe and secure place to do business.

  • Strong legal system

Bermuda has a strong legal system based on English common law. This provides businesses with a high level of legal certainty.

  • Well-developed financial infrastructure

Bermuda has a well-developed financial infrastructure. This includes a sophisticated payments system, a deep pool of capital, and a highly skilled workforce.

  • Member of the Financial Action Task Force (FATF)

Bermuda is a member of the Financial Action Task Force (FATF), which is an international organization that sets standards for combating money laundering and terrorist financing. This demonstrates Bermuda’s commitment to fighting financial crime.

  • Low tax rate

Bermuda has a low tax rate. This can save businesses money on their tax expenses.

  • Professional and experienced regulator

The BMA is a professional and experienced regulator. It is committed to ensuring that banks in Bermuda are safe and sound.

Overall, Bermuda is an excellent jurisdiction to set up an international bank. It offers a number of advantages, including a stable political environment, a strong legal system, a well-developed financial infrastructure, and a low tax rate.

Requirements to Set Up a Bank in Bermuda

Bermuda is a British Overseas Territory located in the Atlantic Ocean. It is a popular destination for international businesses, including banks. The Bermuda Monetary Authority (BMA) is the regulatory body for banks in Bermuda.

To set up a bank in Bermuda, you must meet the following requirements:

  • You must be a company incorporated in Bermuda.
  • You must have a minimum paid-up capital of $10 million.
  • You must have a board of directors that is composed of at least three Bermudian citizens or residents.
  • You must have a management team that has experience in the banking industry.
  • You must submit an application to the BMA and meet all of the BMA’s requirements.

The application process for a bank license in Bermuda can take several months. The BMA will review your application and conduct an on-site inspection of your proposed bank. If the BMA approves your application, you will be granted a bank license.

Once you have a bank license, you can begin operating your bank in Bermuda. You will be subject to the BMA’s regulations and supervision. The BMA is responsible for ensuring that banks in Bermuda are safe and sound.

If you are considering setting up a bank, Bermuda is a good option to consider. The BMA is a professional and experienced regulator, and Bermuda offers a number of benefits for businesses. You’ll find it an excellent alternative to Puerto Rico.

Contact Information

For more information about setting up a bank in Bermuda, you can review the Bermuda Monetary Authority website at: https://www.bma.bm/. We will be happy to assist you to form an international bank in Bermuda. For more information, please contact me at info@premieroffshore.com.

In this post, I’ll explain why I believe Bermuda is the best jurisdiction for an international bank in 2024 and what’s required to build an international bank in Bermuda. This is a relatively new jurisdiction, with only one completed case as of this writing. But, I expect big things from Bermuda and for them to compete with Puerto Rico for the top spot in international bank licenses. 

Bermuda Poised to Become Significant Financial Center with Coinbase and Jewel Bank

Bermuda is poised to become a significant financial center in the wake of the announcement that Coinbase, the largest cryptocurrency exchange in the world, is setting up a new office in the island nation. Coinbase’s decision to establish a presence in Bermuda is a major vote of confidence in the jurisdiction’s regulatory framework and its commitment to innovation.

In addition to Coinbase, Bermuda is also home to Jewel Bank, an international crypto bank that is licensed by the Bermuda Monetary Authority (BMA). Jewel Bank’s presence in Bermuda provides a safe and secure platform for institutional investors to access the cryptocurrency market.

The combination of Coinbase and Jewel Bank in Bermuda is a major development for the island nation and its financial services sector. These two companies represent the cutting edge of the cryptocurrency industry, and their presence in Bermuda will help to position the jurisdiction as a leading global hub for crypto finance.

Coinbase

Coinbase is a cryptocurrency exchange that was founded in 2012. The company is headquartered in San Francisco, California, and it has over 56 million users worldwide. Coinbase offers a variety of services, including the purchase, sale, and storage of cryptocurrencies.

In January 2023, Coinbase announced that it would be opening a new office in Bermuda and received the license in April of 2023. The office will be staffed by a team of engineers, compliance professionals, and customer support staff. Coinbase’s decision to establish a presence in Bermuda is a major vote of confidence in the jurisdiction’s regulatory framework and its commitment to innovation.

Jewel Bank

Jewel Bank is an international crypto bank that was founded in 2018. The company is headquartered in Bermuda, and it is licensed by the BMA. Jewel Bank offers a variety of services, including the custody of cryptocurrencies, the issuance of crypto-backed loans, and the provision of crypto-related investment products.

Jewel Bank’s presence in Bermuda provides a safe and secure platform for institutional investors to access the cryptocurrency market. The company’s custody services are regulated by the BMA, and its crypto-backed loans are backed by physical gold. Jewel Bank’s investment products are designed to provide exposure to the cryptocurrency market without the need to hold cryptocurrencies directly.

The Future of Finance in Bermuda

The combination of Coinbase and Jewel Bank in Bermuda is a major development for the island nation and its financial services sector. These two companies represent the cutting edge of the cryptocurrency industry, and their presence in Bermuda will help to position the jurisdiction as a leading global hub for crypto finance.

Bermuda has a number of advantages that make it an attractive destination for crypto businesses. The jurisdiction has a stable political environment, a strong legal system, and a well-developed financial infrastructure. Bermuda is also a member of the Financial Action Task Force (FATF), which is an international organization that sets standards for combating money laundering and terrorist financing.

The arrival of Coinbase and Jewel Bank in Bermuda is a major step forward for the jurisdiction’s financial services sector. These two companies will help to attract other crypto businesses to Bermuda, and they will help to position the jurisdiction as a leading global hub for crypto finance.

Bermuda: An Excellent Jurisdiction to Set Up an International Bank

Bermuda is a British Overseas Territory located in the Atlantic Ocean. It is a popular destination for international businesses, including banks. The Bermuda Monetary Authority (BMA) is the regulatory body for banks in Bermuda.

There are several reasons why Bermuda is an excellent jurisdiction to set up an international bank. These include:

  • Stable and politically independent jurisdiction

Bermuda is a stable and politically independent jurisdiction. It has a long history of democracy and rule of law. This makes it a safe and secure place to do business.

  • Strong legal system

Bermuda has a strong legal system based on English common law. This provides businesses with a high level of legal certainty.

  • Well-developed financial infrastructure

Bermuda has a well-developed financial infrastructure. This includes a sophisticated payments system, a deep pool of capital, and a highly skilled workforce.

  • Member of the Financial Action Task Force (FATF)

Bermuda is a member of the Financial Action Task Force (FATF), which is an international organization that sets standards for combating money laundering and terrorist financing. This demonstrates Bermuda’s commitment to fighting financial crime.

  • Low tax rate

Bermuda has a low tax rate. This can save businesses money on their tax expenses.

  • Professional and experienced regulator

The BMA is a professional and experienced regulator. It is committed to ensuring that banks in Bermuda are safe and sound.

Overall, Bermuda is an excellent jurisdiction to set up an international bank. It offers a number of advantages, including a stable political environment, a strong legal system, a well-developed financial infrastructure, and a low tax rate.

Requirements to Set Up a Bank in Bermuda

Bermuda is a British Overseas Territory located in the Atlantic Ocean. It is a popular destination for international businesses, including banks. The Bermuda Monetary Authority (BMA) is the regulatory body for banks in Bermuda.

To set up a bank in Bermuda, you must meet the following requirements:

  • You must be a company incorporated in Bermuda.
  • You must have a minimum paid-up capital of $10 million.
  • You must have a board of directors that is composed of at least three Bermudian citizens or residents.
  • You must have a management team that has experience in the banking industry.
  • You must submit an application to the BMA and meet all of the BMA’s requirements.

The application process for a bank license in Bermuda can take several months. The BMA will review your application and conduct an on-site inspection of your proposed bank. If the BMA approves your application, you will be granted a bank license.

Once you have a bank license, you can begin operating your bank in Bermuda. You will be subject to the BMA’s regulations and supervision. The BMA is responsible for ensuring that banks in Bermuda are safe and sound.

If you are considering setting up a bank, Bermuda is a good option to consider. The BMA is a professional and experienced regulator, and Bermuda offers a number of benefits for businesses. You’ll find it an excellent alternative to Puerto Rico.

Contact Information

For more information about setting up a bank in Bermuda, you can review the Bermuda Monetary Authority website at: https://www.bma.bm/. We will be happy to assist you to form an international bank in Bermuda. For more information, please contact me at info@premieroffshore.com.

building a fintech crypto card issuing business
Christian Reeves

Building a Compliance Program for a Fintech, Crypto, or Credit Card Issuing Business

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In this post, I will review how to build a compliance program for a new or startup fintech, crypto, or credit card issuing business. Most startups focus on tech, testing, and finding customers in the early days. But, a complete compliance program should be the first thing a fintech, crypto, or credit card issuing business should build because this governs onboarding and nearly all aspects of the business. 

Also, your compliance program and documents are the keys to maintaining good relations with your bank, brokerage, exchange, processor, or issuer. Many providers will open an account with minimal documents. But, once you begin transacting, they will ask all kinds of questions. If you don’t have a compliance program in place, your fintech, crypto, or credit card issuing business will be paused or closed until you can build a proper compliance program. 

Building the Program – First Steps

Building a compliance program for a credit card issuing company requires adherence to various regulatory requirements, including those from payment networks like MasterCard and Visa, as well as complying with Know Your Customer (KYC) and Anti-Money Laundering (AML) policies. Here is an overview of the process:

  1. Understand MasterCard and Visa requirements: Both MasterCard and Visa have their own set of rules and regulations for credit card issuers. These may include guidelines on transaction processing, chargeback management, fraud prevention, data security, and reporting. Review the MasterCard Rules and the Visa Core Rules and Visa Product and Service Rules to familiarize yourself with their requirements.
  2. Develop internal policies and procedures: Create comprehensive internal policies and procedures that adhere to MasterCard and Visa requirements, as well as applicable federal and state laws and regulations. This may include policies for card issuance, underwriting, account management, billing, dispute resolution, and fraud management.
  3. Implement a KYC program: A robust KYC program should include customer identification procedures, risk-based customer due diligence, and ongoing monitoring of customer transactions. Ensure that your program aligns with applicable KYC regulations and industry best practices.
  4. Implement an AML program: Develop an AML program that includes risk-based customer due diligence, transaction monitoring, suspicious activity reporting, record-keeping, and employee training. Ensure that your program complies with applicable AML regulations, such as the Bank Secrecy Act (BSA) and the USA PATRIOT Act.
  5. Establish a Compliance Management System (CMS): A CMS is a formalized system for managing compliance within the organization. It should include components like compliance policies and procedures, a compliance officer, employee training, and monitoring and corrective action processes.
  6. Develop a data security program: Implement a data security program that complies with the Payment Card Industry Data Security Standard (PCI DSS) and any applicable data privacy regulations, such as the General Data Protection Regulation (GDPR) or the California Consumer Privacy Act (CCPA).
  7. Train employees: Train employees on your compliance program, policies, and procedures. Regularly update training materials to ensure that employees stay informed about regulatory changes and industry best practices.
  8. Monitor and audit: Regularly monitor and audit your compliance program to identify any gaps or areas for improvement. Implement corrective actions as necessary to maintain compliance with all applicable regulations and requirements.

Creating a compliance program for a credit card issuer is similar to creating a compliance program for a bank in several ways:

  • Both require adherence to federal and state regulations, as well as KYC and AML policies.
  • Both need to establish a CMS to manage compliance within the organization.
  • Both require employee training to ensure understanding of and adherence to the compliance program.
  • Both need to conduct regular monitoring and audits to maintain compliance with applicable regulations and requirements.

However, credit card issuers must also comply with the specific rules and regulations set forth by payment networks like MasterCard and Visa, as well as adhere to the PCI DSS for data security.

Building a Program – Toolbox

A robust compliance program for a credit card issuer should include various tools and resources to ensure adherence to regulatory requirements and mitigate risks. Some common and popular compliance tools include:

  1. Compliance Management System (CMS): A CMS is a centralized platform to manage, track, and report on all aspects of the organization’s compliance program. It can help automate and streamline processes, such as policy management, risk assessment, training, and reporting.
  2. Risk Assessment Tools: Risk assessment tools can help identify, assess, and prioritize risks associated with credit card issuing activities. These tools may include questionnaires, checklists, or software solutions designed to assess risks in areas like fraud, AML, and data security.
  3. Policy Management Software: Policy management software can be used to create, maintain, and distribute internal policies and procedures related to credit card issuing operations. This software typically includes version control, approval workflows, and audit trails to ensure consistency and compliance with regulations.
  4. Transaction Monitoring System: A transaction monitoring system can be used to detect suspicious activities, potential fraud, and other risks related to credit card transactions. This may involve rule-based systems or machine learning algorithms to analyze transaction data and generate alerts for further investigation.
  5. Fraud Detection Tools: Fraud detection tools, such as artificial intelligence (AI) and machine learning algorithms, can help identify patterns indicative of fraudulent activities. They may be used to analyze transaction data, monitor user behavior, and identify potential risks in real time.
  6. Know Your Customer (KYC) and Customer Due Diligence (CDD) Solutions: KYC and CDD solutions can help automate customer identification, verification, and risk assessment processes. These tools may include identity verification services, watchlist screening, and ongoing customer monitoring.
  7. Anti-Money Laundering (AML) Software: AML software can help automate the process of monitoring transactions for suspicious activity, filing suspicious activity reports (SARs), and maintaining compliance with AML regulations. This may include rule-based systems or more advanced AI-driven solutions.
  8. Data Security Solutions: Data security solutions, such as encryption tools, firewalls, and intrusion detection systems, can help protect sensitive customer and transaction data, ensuring compliance with data privacy and security regulations like the Payment Card Industry Data Security Standard (PCI DSS).
  9. Training and Learning Management Systems (LMS): An LMS can help manage and track employee training related to compliance, including course content, attendance, assessment, and reporting. This can be especially useful for organizations that must regularly train employees on AML, KYC, and other compliance topics.
  10. Regulatory Reporting Tools: Reporting tools can help streamline the process of generating, submitting, and tracking regulatory reports, such as SARs or periodic financial statements. These tools may include templates, automated data aggregation, and tracking capabilities.

While these tools can help support a comprehensive compliance program for a credit card issuer, it is important to remember that the specific tools needed will depend on the organization’s size, risk profile, and regulatory environment. Tools will also depend on the jurisdiction of your customers, of which I was uncertainly reviewing your website. 

Building a Program – Bank Secrecy Act

The Bank Secrecy Act (BSA) does apply to credit card issuers. The BSA, also known as the Currency and Foreign Transactions Reporting Act, was enacted to combat money laundering and other financial crimes. It requires financial institutions, including credit card issuers, to maintain certain records, file reports, and implement anti-money laundering (AML) programs.

Credit card issuers and fintech companies are considered financial institutions under the BSA, as they offer various types of financial products and services. Therefore, they are subject to the same AML rules and regulations as banks and other financial institutions. These rules and regulations include Know Your Customer (KYC) policies, Currency Transaction Reports (CTRs), Suspicious Activity Reports (SARs), and other due diligence requirements.

Compliance with the BSA helps credit card issuers mitigate risks associated with money laundering, terrorism financing, and other financial crimes. Non-compliance can lead to substantial fines and penalties, as well as reputational damage.

Building a Program – US Sanctions for Card Issuers

U.S. sanctions are relevant to U.S. credit card issuers and fintech companies because they impose restrictions on transactions and dealings with specific individuals, entities, or countries. They are required to comply with these sanctions to prevent financial crimes, such as money laundering and terrorism financing. Non-compliance can lead to significant penalties and reputational damage.

Here’s how U.S. sanctions are relevant to U.S. credit card issuers and fintech companies:

  1. Restricted transactions: Sanctions prohibit U.S. credit card issuers from engaging in transactions with individuals, entities, or countries designated by the Office of Foreign Assets Control (OFAC), a division of the U.S. Department of the Treasury. This includes processing payments, providing services, or extending credit to sanctioned parties.
  2. Compliance programs: Credit card issuers must implement comprehensive compliance programs to identify and block transactions involving sanctioned parties. These programs should include policies and procedures, employee training, and transaction monitoring systems to ensure compliance with OFAC regulations.
  3. Due diligence: Credit card issuers are required to conduct due diligence on their customers, merchants, and business partners to ensure they are not engaging in transactions with sanctioned parties. This involves screening customers against OFAC’s Specially Designated Nationals (SDN) list and other restricted party lists.
  4. Reporting requirements: U.S. credit card issuers must report any blocked or rejected transactions involving sanctioned parties to OFAC within a specified timeframe. Failure to report such transactions can lead to penalties and enforcement actions.
  5. Penalties for non-compliance: Non-compliance with U.S. sanctions can result in substantial fines, penalties, and reputational damage for credit card issuers. In some cases, individuals involved in non-compliance may also face criminal prosecution.

U.S. credit card issuers and fintech companies must stay informed of updates and changes to U.S. sanctions programs and ensure their compliance programs are up-to-date and effective. This helps protect the issuer from potential financial and reputational risks associated with non-compliance.

Building a Program – AML & BSA Risk Assessment 

An Anti-Money Laundering (AML) and Bank Secrecy Act (BSA) risk assessment is a comprehensive evaluation of an organization’s exposure to money laundering, terrorism financing, and other financial crime risks. A risk assessment typically includes factors such as geographical risk, market risk, product risk, customer risk, and distribution channel risk. By assigning scores to these factors, an organization can better understand its risk exposure and implement appropriate controls to mitigate those risks.

Here is a description of an AML/BSA risk assessment that incorporates a scoring system based on various risk factors:

  1. Geographical risk: Assess the countries and regions where the organization operates or conducts business with customers. Assign a score based on the level of risk associated with each location, considering factors such as political stability, corruption levels, the presence of organized crime or terrorist groups, and AML/CTF regulatory framework effectiveness.
  2. Market risk: Evaluate the organization’s exposure to market risks, such as fluctuations in interest rates, currency exchange rates, or stock market prices. Assign scores based on the level of market volatility and the organization’s susceptibility to these risks.
  3. Product risk: Assess the organization’s products and services, focusing on their vulnerability to money laundering and terrorism financing. Assign a score to each product or service based on factors such as the level of anonymity, transaction size, ease of transferability, and complexity of the product or service.
  4. Customer risk: Evaluate the organization’s customer base, considering factors such as customer type (individual, corporate, or government), occupation, source of funds, and expected transaction patterns. Assign a score based on the level of risk associated with each customer segment.
  5. Distribution channel risk: Assess the organization’s distribution channels, such as branches, agents, digital platforms, or correspondent banking relationships. Assign a score based on factors such as the level of oversight, transparency, and the risk of money laundering or terrorism financing associated with each channel.
  6. Internal controls and compliance risk: Evaluate the effectiveness of the organization’s internal controls and compliance program, including policies, procedures, employee training, and monitoring systems. Assign a score based on the level of risk mitigation provided by these controls.

Once the scores are assigned, the organization can aggregate the scores to create an overall risk score for each category. This process helps identify areas of higher risk that require enhanced due diligence and monitoring.

The results of the risk assessment should be used to develop and enhance the organization’s AML/BSA compliance program, ensuring that resources are allocated effectively to mitigate identified risks. Regularly reviewing and updating the risk assessment is essential to maintain its effectiveness and ensure the organization’s compliance with evolving regulatory requirements.

Building a Program – Miscellaneous Policies 

Here’s an overview of a few key policies and their relevance to credit card issuers which I haven’t covered above:

  1. Suspicious Activity Reports (SARs) Policy: Under the Bank Secrecy Act (BSA), credit card issuers are required to file SARs for any transaction that may involve money laundering, terrorist financing, or other suspicious activities. This policy should establish guidelines for identifying, investigating, and reporting suspicious transactions, as well as maintaining proper documentation.
  2. USA PATRIOT Act Policy (Section 314 reporting): Section 314(a) of the USA PATRIOT Act allows financial institutions, including credit card issuers, to share information with law enforcement agencies to identify and report potential money laundering or terrorist financing activities. The policy should outline procedures for responding to 314(a) requests, safeguarding customer information, and maintaining records of information sharing.
  3. FinCEN Policy: The Financial Crimes Enforcement Network (FinCEN) is responsible for implementing and enforcing the BSA and AML regulations. A credit card issuer’s FinCEN policy should detail the company’s compliance with FinCEN’s regulations, including Customer Identification Program (CIP), Customer Due Diligence (CDD), Enhanced Due Diligence (EDD), and recordkeeping requirements.
  4. OFAC Policy: The Office of Foreign Assets Control (OFAC) enforces economic and trade sanctions against certain individuals, entities, and countries. Credit card issuers must have a policy in place to ensure compliance with OFAC regulations, including screening customers, transactions, and business partners against OFAC’s Specially Designated Nationals (SDN) list and other restricted parties lists, as well as blocking or rejecting prohibited transactions.
  5. FBAR Policy: The Report of Foreign Bank and Financial Accounts (FBAR) is a reporting requirement for U.S. persons with foreign financial accounts. While this requirement may not directly apply to credit card issuers, they should have policies in place to ensure compliance with FBAR regulations if they hold or have signature authority over foreign financial accounts.
  6. Identity Theft Policy: The Fair and Accurate Credit Transactions Act (FACTA) requires financial institutions, including credit card issuers, to establish an Identity Theft Prevention Program (ITPP) to detect, prevent, and mitigate identity theft. The policy should include procedures for identifying and addressing red flags, verifying customer identity, maintaining customer information security, and responding to identity theft incidents.

By developing and implementing these policies, credit card issuers or fintech companies in the United States can demonstrate compliance with relevant regulations, mitigate risks associated with financial crimes, and protect their customers and business from potential harm. Regularly reviewing and updating these policies is essential to ensure ongoing compliance and effectiveness.

Building Program – Why is this Relevant 

Credit cards and fintech systems can be used in various ways to facilitate money laundering. Money laundering is the process of making illegally-gained proceeds appear legitimate by disguising their origins. Here are some ways that credit cards can be used in money laundering schemes:

  1. Overpayment and refunds: A criminal may make a large overpayment on their credit card account using illicit funds and then request a refund. This creates the appearance of a legitimate transaction and allows the launderer to receive “clean” money from the credit card issuer.
  2. “Credit card factoring” or “credit card laundering”: This involves a criminal using a shell or front company to process fraudulent credit card transactions. They use stolen or fake credit card information to create transactions, which are then processed through the merchant account of the shell company. The company receives the funds from the credit card processor, less any fees, and transfers the laundered money to the criminal’s account.
  3. Collusion with merchants: Criminals may collude with complicit merchants who allow them to use their credit cards to make purchases or pay for services with illegal funds. The merchant then refunds the transaction, providing the criminal with laundered money from the merchant’s account.
  4. Buying and selling goods: Criminals may use illicit funds to purchase high-value goods or services using credit cards, and then sell those goods or services to convert them back into cash. This process can help disguise the origins of the illegal funds.
  5. Multiple small transactions: Criminals can use credit cards to make multiple small transactions (structuring) to avoid detection or reporting thresholds. These transactions may be spread across several accounts, cards, or merchants to further reduce the risk of detection.
  6. Prepaid credit cards: Prepaid credit cards can be used to launder money, as they can be bought and reloaded with cash. Criminals can use these cards for purchases, ATM withdrawals, or online transactions without revealing their true identity. In some cases, they may also use prepaid cards to transfer money between different countries.

Financial institutions, including credit card issuers and Fintech companies, are required to implement robust anti-money laundering (AML) programs to detect and prevent such activities. This includes Know Your Customer (KYC) policies, transaction monitoring systems, and Suspicious Activity Reports (SARs) to identify and report any suspicious activities.

Building a Program – Transaction Flow for a Credit Card Provider

The typical transaction flow for a credit card issuer involves multiple parties and several steps. This section is specific to card issuers as fintech companies have structures that are to diverse to cover in an article, Here is an overview of the process when a cardholder makes a purchase using a credit card:

  1. Cardholder initiates a purchase: The cardholder presents their credit card to the merchant for payment.
  2. Merchant processes the transaction: The merchant uses a point-of-sale (POS) terminal, payment gateway, or other payment processing system to capture the card details and submit the transaction for authorization.
  3. Transaction is sent to the acquiring bank: The merchant’s acquiring bank (or payment processor) receives the transaction details and forwards the information to the card network (e.g., Visa or MasterCard).
  4. Card network routes the transaction: The card network routes the transaction to the issuing bank (the bank that issued the credit card to the cardholder) for authorization.
  5. Issuing bank authorizes the transaction: The issuing bank checks the cardholder’s account for available credit, verifies that the card is valid and not flagged for fraudulent activity, and either approves or declines the transaction. The response is sent back through the card network and the acquiring bank to the merchant.
  6. Merchant receives authorization response: The merchant receives the response and completes the sale if the transaction is approved. The approved transaction is then stored in a batch for later settlement.
  7. Merchant submits the batch for settlement: At the end of the business day or another predetermined time, the merchant submits the batch of approved transactions to the acquiring bank for settlement.
  8. Acquiring bank requests funds: The acquiring bank sends the batched transaction details to the card network, which then forwards the information to the respective issuing banks.
  9. Issuing banks transfer funds: The issuing banks transfer the funds for the settled transactions, minus interchange fees, to the card network.
  10. Card network transfers funds to the acquiring bank: The card network consolidates the funds from the issuing banks and transfers the net amount, minus network fees, to the acquiring bank.
  11. Acquiring bank deposits funds to the merchant’s account: The acquiring bank deposits the funds, minus any applicable fees, into the merchant’s account.
  12. Cardholder is billed: The issuing bank adds the transaction amount to the cardholder’s account balance. The cardholder will be responsible for paying the balance according to their credit card agreement.

This transaction flow represents a simplified version of the process. In practice, there may be variations depending on the specific payment infrastructure, card network, and additional services or features offered by the involved parties.

SOP for a Credit Card Processor and Fintech Company

Creating a comprehensive compliance Standard Operating Procedure (SOP) for a credit card issuer and a fintech company requires addressing multiple areas of regulatory and operational compliance. While the exact SOP will depend on your specific circumstances, the following components should generally be included:

  1. Compliance Management System (CMS): Develop a formalized system for managing compliance within the organization, including the appointment of a dedicated compliance officer, clear reporting lines, and regular communication with senior management.
  2. Regulatory Compliance: Ensure adherence to all applicable federal, state, and local regulations, as well as payment network rules (e.g., MasterCard and Visa). This may include consumer protection laws, fair lending practices, data privacy, and security requirements.
  3. Know Your Customer (KYC): Establish a robust KYC program that includes customer identification, risk-based due diligence, and ongoing monitoring of customer transactions. Ensure that the program complies with all applicable KYC regulations.
  4. Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF): Implement a comprehensive AML/CTF program, including risk-based customer due diligence, transaction monitoring, suspicious activity reporting, record-keeping, and employee training.
  5. Third-Party Risk Management: Develop a process for assessing, monitoring, and managing risks associated with third-party service providers, such as payment processors, technology vendors, and collection agencies.
  6. Fraud Prevention and Detection: Implement a fraud management program that includes transaction monitoring, fraud detection tools, chargeback management, and customer education on fraud prevention.
  7. Data Security and Privacy: Establish a data security program that complies with the Payment Card Industry Data Security Standard (PCI DSS) and any applicable data privacy regulations, such as the General Data Protection Regulation (GDPR) or the California Consumer Privacy Act (CCPA).
  8. Internal Policies and Procedures: Develop and maintain comprehensive internal policies and procedures that cover all aspects of the credit card issuer’s operations, including card issuance, underwriting, account management, billing, dispute resolution, and fraud management.
  9. Employee Training and Awareness: Provide regular training to employees on compliance requirements, internal policies, and procedures. Ensure that training materials are updated to reflect regulatory changes and industry best practices.
  10. Monitoring, Auditing, and Reporting: Establish a process for regularly monitoring and auditing the credit card issuer’s compliance program to identify gaps, areas for improvement, and potential violations. Implement corrective actions as needed and report any significant compliance issues to senior management and, if required, to regulatory authorities.
  11. Record-Keeping: Maintain accurate and complete records of all compliance-related activities, including risk assessments, audits, training, and reporting, as required by applicable regulations.

The million-dollar issue: Do all credit card issuers and Fintech companies take possession of client funds? As a result, do all credit card issuers require a money services license?

Credit card issuers and Fintechs generally do not take possession of client funds in the same way as banks, which hold deposits in customer accounts. Credit card issuers extend a line of credit to cardholders, allowing them to make purchases or obtain cash advances up to a specified limit. Cardholders are then required to repay the borrowed amount, typically with interest, according to their credit card agreement.

As a result, credit card issuers usually do not fall under the category of money services businesses (MSBs) and may not require a money services license. MSBs typically include entities involved in money transmission, currency exchange, check cashing, and other financial services that involve the handling of client funds.

For more on this topic, you might also read through Structuring a Fintech or Card Issuer without an MSB License

Process to Apply for a Money Service Business License

In the United States, money transmission licensing is regulated at the state level. Each state has its own requirements and procedures for obtaining a money transmission license, which means that if you plan to operate in multiple states, you may need to obtain a license in each state where you conduct business. Here is a general outline of the process:

  1. Research state-specific requirements: Begin by researching the specific licensing requirements for each state in which you plan to operate. You can usually find this information on the state’s financial regulatory agency website or by consulting with a legal professional.
  2. Prepare your application: Each state has its own application form and supporting documentation requirements. Commonly required documents may include a business plan, financial statements, policies and procedures, AML program documentation, background checks, and fingerprints for key personnel, as well as information about the company’s organizational structure and management.
  3. Obtain a surety bond: Most states require money transmitters to obtain a surety bond as part of the licensing process. The bond amount varies by state and is designed to protect consumers in case the licensee fails to meet its obligations.
  4. Pay application fees: Each state typically requires payment of a non-refundable application fee and, if applicable, a licensing fee upon approval.
  5. Submit your application: Once you have prepared all the required documents, submit your application to the appropriate state agency for review. The review process can take several weeks to several months, depending on the state and the complexity of your application.
  6. Respond to any inquiries or requests for additional information: During the review process, the state agency may request additional information or clarification. Respond promptly to these requests to avoid delays in the licensing process.
  7. Obtain your license: If your application is approved, the state agency will issue your money transmission license. You may need to pay an initial licensing fee or meet additional requirements, such as providing proof of a surety bond, before your license becomes active.
  8. Maintain compliance: Once licensed, you must maintain compliance with state-specific regulations, including periodic reporting, financial statement submissions, and maintaining a surety bond. You may also be subject to periodic examinations by the state agency to ensure ongoing compliance.
  9. Renew your license: Money transmission licenses typically have expiration dates and must be renewed periodically. Each state has its own renewal process and fees, so be sure to stay aware of the requirements and timelines to avoid any lapses in your license.

Bond Requirements (CA and TX as examples)

Money Services Businesses (MSBs) are required to obtain surety bonds as part of the licensing process. These bonds help protect consumers from potential financial loss resulting from the MSB’s failure to comply with state regulations or unethical business practices.

Here are the bond requirements for MSBs in California and Texas:

  1. California: Money transmitters in California are required to obtain a surety bond under the California Money Transmission Act. The bond amount varies based on the volume of the money transmitter’s business. The minimum bond amount is $250,000, and the maximum bond amount is $7,000,000. However, if the money transmitter also conducts business in receiving money for obligations, the maximum bond amount may be increased to $10,000,000.
  2. Texas: In Texas, MSBs that are engaged in money transmission or currency exchange must obtain a surety bond under the Texas Finance Code. The bond amount is determined by the Texas Department of Banking based on the MSB’s business activity and volume. The minimum bond amount is $300,000, and the maximum bond amount is $2,000,000. In addition to the state-level bond requirement, certain cities in Texas, such as Austin and Houston, may also require MSBs to obtain a separate bond at the local level.

Note that bond requirements may vary based on the specific type of MSB (e.g., money transmitter, check casher, currency exchanger) and other factors, such as the volume of transactions processed. The above is just an example.

Given the complexity and state-specific nature of money transmission licensing, this is a very complex matter. We are capable of applying for licenses in multiple states if that is what’s required. My quotation below does NOT include the cost of applying for an MSB license(s).

Consulting Services

We can create a compliance program that covers all essential aspects, including regulatory compliance, risk assessment, transaction monitoring, fraud detection, data security, and employee training as described above. Our team of experienced compliance professionals will work closely with you to ensure the program is tailored to your organization’s unique needs and requirements.

We can assist in all aspects of a fintech, crypto, or credit card issuing business compliance program. For more information and pricing, please contact us at info@premieroffshore.com. For information on this topic for banks, see my other website www.banklicense.pro 

FBO Account MSB License
Christian Reeves

Structuring a Fintech or Card Issuer without an MSB License

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One of the biggest issues facing fintech and card issuers in the United States is how to structure the business to avoid the need for an MSB license. An MSB license can tie up many millions of dollars in capital and cost a fortune to acquire on a national level. Thus, there is how to structure a fintech or card issuer without an MBS license. 

First, allow me to describe an MSB license. An MSB or Money Services Business license is a regulatory approval that is mandatory for any company operating in the money transfer industry or providing financial services. MSB is a broad term that encompasses various types of financial service providers such as currency exchanges, money transmitters, and stored value card issuers. The goal of this license is to prevent money laundering, terrorist financing, and illegal activities from being conducted through these companies.

For fintech or card issuer companies, obtaining an MSB license is critical because it enables them to legally operate in the financial industry. Fintech companies who engage in activities such as international transactions or online payments must have this license to conduct business. Card issuers, on the other hand, may need an MSB license when offering prepaid cards or other stored-value products. In addition to compliance with regulations, holding an MSB license can also help improve customer confidence and trust as it provides a level of legitimacy and credibility to a business.

Basically, any time you take control of customer funds, you need an MSB license. Thus, the way to eliminate the need for an  MBS license as a fintech or card issuer is to not take control of customer funds. One way to accomplish this is to use an FBO account at your local bank. 

An FBO (For Benefit Of) account is a type of bank account used to hold funds on behalf of a third party. It is different from a typical corporate bank account in that the funds in an FBO account do not belong to the account holder but rather to the named beneficiary or beneficiaries.

FBO accounts are commonly used in various scenarios, such as when a company collects funds on behalf of its clients, in trust accounts managed by lawyers, or by non-profit organizations to hold donations.

The primary difference between an FBO account and a regular corporate bank account lies in the ownership and control of the funds. In an FBO account, the account holder (usually a business) acts as a custodian, merely holding the funds in a fiduciary capacity for the benefit of the named beneficiary or beneficiaries. The account holder does not have the authority to use the funds for its own purposes.

In contrast, a typical corporate bank account is owned and controlled by the company, which can use the funds as needed for its business operations.

Regarding the need for an MSB (Money Services Business) license, FBO accounts can help reduce or eliminate the requirement for such a license because the account holder does not take possession of client funds. MSB licenses are typically required for businesses that transmit or convert money, such as money transmitters, currency exchangers, or check cashers.

By using an FBO account, a business can avoid being classified as an MSB because it does not take possession of client funds, nor does it engage in money transmission or currency exchange activities. Instead, it merely holds the funds in a fiduciary capacity on behalf of the client. However, it’s essential to consult with a legal or compliance expert to ensure the specific arrangement does not trigger any regulatory requirements, as regulations may vary depending on jurisdiction and the nature of the business.

I hope you find this information helpful. For more information on banking licenses, see our website on this topic, www.banklicense.pro. We are here to assist you structure a fintech or MSB or credit card issuing business in the United States or in Mexico. For more information, please send me a message to info@premieroffshore.com

Swiss Flag
Christian Reeves

Exchanging Bitcoin for Physical Cash in Switzerland

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As the popularity of cryptocurrencies like Bitcoin continues to grow, so does the demand for methods to exchange them for physical cash. While licensed exchanges are a common and regulated way to conduct these transactions, many people wonder if it is legal to exchange Bitcoin for physical cash in Switzerland without using a licensed exchange. In this article, we will explore the legal landscape surrounding this topic and the potential risks and considerations involved in such transactions.

Is it legal to sell cryptocurrency for physical cash in Switzerland?

Yes, it is legal to sell cryptocurrency for physical cash in Switzerland. Switzerland has a relatively friendly regulatory environment for cryptocurrencies and has been proactive in creating a legal framework for their use and exchange. The Swiss Financial Market Supervisory Authority (FINMA) has issued guidelines on how to handle cryptocurrencies and comply with Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations.

As long as the parties involved in the transaction comply with the relevant laws and regulations, selling cryptocurrency for physical cash is allowed. However, it is essential to ensure that proper AML and KYC procedures are followed, as well as adhering to any other applicable regulations. This may include registering with FINMA if the transaction volume exceeds a certain threshold or if the business is operating as a financial intermediary.

It is recommended to consult with legal professionals or experts in Swiss cryptocurrency regulations to ensure full compliance with the law when conducting such transactions.

Understanding the Swiss Regulatory Framework:

Switzerland has established itself as a hub for blockchain and cryptocurrency businesses, thanks to its progressive approach to regulation. The Swiss Financial Market Supervisory Authority (FINMA) is responsible for overseeing financial services providers, including those dealing with cryptocurrencies.

According to FINMA guidelines, businesses that exchange cryptocurrencies for fiat currencies may be considered financial intermediaries and subject to Anti-Money Laundering (AML) regulations. However, this classification depends on the nature and scale of the transactions. If a person engages in occasional transactions for personal use or as a hobby, they may not be considered a financial intermediary and may not be subject to licensing requirements.

Peer-to-Peer Transactions and Legal Considerations:

Exchanging Bitcoin for physical cash through peer-to-peer (P2P) transactions, such as private sales or trades with friends, may not require licensing, provided the transactions are infrequent and not part of a business activity. However, engaging in regular or large-scale transactions may be considered financial intermediation and subject to Swiss AML regulations.

There are several risks and considerations associated with P2P transactions, including:

  1. Legal liability: If you inadvertently engage in unlicensed financial intermediation, you may face legal consequences, including fines or penalties.
  2. Fraud and security risks: P2P transactions may expose you to fraud, theft, or other security risks, as you may be dealing with unknown parties without the protection of a licensed exchange.
  3. Tax implications: Regardless of whether you use a licensed exchange, it is essential to report any gains or losses from Bitcoin transactions to the Swiss Federal Tax Administration (FTA) or to your appropriate tax authority, such as the IRS in the United States, and pay any applicable taxes.

Conclusion:

While it may be possible to exchange Bitcoin for physical cash in Switzerland without using a licensed exchange under certain circumstances, it is essential to understand the legal landscape and the potential risks involved. Engaging in occasional P2P transactions for personal use may be permissible, but regular or large-scale transactions may require compliance with Swiss AML regulations. Therefore, if you are a seller of Bitcoin, be sure to only engage in such transactions with a firm in Switzerland that will follow these laws.

If you are interested in selling Bitcoin or another cryptocurrency for cash, please contact us at info@premieroffshore.com and we can connect you will a firm in Switzerland. Please note that we do not work with people who wish to sell in the United States where such a transaction is likely to be illegal. 

US Cash
Christian Reeves

Exchanging Bitcoin for Physical Cash in the United States

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The growing popularity of cryptocurrencies, such as Bitcoin, has led to an increase in demand for various methods to exchange them for physical cash. While licensed exchanges are a common and regulated way to conduct these transactions, many people wonder if it is legal to exchange Bitcoin for physical cash in the United States without using a licensed exchange. In this article, we will explore the legal landscape surrounding this topic and the potential risks and considerations involved in such transactions.

Understanding the Regulatory Framework:

In the United States, the regulatory framework governing cryptocurrencies is complex and varies across different federal and state agencies. The Financial Crimes Enforcement Network (FinCEN), a bureau within the U.S. Department of the Treasury, is responsible for enforcing anti-money laundering (AML) and countering the financing of terrorism (CFT) regulations for virtual currency businesses.

According to FinCEN guidance, individuals who exchange virtual currency, such as Bitcoin, for real currency (including physical cash) may be considered money transmitters and subject to federal registration and licensing requirements. However, this classification depends on the nature and frequency of the transactions. If a person is merely engaging in occasional transactions for personal use or as a hobby, they may not be considered a money transmitter.

State-Level Regulations:

In addition to federal regulations, some states have implemented their own licensing and regulatory requirements for cryptocurrency businesses. For example, New York State requires a “BitLicense” for businesses engaged in virtual currency activities, while other states have different licensing requirements or exemptions. It is crucial to understand and comply with any applicable state-level regulations when exchanging Bitcoin for physical cash.

Peer-to-Peer Transactions and Legal Considerations:

Exchanging Bitcoin for physical cash through peer-to-peer (P2P) transactions, such as private sales or trades with friends, may not require licensing, provided that the transactions are infrequent and not part of a business activity. However, engaging in regular or large-scale transactions may be considered money transmission and subject to federal and state regulations.

There are several risks and considerations associated with P2P transactions, including:

  1. Legal liability: If you inadvertently engage in unlicensed money transmission, you may face legal consequences, including fines, penalties, or even criminal charges.
  2. Fraud and security risks: P2P transactions may expose you to fraud, theft, or other security risks, as you may be dealing with unknown parties without the protection of a licensed exchange.
  3. Tax implications: Regardless of whether you use a licensed exchange, it is essential to report any gains or losses from Bitcoin transactions to the Internal Revenue Service (IRS) and pay any applicable taxes.

US Person Charged with a Crime

There have been instances where people have been charged with crimes in the United States for selling Bitcoin in private transactions without using an exchange. These cases usually involve violations of money transmission laws, anti-money laundering (AML) regulations, or other financial crimes.

One example is the case of LocalBitcoins trader “Bitcoin Maven,” whose real name is Theresa Lynn Tetley. In 2018, she was sentenced to 12 months in federal prison, forfeited 40 Bitcoins, $292,264 in cash, and 25 gold bars for operating an illegal money transmission business and laundering funds using Bitcoin. Tetley conducted her transactions without registering as a money services business (MSB) with the Financial Crimes Enforcement Network (FinCEN) and failed to implement anti-money laundering procedures, thus violating federal laws.

Another example is the case of Sal Mansy, who was charged in 2016 for operating an unlicensed money-transmitting business by trading Bitcoin without a license. Mansy conducted over $2.4 million worth of Bitcoin transactions without registering with FinCEN and was sentenced to a year in federal prison.

These cases highlight the importance of understanding and complying with federal and state regulations when conducting private Bitcoin transactions in the United States. Failure to follow these regulations can result in criminal charges, fines, and even imprisonment.

Conclusion:

Engaging in occasional P2P transactions for personal use may be permissible, but regular or large-scale transactions will require compliance with US federal and state regulations. Therefore, if you wish to sell Bitcoin in a private transaction, you must do so in a country where this is legal… and you must follow all applicable laws in the transaction. 

Here is an article on selling crypto in a private transaction in Switzerland where it is legal: Exchanging Bitcoin for Physical Cash in Switzerland.

Changes to the Mexican SOFOM in 2020
Christian Reeves

Changes to the Mexican SOFOM in 2020

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Mexican reform is in full stride as the new president implements his programs. Some of these changes affect the Mexican SOFOM. Here’s what you need to know about setting up a SOFOM in 2020. 

Reform regarding SOFOMs in Mexico is likely to pass as most banks and financial institutions have already felt the wave of change coming their way. Whether it is good or bad is for you to decide about changes to the SOFOM in 2020. 

The agency in charge of creating new reforms in the country is called CONDUSEF. The CONDUSEF has in its power the ability to review and to make modifications to contracts involving SOFOMs. 

This is not limited to the way SOFOMs works as a whole, the modifications this government institutions make can even alter the way SOFOMs deal with clients and realize their service among other things. 

Think of CONDUSEF as the constitution of how SOFOMs operate in the country. These 2020 reforms, rules, and regulations only apply to regulated SOFOMs. If your SOFOM is not regulated then you won’t have to worry about this. 

In order for a regulated SOFOM to remain in business in 2020 and beyond, 70% or more of its assets must come from the allowed activities that it is authorized to perform as stated in the bylaws. Such authorized activities will usually include mortgages, financing, factoring, and the approval and issuance of credit. 

If your SOFOM does not generate 70% of its assets from this manner, then the same percentage needs to come from the administration of its portfolio as a way to be considered part of the financial system. That is to say, 70% of its income should come from the management of its assets (such as is the case with an investment advisor or fund. 

When a regulated SOFOM is considered part of the financial system, it can receive tax advantages. An important tax advantage that comes with the SOFOM being part of the financial system is that its credit portfolio will not be included in the calculation of the tax on its assets. 

Another tax advantage that you and your clients can take advantage of if you form a SOFOM is that the interest that you charge to your clients shall not be subject to a value-added tax. VAT is 16% in Mexico, so this is a big deal. 

SOFOMs are one of the preferred ways for foreign investors to begin capitalizing in the Mexican and Latin American markets. These structures have fewer restrictions on how they can operate compared to the US and Europe and are very powerful financial entities within Mexico.

All of the previous restrictions on investments by foreign investors associated with the capital stock of the SOFOMs have been eliminated. One of the many benefits of the reforms whose one of its main goals is to promote foreign investment. 

This is great news as before, foreign investors needed to do a ton of due diligence before they could invest in Mexico, and even when everything was in order their investment was limited. The red tape on SOFOMs was intense and intended to keep foreigners out. 

As of today, a SOFOM can be formed entirely with foreign investments as long as they follow the same protocol a Mexican entity needs to follow to be structured and that they register with the proper government institutions. 

This presents a great opportunity for foreign investors to take advantage of the situation and set up a SOFOM to operate within Mexico. This structure might provide financial services or investment management throughout Latin America. The SOFOM might also operate as a cryptocurrency exchange or money transmission business.

When you establish a SOFOM, you are given the opportunity to register it as a regulated or nonregulated entity. As a foreign investor, you have the advantage of using the nonregulated version as a low-cost financial services entity. The setup costs and operational costs for this entity in Mexico are a fraction of those associated with an international bank in Puerto Rico, for example. 

For the same reason, financial institutions who own a SOFOM or individual foreign investors have the opportunity to offer their clients a lower interest rate on credit and loans. Also, the costs of labor and other expenses will be significantly lower than in competing jurisdictions. For example, see Sample Operating Expenses for an Offshore Bank in Puerto Rico.

SOFOMs are becoming extremely popular in Mexico and I expect this popularity to continue in 2020 as the regime of the new president continues to implement his reforms The CONDUSEF is already preparing for an influx of foreign investment associated with the registry of SOFOMs. 

I hope you’ve found this article on what is a SOFOM to be helpful. For more information, or for assistance in establishing a SOFOM on Mexico, contact us at info@premieroffshore.com or call us at (619) 483-1708

IRA Romney
Christian Reeves

What we can learn from Mitt Romney’s IRA

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Mitt Romney is expected to win the race for a Senate seat in Utah and could end up becoming one of the most powerful players in the United States Senate. Mr. Romney is a former governor of Massachusetts and ran for president in 2012 but lost to Barack Obama. With all of that said, the most interesting thing about Mr. Romney is his IRA account.

Estimates of Mr. Romney’s IRA account are as high as $101.6 million depending on who you ask. No matter the exact number, let’s agree that this is damned impressive considering the maximum contributions to a traditional IRA is relatively small.

According to the IRS website, for 2015, 2016, 2017 and 2018, your total contributions to all of your traditional and Roth IRAs cannot be more than $5,500 ($6,500 if you’re age 50 or older). Plus, your ROTH contribution is limited by your filing status and your income. We can assume Mr. Romney was well over this income level.

Because he didn’t qualify for a ROTH IRA, Mr. Romney used an ordinary IRA or simplified employee pension (SEP) IRA, which means he’ll have pay ordinary income tax on the gains, starting when he reaches 70 ½.

So, how the heck did Romney’s IRA account reach $100M?

While at Bain Capital, the investment management firm he founded, Romney made investments into startup companies that he thought would take off. He knew that Bain was making major investments into these pre-IPO companies, and, if they succeeded, he could make a fortune post IPO. He put a few thousand down knowing that Bain was investing millions, and he had all of Bains research.

You could have had the same returns buying Bitcoin in your IRA back in 2013. An investment of $100 would have gotten you 1 coin. That coin would have been worth nearly $19,000 at the peak and about $7,000 today. An investment of $5,000 (the contribution limit) would have earned you $94 million had you timed the market right.

The benefits of making the investment with a traditional IRA are 1) using the pre-tax money, and 2) no tax in trades until you reach 70.5 years of age. At that time, you pay ordinary income rates, which are about 37%. 3) tax deferral on all gains and use of your capital throughout the years.

Had you used savings rather than an IRA to buy that Bitcoin, you would have paid long-term capital gains when you sold your Bitcoin on December 16, 2017. This would have been at about 20%.

Had you made the investment through a ROTH IRA, you would pay income tax on your full salary, with no deduction for the retirement account. Then, the crypto would appreciate tax-deferred (as described above) and you would pay zero tax when you sold the Bitcoin. Obviously, if you qualify for a ROTH, this would be the tax-efficient vehicle for high yield investments.

It’s also been reported that Romney used offshore IRA LLCs and UBIT blockers to protect and enhance his IRA returns. Both of these have been used for decades by very high net-worth IRA investors.

An IRA LLC allows you to move some or all of your retirement account offshore. Once that’s done, you can invest in real estate, hard assets, high yield foreign stocks, most physical gold, and just about anything else you like. The most popular investments for high net-worth persons is offshore master/feeder funds.

Moving your IRA offshore should open up your account to higher returns from foreign markets. It will also put you in control of the account. You become the investment manager of your IRA – the Bain Capital if you will – you select the investments and write the checks.

An offshore IRA LLC is especially valuable to those who wish to invest in foreign real estate. Only you will be willing to travel and learn the country. Only you will spend the time and money to find the best opportunities abroad. So, if you’re going to make multiple foreign investments, you should be the investment manager of your retirement account.

If you’ll make only one or two investments, consider using an offshore self-directed account. In these, the custodian makes the investment for you and you save the $3,500 setup costs of an offshore IRA LLC. If you will make multiple investments or want control, then go with an LLC. For more on these differences, see: Self Directed IRA or Offshore IRA LLC?

And, once you have your IRA offshore, you may be able to use it to gain residency in a country like Panama. Invest $22,000 from your IRA into Panama’s friendly nation reforestation visa program, pay legal and other fees from your personal savings, and you can gain residency in Panama. After 5 years of residency, you can apply for citizenship.

For more ideas, see: Best IRA Investments for 2018

The other IRA tool Romney reportedly used is a UBIT blocker.  This one will require a bit of explanation.

When you earn ordinary income in an IRA from a business (not dividends), or make money using leverage, the profits generated are called Unrelated Business Income. UBI is taxed at ordinary rates in the US as earned, which is about 35%.

So, if you buy a rental property in the US, and half the money comes from your IRA and half from a non-recourse mortgage, about half your rental income and your gain when you sell the property will be taxed at 35%. The other 50% will flow into your IRA account tax deferred.

Enter into this same transaction offshore, and add a UBIT blocker corporation to your IRA LLC, and you pay zero tax. UBI is converted to passive income and blocked from Uncle Sam.

I note that these tax benefits for IRAs are ONLY available outside of the United States. Using a blocker corporation in the United States, or with US real estate, subjects you to tax at the corporate level. See: How to invest your IRA into offshore hedge funds and active businesses.

I hope you’ve found this article on what we can learn from Mitt Romney’s IRA to be helpful. For more information on moving your retirement account offshore, please contact me at info@premieroffshore.com or call us at (619) 483-1708.

Offshore Security Tokens in 2018
Christian Reeves

Offshore Security Tokens in 2018

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I expect the offshore security token to be the hot investment for 2018. As smaller ICOs are pushed out of the United States, the best of the best will restructure and issue their security tokens offshore. Here’s what you need to know about offshore security tokens in 2018.

First, allow me to define what I mean by an offshore security token. There are two types of tokens, a security token, and a use token.

A security token is a token issued by a company that acts like a share of stock. It gives you some level of ownership in the company and/or a right to the future earnings and profits of the business. Whether a token is a security or not is defined by the Howie Test.

A use token is a coin that doesn’t give the holder a right to the profits of the company and doesn’t act like a share of stock. A use token is meant to be used on the network.

A popular example of a utility token is the BON Token, issued during Bonpay Token Sale. The BON utility token is designed to work only in Bonpay ecosystem and product line. You use BON to pay for services on the network and it does not have any qualities usually attributed to a share of stock.

Another example of a utility token would be if UBER had issued an ICO. The UBER token would give the buyer the right to a certain number of rides or miles on the network. It would not be linked to the profits of the company.

This is all to say, a security token gives the holder an ownership right in the company while a utility token offers only certain functions inside the company’s platform. Security tokens are regulated by most governments while utility tokens are not.

When a security token is sold in the United States, it must follow all the same rules as when a stock is sold. All ICOs of security tokens in the United States must go through the same process as Initial Public Offerings.

As a result, the cost of issuing an ICO in the US has gone up exponentially. You now must spend hundreds of thousands of dollars, or even millions of dollars, to issue an ICO or IPO in the land of the free.

This cost is usually paid by early rounds of fundraising. Angel investors, venture capitalists and other early stage investors invest in the company, taking the best shares and getting the best deals. What’s left is the picked over carcass of a company which is then sold to the general public.

The purpose of the ICO was to give the people access to new and early stage companies. To allow you and I to be the venture capitalists and get in on the best deals at a very early stage. This has been taken away, and returned to the old guard by the SEC.

For more, see What SEC Regulation Means to ICOs in the United States

When a US firm doesn’t want to issue a full IPO type security token, they can do what is called a Reg D offering. This allows them to sell their tokens to “accredited investors” only. An accredited investor is someone worth at least $1,000,000, excluding the value of their primary residence, or have income at least $200,000 each year for the last two years (or $300,000 combined income if married) and have the expectation to make the same amount going forward.

However, a Reg D offering has a major downside to US investors. The accredited investor can’t sell their token for at least 1 year. While non-US investors can trade and sell as they wish, US investors must HODL. This is a huge program for multinational ICOs.

This lockup period puts US investors at a major disadvantage to foreign buyers. This is such a big problem as to make issuing a security token in the United States under Reg D nearly worthless.

As a result, most security tokens are moving offshore. They’re setting up in Cayman Islands and elsewhere. They’re being sold to non-US persons and offshore structures only. We Americans are being locked out of the ICO market.

You can still get in on these ICOs by forming an offshore structure. Most ICOs allow foreign companies owned by US persons, so long as you sign the subscription documents while out of the country.

To get in on these offerings, you can form a company in Belize, Cook Islands, or Nevis. You can also move your IRA offshore, and into an offshore IRA LLC, to buy foreign security tokens in your retirement account.

For more on IRAs, see Best IRA Investments for 2018 and Here’s how to take your IRA offshore in 6 steps.

You’ll need to do some work to find quality international ICOs. These foreign companies are prohibited from marketing in the United States. Thus, you will need to attend international conferences or get an introduction from a foreign investment advisor with whom you have a relationship.

I hope you’ve found this article on offshore security tokens for 2018 to be helpful. For more information on forming an international company or on moving your retirement account offshore, please contact us at info@premieroffshore.com or call us at (619) 483-1708.

Best IRA Investments for 2018
Christian Reeves

Best IRA Investments for 2018

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The best IRA investments for 2018 are all offshore. If you want higher returns in your retirement account, you need to invest offshore. If you want to move some of your IRA out of the United States, you need to invest your account offshore. With that in mind, here are the best IRA investments for 2018.

To start, let me note that you can only place a vested retirement account offshore. A vested account is usually one from a previous employer. If you can move the account from one custodian to another, it’s vested. If you can’t move the account because it’s held at your current employer’s custodian, it’s not vested.

Second, keep in mind that most custodians don’t want you to invest your IRA offshore. They want you to buy their mutual funds, annuities, and whatever else they make a nice commission on. When you invest offshore, your custodian makes zero on the buy/sell. They make nada on your gains and get no management fees.

With that in mind, here are the best IRA investments for 2018:

  1. Foreign real estate in countries with low capital gains rates,
  2. International ICOs,
  3. Crypto trades at foreign exchanges with better rates (difference in bid /ask),
  4. Investments that lead to foreign residency, and
  5. Leveraged investments no available in the United States.

The most popular international IRA investment for 2018 is real estate. Foreign real estate offers a higher yield compared to the United States and is a relatively low-risk investment. While other offshore IRA investments are higher risk with massive upsides (such as crypto below), real estate is true to the IRA mantra of steady and conservative.

Foreign real estate is the best IRA investment in 2018 for those willing to put in the time, effort, and expense to find deals. Yes, returns are higher abroad if you find the right area and the correct tax structure. But, finding these deals means hitting the streets to learn the target country, the city, and finally the neighborhood.

And the best IRA investment for 2018 will usually be in a country with a low capital gains rate. Because you won’t pay tax on the gain in the United States, you don’t care about the foreign tax credit. Therefore, you want to invest in a country that will minimize your worldwide tax costs.

When you invest non-IRA funds, you pay 20% to the US on long-term gains. If you invest in a country with a 20% capital gains rate, you pay zero to the US because the Foreign tax credit gives you a dollar for dollar credit on your US return. When you invest in a country with a 10% rate, you pay 10% to that country and 10% to the US.

When you invest using your IRA, your US rate is basically zero and the foreign tax credit doesn’t apply (in most cases). Thus, you want to buy in a zero tax country like Belize or a low tax country like Colombia (capital gains rate is 10% but the tax on rental income is 33%). For more, see: Where to Buy International Real Estate.

See also: Which Countries Tax Worldwide Income?

The second most popular category of foreign IRA investments for 2018 is cryptocurrency and ICOs. The United States has forced US exchanges to report all sales, creating a tax nightmare for many. Also, the US SEC is pushing the majority of ICOs offshore. If you want to get in on the ground floor of an ICO, before all the vulture capitalists have picked it clean, then you need to invest offshore.

For these reasons, the best IRA investments for those looking to get into crypto, smaller coins, and most ICOs, are offshore in 2018. For more see: Take your IRA offshore and invest in cryptocurrency.

The third most popular investment for your IRA is one that can be paired with residency or citizenship. In some countries, you can gain residency with an investment. If that investment can be held by your IRA, you can use retirement funds to secure residency.

However, you need to be careful. You can make the investment using IRA money. Then you need to pay all costs associated with the residency application with personal savings (not IRA money). If you were to pay for residency with IRA funds, this would be an improper benefit.

For example, you can get residency in Panama with a real estate investment of at least $350,000 or an investment in an authorized reforestation plantation of $20,000. For more on this, see Best Panama Residency by Investment Program.

The fourth best IRA investment for 2018 is only for very sophisticated IRA investors. It is any leveraged purchase or foreign real estate with a mortgage. This is because these investments are only possible outside of the United States.

When you invest your IRA in the US using leverage or a mortgage, you must pay Unrelated Business Income Tax at about 35%. That is to say, all gains from leverage or a mortgage are taxed at 35% before being passed through to your retirement account.

For example, you buy a house in California using your IRA. 50% of the money comes from your IRA and 50% from a non-recourse loan (the only type of loan an IRA can accept). When you sell that home, half the capital gain will be taxed at 35% and half will flow into your IRA tax-free.

When you invest using a mortgage or leverage (maybe in a crypto account) outside of the United States, you can block and avoid this tax. Set up a UBIT blocker corporation along with an offshore IRA LLC and eliminate UBIT in your international IRA transactions.

I hope you’ve found this article on why the best IRA investments for 2018 are all offshore to be helpful. For more on converting your retirement account to a self-directed IRA or forming an offshore IRA LLC, please contact us at info@premieroffshore.com or call us at (619) 483-1708.

Where to Start a Cryptocurrency Exchange
Christian Reeves

Where to Start a Cryptocurrency Exchange – Crypto Friendly Countries

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In this article, I will focus on where to start a cryptocurrency exchange in 2018. That is, where to incorporate a new cryptocurrency exchange. Which countries are friendly to startup cryptocurrency exchanges and why you should consider each based on your business model.

Countries are not listed in any particular order. You should select your jurisdiction of operation based on your long-term objectives, business model, and target markets. You should also consider whether you wish to have a formal license or not.

I’m starting from the position that regulation is good for cryptocurrency in 2018. Banks are pushing out crypto exchanges and crypto investors because of concerns about compliance. If a bank is confident that an exchange is will run a clean and compliant business, and follow the same AML and KYC procedures as an FX or brokerage firm, they are more likely to open accounts for you.

It may be possible to start a crypto exchange in 2018 without a license. But, by 2019 or 2020, I expect everyone will be licensed and regulated. Some software vendors include licensing in their turnkey package. I suggest you buy your core software from a company that can provide this service if and when it becomes necessary.

Some of my comments below are speculative. They come from meeting with experts in various countries and with regulators around the world. But, in some cases, no licenses have been issued and thus the government’s resolve has not been tested.

For example, the lowest cost jurisdiction for a licensed exchange appears to be Belize. However, no licenses have yet been issued. I am hopeful that these will be made available. But, until one is approved, I’m just speculating.

Estonia is also low cost. Plus, this country is a very tech savvy with their e-residency program. The problem is that the banks in Estonia won’t open an account for an Estonia licensed exchange if that exchange is owned by foreigners. So, how valuable is the license?

For more information on how to start an international or offshore cryptocurrency exchange, please see: How to Build an International Cryptocurrency Exchange.

Without any more adieu, here are my thoughts on where to start a cryptocurrency exchange and the best countries from which to operate that exchange.

Mexico

Mexico is one of the more interesting jurisdictions to start a cryptocurrency exchange in 2018. This country of 140,000 million has a few exchanges in operation and is just beginning to regulate.

The exchanges in Mexico are currently self-regulating with reasonable KYC and AML procedures in place. The more a client deposits into their account, the more the exchange will want to know about them.

A client can play around with the system with a few dollars. This usually required a Mexican phone number. Once they connect to a local bank account or begin making sizable withdrawals, they will need to prove their identity.

And Mexico has the most efficient cash transaction system in the world for cryptocurrency… yes, in the world!

Users can walk into any of 140,000 convenience stores in Mexico and make a cash withdrawal or deposit into their cryptocurrency account. Take cash and a code to the cashier and your deposit will show on your account in minutes. Buy a debit card from the store, convert your BTC to Pesos, and transfer those pesos into your card. You can then take a cash withdrawal or use the card just about anywhere.

We expect this period of self-regulation of cryptocurrency exchanges to last 6 to 12 months. It might be longer depending on what happens in the Presidential elections this year. Legislation to regulate exchanges has been passed but not implemented yet.

Like many countries, the Mexican Central Bank announced that bitcoin and cryptocurrencies are not considered currencies and are not backed by the government nor laws. However, the government also said that crypto is not illegal and that they’ll allow self-regulated exchanges to operate while laws are being implemented.

The government also said they won’t step in to regulate ICOs. They warned consumers to avoid high-risk investments, but haven’t yet taken steps to protect consumers. The government hinted that ICOs could be regulated and only available only to accredited investors in the future.

When new laws and regulations are implemented, which they will be, expect formal compliance and some level of corporate capital to be required. New firms should be working closely with local counsel to build up reserves and put AML and KYC systems in place before applying for a license.

Chile

Everyone’s been talking about Chile as a great cryptocurrency center… as the next chilecon valley. And, that was true until April of 2018. Over the last few days, all the banks in Chile have closed the accounts of exchanges, ICOs, and anyone doing business in crypto. Both commercial banks and government banks have closed the accounts of exchanges.

Most blame the loss of banking services on a lack of clear regulation of cryptocurrency exchanges in Chile. If and when regulations are passed, as they have been in Mexico, look for business to return and banking to be made available.

  • Regulations have been passed in Mexico. They have not been implemented by the regulators yet. Thus, exchanges are in a period of self-regulation.

In my opinion, much of these problems come from a lack of regulation. The banks and government regulators don’t know what to do, so they take extreme steps to reduce their risks. Banks close accounts because the risk to the bank exceeds the value of the account. Risk comes from uncertainty. So, regulation in Chile will reduce or eliminate the risk.

Cayman Islands

The Cayman Islands are the jurisdiction for cryptocurrency investment funds. Cayman has long been a leader in large sophisticated hedge funds and it continues in that reputation today. If you plan to raise a $100 million dollar fund, Cayman is the place to do it.

Cayman has also been the country of choice for some of the largest ICOs. However, this has lead to a glut of ICOs and underfunded low-quality projects hoping to take root in the islands. I suggest that only the very best funded and highest quality ICOs should consider Cayman. See: The Offshore ICO Scam and Cayman Islands Corporations.

The same can be said for anyone attempting to launch an exchange in Cayman. The licensing process will be intense and you must have a solid compliance program and a team on the island. I estimate this license will cost $150,000 and take 6 to 12 months.

Some will find it easier to operate in Cayman as a crypto brokerage rather than a crypto exchange. Exchanges exchange money from one currency to another, as in exchanging a Bitcoin for $7,000 USD. Brokerages enable traders to place long or short bets on the BTC/USD price. For an example of such a brokerage, see: www.Xenia.com.

Belize

It appears that regulators in Belize might allow an exchange to operate under a money management license. This license is issued by the International Financial Services Commission in Belize or the IFSC.  

Corporate capital for this license is $50,000 and the cost is between $18,000 and $25,000 with filing fees. Annual fees, including the local agent, are about $5,000.

You will also need a 5-year business plan, resumes and police reports for all shareholders, officers and directors, and proper KYC and AML procedural manuals. The applicant must prove to the regulators that they have the experience and expertise to run a clean and compliant cryptocurrency exchange from Belize.

No exchange has been approved in Belize yet, but this could become the path forward. Then again, regulators might shut this door in the next few months.

Costa Rica

Historically, Costa Rica has been open to new high tech businesses. For example, Costa Rica was the center of the online gaming industry in the early 2000s. Just about every sportsbook and casino was based in Costa Rica for a time.

Also, San Jose, Costa Rica has a number of Bitcoin ATM machines and vendors that accept crypto. And Costa Rica has its own cryptocurrency, Pura.

The primary exchange selling to residents of Costa Rica is SatoshiTango. They have banking Portugal and provide services throughout Latin America.

Like Mexico, the Costa Rican Central Bank issued a statement that bitcoin and cryptocurrencies are not considered currencies and are not backed by the government. However, cryptocurrencies are not illegal.

Costa Rica does not offer a cryptocurrency license and no legislation is pending. San Jose would be an interesting low-cost city from which to operate a self-regulated exchange. You might combine operations in Costa Rica with a license from Estonia and use 3rd party providers or OTC / CTC systems to fund accounts and trade currencies until you can negotiate a correspondent bank account.

Estonia

Estonia is one of the lower cost licensing jurisdictions. You should expect to pay 10,000 to 20,000 euros for a cryptocurrency exchange license from Estonia.

An application can be in English or Russian. Criminal history reports and background information must be provided by all officers, shareholders, and directors. Also, you must provide a detailed business plan, KYC documents, AML system, and financial statements.

Also, Estonia is a member of the European Union. This means that businesses incorporated and operated from Estonia are portable throughout the Union. Note that I’m talking about business operated from Estonia, not those operated abroad through the e-residency program.

If the business is to be operated from outside of Estonia, and most of the owners are foreigners, it will be impossible to get a bank account in Estonia. While you will get a license from Estonia, you won’t get a bank account.

Malta

Like Luxembourg, Malta made a splash by issuing a license to a big name, Binance. Malta has been working hard to bring stability to the industry ever since.

Malta’s government launched the Malta Digital Innovation Authority in February 2018 in order to provide legal clarity for companies developing Blockchain technologies, cryptocurrencies, and Initial Coin Offerings (ICO). Whenever the government is working to facilitate an industry, it’s a country you should consider.

That is to say, Malta’s government is reportedly developing a broad national strategy that will see the government embrace bitcoin and blockchain innovation to promote and adopt the technology.

Like Costa Rica, Malta was a leader in online gambling. They passed the first legislation in 2004 and have been a major player in Europe since then. Malta hopes to duplicate this success in crypto by offering the most efficient legal framework in the region.

At this time, and because Bitcoin is not deemed to be a regulated instrument under MiFID, companies dealing in Bitcoin are not required to apply for a license with the Malta Financial Services Authority (MFSA). However, the rapid growth of the industry will likely to necessitate greater regulatory oversight in the mid to near term. Expect Malta to issue licensing procedures soon.

For pending and planned legislation in Malta, see Malta Becoming a Crypto Hub.

Switzerland

The bottom line is that Switzerland is the best cryptocurrency jurisdiction in Europe. If you have an unlimited budget, and you don’t mind paying about 12 to 18% in corporate tax, you want to be in Switzerland. If you want to run a top tier exchange that markets into the European Union, you should be in Switzerland or Malta.

Switzerland and the United States dominated ICOs in 2017. Swiss ICOs raised $550 million vs the United States at $580 million from January to October of 2017. The next largest was Singapore at $184 million.

Switzerland has two popular coins. The Swisscoin, which is a token focused on Swiss investors and SwissRealCoin, which is a token based on Swiss real estate. There have also been crypto banks and crypto wealth management firms opening in Switzerland.

Bottom line, Switzerland is dominating financial services in and around cryptocurrencies and blockchain.

If you wish to set up in Switzerland, I suggest you open in Crypto Valley, which is in the city of Zug. This canton has the lowest taxes in the country and has been a bastion for offshore corporations for decades.

The Crypto Valley Association is an independent, government-supported association much like LHoFT in Luxembourg. It was “established to take full advantage of Switzerland’s strengths to build the world’s leading blockchain and cryptographic technologies ecosystem.”

As a general rule, all companies in Switzerland performing financial activities are required to receive an authorization for their operations from the Swiss Financial Market Supervisory Authority (FINMA). However, cryptocurrency businesses are not currently required to register with FINMA because crypto is not seen as a “currency.” We expect companies to be required to register soon.

Companies performing bitcoin transactions must still comply with specific regulations provided by the Swiss Anti-Money Laundering Act. Therefore, exchanges in Switzerland are self-regulating much like those in Mexico awaiting formal regulation, but failure to follow AML rules can result in major penalties.

Most exchanges are seeking banking relationships in Europe these days. Even those focused on Latin America and Asia are banking in the EU. In order to get a quality bank account, crypto exchanges are forming Swiss corporations in Zug, setting up an office there, complying with Swiss rules, and then applying for banking in Europe.

Keep in mind that these Swiss companies will need to continue to comply with Swiss laws to keep their bank accounts. This means they’ll need to keep up with new laws and secure a license if one becomes available.

Some ICOs are regulated in Switzerland and must register. Those  who sell an asset token, and not a utility or payment token, are regulated. This is because an asset token is considered a security in Switzerland. See: Guidelines for initial coin offerings (ICOs) Published 16 February 2018, a PDF download from the Swiss regulator finma.

For more on Switzerland, see Switzerland embraces cryptocurrency culture from the Financial Times.

We’ll be happy to assist you with an ICO or to set up a cryptocurrency exchange in Switzerland with banking in Europe. For a quote and more information, please contact us at info@premieroffshore.com or call us at (619) 550-2743.

Luxembourg

The two international top-tier crypto jurisdictions in Europe are Switzerland and Luxembourg. Exchanges in Luxembourg are governed by the CSSF and must follow the same strict rules as other non-bank financial institutions. Cryptocurrency exchanges in Luxembourg are referred to as electronic money institutions.

With Bitstamp moving to Luxembourg back in 2016, this country cemented its place as a top crypto nation in the European Union. Since then, a number of high profile exchanges, such as BitFlyer, have moved to Luxembourg.

Cryptocurrency exchanges in Luxembourg operate under the payments institutions license and report under the electronic money institutions statutes. In most cases, your minimum capital will be 350,000 euros.

“Electronic money” is defined in Luxembourg as something of monetary value representing a claim against the issuer which is:

  • stored in electronic format, including on magnetic media, and
  • issued against the remittance of funds with the goal of making payments, and
  • accepted by an individual or organization other than the issuer of the electronic money.

In addition to issuing electronic money, these companies may supply payment services, grant loans (under certain conditions) linked to payment services, supply operational services, and other services closely linked to the issuing of electronic money or to the supply of payment services, manage payment systems, and undertake commercial activity.

In our experience, setting up a licensed exchange in Luxembourg is an expensive endeavor requiring many months. Typical legal costs are $150,000, including your promotor / project lead, an attorney in Luxembourg, and securing the support of LHoFT.

Japan

Japan has the most advanced crypto laws on the planet. If you want to operate from a top tier country with a strong demand for bitcoin, and the most advanced laws, then consider Japan.

As I said above, I consider regulation a positive force in the industry. It gives crypto exchanges and, possibly, more importantly, banks, confidence in how to deal with the industry. It creates a level playing field on which everyone can compete. It ensures only compliant and well-run cryptocurrency exchanges are allowed to operate in the country.

The Revised Payment Services Act took effect on April 1, 2017. Since that time, Japan has had the most complete regulations for cryptocurrency transactions. These laws are administered by the Financial Services Authority (FSA).

The minimal capital amount is JPY 10 million ($93,500 USD), but more than JPY 50 million (about $500,000 USD) is recommended. Strict KYC and AML policies must be in place, you must have an external auditor, and a physical office is required.

And, keep in mind that these regulations apply to anyone running an exchange from Japan and anyone selling into Japan. Firms selling into Japan without a license have been shut down and sanctioned. For example, Binance secured a license in Malta after being warned by Japan for operating without a license.

Expect Japan to be used as a model by major markets as compliance and regulation rolls through the industry.

Australia

Australia licensed three cryptocurrency exchanges since new regulations came into effect April 3, 2018. All exchanges operating in the country have until May 14, 2018, to get in compliance and be approved for a license.

After spending several years battling a confusing and at times contradictory regulatory landscape, exchanges doing business in Australia can now take advantage of an official program like those available in Japan and South Korea. A formal licensing scheme should make banking easier and eliminates the risk of inadvertently running afoul of government KYC and AML policies.

Exchanges operating in Australia now must comply with the following:=

  • customer identification and due diligence
  • adopting and maintaining an AML/CTF program—this includes identifying, managing and lessening money laundering and terrorism financing risk
  • suspicious matter reporting
  • reporting of cash transactions of $10,000 or more.
  • record keeping

In order to apply for a license, applicants must have an office in Australia, an auditor, business plan, and complete compliance systems in place. Only those with a solid team and expert compliance systems will be granted a cryptocurrency license in Australia.

The license required to operate a crypto exchange in Australia is the Financial Services License. In most cases, capital required will be $50,000 plus a 5% reserve based on the size of your exchange. Various ratios apply after $100 million in assets and capital reserves shall not exceed $100 million. It appears that most applicants should have $10 million before they file an application. See Pro Forma PF 209 (a PDF file).

Philippines

The Philippines issued two cryptocurrency exchange licenses in August of 2017 and has been active in the industry since that time. Exchanges wanting to offer services throughout Southeast Asia are usually setting up shop in the Philippines or Thailand. The more advanced regulations are in the Philippines.

Cryptocurrency exchanges in the Philippines are governed by Circular 944, 2017. There are currently 29 applications pending with the central bank. How many actually want to sell into the Philippines is unclear.

BSP Governor Nestor Espenilla, Jr. suggested they “have an open-minded approach to fintech (financial technology). This means that we take a very active role in ensuring that our policies provide opportunities for innovation.”

“Today, there are two virtual currency exchangers registered with the BSP and several more are under evaluation,” the central banker emphasized.

Many of the exchanges moving to the Philippines are from China. They’re not focused on the local market, which is only about $8.8 million per month. They’re looking at the region, possibly including Chinese clients who have found a way to get around the great firewall.

Thailand

Bangkok was shaping up to be a cryptocurrency center of Southeast Asia. Exchanges were opening there and being welcomed by the banks.

Then it all went south. Banks turned against cryptocurrency and began stuttering accounts. This began with the government bank and the rest followed suit.

My guess is that the fragile government of Thailand saw risk in allowing a means of exchange which they didn’t control. For this reason, I expect the exchanges to be forced out of Thailand.

Singapore

Singapore is one of the last major banking centers that allow for unregulated or self-regulated cryptocurrency exchanges. As of February 2018, the government warned of the risks of cryptocurrency but said it would not regulate the industry.

Then, in March, the government indicated they might take steps to protect investors. Experts think that Singapore will go the way of Switzerland and require KYC, AML and compliance standards for cryptocurrency exchanges. They might not require a license, but they will require record keeping and standards of care.

Of the exchanges opening in Asia, those looking for a low cost and low overhead solution are focusing on the Philippines. Those looking for better banking and to be within a major financial center, are opening in Singapore.

Gibraltar

Gibraltar is hoping to become the headquarters of all things blockchain. It appears that most legislation is aimed at the technology behind cryptocurrency and ICOs and not the tokens or currencies themselves. Thus, you might say that Gibraltar is taking a longer-term view by focusing on the underlying technology and using its portability into the EU to add value.=

A notification on the regulator’s website states that as from January 1, 2018, any use of distributed ledger technology for storing or transmitting value belonging to others will need to be authorized by the Commission. By the way, the following entries: “Initial Application Assessment Fee”, “Application Fee”, “Supplementary Fees”, “Annual Fees”, “Further Fees”, populate a list tucked in between the “Principles” and the “Frequently Asked Questions” sections.

Gibraltar hopes to take some ICO business away from Switzerland and offers lower cost and more definitive regulation that its much larger neighbor. For more, see it’s Statement on Initial Coin Offerings.

Belarus

Belarus issued regulations on December 8, 2017 and this law took effect on March 28, 2018. See: Questions and answers on Decree No. 8. This law creates a tax holiday and a FinTech campus called High Technology Park (HTP) for blockchain and crypto businesses.

Any member of the park may run an ICO without restriction. In addition, they may issue ICOs on behalf of others. Most of these ICOs are intended for offshore and EU investors.

A cryptocurrency exchange registered at HTP should have capital of $100,000 to $500,000 in a local bank. The amount will depend on the size of your operation.

Most interesting and unique, HTP companies can act as investment funds and perform cryptocurrency investing legally and with banking support. No need to incorporate your fund in a high-cost jurisdiction such as Cayman if you’re operating from Belarus.

The negative with Belarus compared to Malta is that Belarus is not a member of the European Union. Malta is a member state and its businesses may be “ported” throughout the EU.

The benefit of Belarus over Estonia is that banks in Belarus accept cryptocurrency exchanges. You’ll get an exchange license in Estonia, but not a bank account.  

See also Belarus To Become World’s Best Jurisdiction For Cryptocurrencies, ICOs And Smart Contracts.

Conclusion

I hope you’ve found this article on where to start a cryptocurrency exchange to be helpful. For assistance building a new international exchange, please contact us at info@premieroffshore.com or call us at (619) 483-1708. We’ll be happy to assist with licensing, compliance, software, and a turnkey solution for your cryptocurrency exchange.

How to Build an International Cryptocurrency Exchange
Christian Reeves

How to Build an International Cryptocurrency Exchange

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In this article, I’ll look at the steps to build a cryptocurrency exchange. Whether you’re building out a new cryptocurrency exchange or planning on expanding beyond your current country, these are the steps necessary to start an international cryptocurrency exchange.

Note that this article is for those wishing to start an international cryptocurrency exchange. Setting up in the United States is a very challenging process with different issues to consider.

For example, in the United States, the SEC is targeting cryptocurrency exchanges and might require them to register as “exchanges.” Whether this simply means that cryptocurrency exchanges will need to be called cryptocurrency platforms (for example), or that all systems that facilitate trade must spend millions on compliance and registration, is yet to be seen. For more, take a read through US: Cryptocurrency Trading Platforms Must Be Registered With SEC.

Another example of America’s unique attitude is its attack on customers of cryptocurrency exchanges. The United States IRS is waging all out war on cryptocurrency by imposing ever higher taxes on trades and criminalizing trades that occur outside of a regulated exchange.

For these reasons, many cryptocurrency traders are looking to move offshore. Likewise, many cryptocurrency exchanges are expanding beyond the United States and placing ever more emphasis on international markets.

With all of that preamble, here’s how to build an international cryptocurrency exchange.

  1. Select a jurisdiction that fits your needs and your budget.
  2. Form your corporation and open a corporate bank account (for business transactions, not client funds).
  3. Capitalize your cryptocurrency exchange business.
  4. Purchase a core cryptocurrency exchange system.
  5. Create a token or coin that you can trade against BTC, ETH, etc. Support as many crypto and FIAT/crypto pairs as possible.
  6. Document your compliance system and procedures, such as Know Your Customer (KYC) and Anti-Money Laundering (AML) rules.
  7. Hire a staff with a focus on compliance, banking, etc. (in addition to the marketing people I assume you’ve already hired). Begin by self-regulating with an eye towards global licenses in the future.
  8. Negotiate a cryptocurrency license in the jurisdiction from which you will operate. Many of the top exchanges operate without any licenses. However, times are changing.
  9. Setup a loaded card, debit card, or another system to get money out of the exchange that doesn’t require a wire transfer.
  10. Create a USD backed coin that can be used to transact and hold “FIAT” in the wallet. The primary purpose is to reduce wires and outflows by creating a coin which is not volatile. Such a coin should have a 1 to 1 dollar reserve is a US bank.
  11. Negotiate a cryptocurrency license in certain jurisdictions where your clients will be located. That is, if you plan to market in the UK, you will need a UK license.
  12. Open a correspondent account to receive client funds and convert FIAT to and from crypto.

Of the tasks above, the most difficult will your correspondent account. For this reason, tasks 1 to 11 are all building your business to a place where you can successfully negotiate such an account and to prepare for the future. About 80% of the requests for assistance we get from existing exchanges are related to their correspondent accounts.

Jurisdiction

The first task in building an exchange is to select your jurisdiction of operation. Where do you want to incorporate your business? Under which laws and regulations do you want to operate?

The two top offshore jurisdictions are the Cayman Islands and Switzerland. These are also the most regulated and most expensive. If you have an unlimited budget and want to run a well regulated and compliant cryptocurrency exchange, Switzerland and Cayman are where you want to be.

The demand for Cayman is quite high. And this has lead a few unscrupulous promoters to sell cryptocurrency and ICO structures they know are useless. If you want to operate in Cayman, you’d better be very well capitalized and have your KYC and AML systems in place. For more information on this, see: The Offshore ICO Scam and Cayman Islands Corporations.

Proper cryptocurrency exchanges in Cayman are operating under the islands FX brokerage license. They are not using the currency exchange or money transmitter license as is popular in other countries. For an example, see: Xenia.ky

And of course, these jurisdictions are expensive and exclusive. Of course, government regulators are very cautious. The reason everyone wants to be in Cayman is that this jurisdiction has a solid world image. It obtained this image through decades of compliance and a solid regulatory environment. It’s not going to throw away that image by allowing a poorly run cryptocurrency exchange to operate within its borders and leverage its reputation.

Other solid jurisdictions include Canada, Japan, Singapore, Mexico, Liechtenstein, Luxembourg, Gibraltar, Malta, Estonia, Lithuania, and Belarus. The lowest cost license is Belize at about $35,000.=

In my opinion, Mexico is one of the most interesting jurisdictions from which to operate an international cryptocurrency exchange. This country of 130,000 million allows unlicensed self-regulated exchanges as of April 2018. It has great FinTech cities like Mexico City, Monterrey, and Guadalajara. The city of Tijuana borders San Diego, California and has been an outsourcing hub for Silicon Valley for years.

The government recently passed laws regulating cryptocurrency exchanges which will go into effect in the next 6 to 12 months. Now is the time to build a new self-regulated exchange in Mexico to reach sustainability before these laws come in to place.

And Mexico is the only jurisdiction that offers loaded cards on a large scale for withdrawals and cash deposits into its exchanges at 140,000 convenience stores. For more, see: Mexico is a Cryptocurrency Paradise.

Finally, I believe quality international exchanges should embrace licensing requirements or sub-licensing options. These will become the norm in the next year and you want to be in a country with business-friendly statutes and a solid banking system to support those laws. You want to be a key player in a country that will suit your business in the long term.

Capitalization

If you’re going to build an international cryptocurrency exchange from scratch, I suggest you’ll need $500,000 to $1 million in capital to get through steps 1 to 11. You’ll need significantly more capital for step 12, your correspondent banking account if you don’t “outsource” this component.

The $500,000 level assumes you’re buying a turnkey software solution from a partner. One that provides the software, compliance, license consulting services or sub-licenses (if applicable), token and USD coin issuance, and technical support.

If you’re really going to go it alone, and you want to be licensed, then you’ll need $5 to $12 million for a multijurisdictional cryptocurrency exchange. Most of this increase in capital will be attributed to your licenses and correspondent banking partners. Remember that you’ll need one correspondent bank for each FIAT currency you’ll offer.

I should point out that many of the largest international cryptocurrency exchanges do not have global licenses. For example, Bittrex, Bitfinex, Kraken, Binance, do not have global licenses but still, their transaction volumes are among the top exchanges.

This proves that customers are not as concerned with your license as with your reputation and the quality of your platform. However, government regulators and banks are getting concerned. For example, Japan recently sanctioned 7 exchanges and is moving to enforce regulations on anyone selling into this market.

This all means that, while you can operate today without a license, your long-term strategy should include a path to a proper license in your primary markets. Also, you should self-regulate with strict internal KYC and AML procedures.

Core Cryptocurrency Exchange Platforms

We’ve researched the core cryptocurrency exchange platforms and found that most are priced at $300,000, with some as high as $500,000, for the source code. If you want to build an international exchange, and don’t want to spend years coding your own version, expect to spend a minimum of $300,000 for a quality system.

When you price a core cryptocurrency exchange platform, here’s what you should be looking for:

  • Trading platform
    • Support spot, futures, OTC trading
    • Multiple languages support
    • Customizable analytic & charting tools
    • Facilitated background management system
  • Matching engine that provides clustering of asynchronous matching with tens of thousands matches per second.
  • Wallet
    • Cold and hot wallet management (this is the new industry standard)
    • Multi-signature guarantees asset security
    • Multi-coins exchange support
    • Structured wallets and easily listing service
  • Risk Management
    • Data monitored data in real time
    • Sensitive alerts of assets changes
    • Asset flow and retrospective query support
    • Intrusion detection and anti-seepage detection
  • Market Making
    • Actual market volume import and liquidity supply
    • Risk-free hedging strategies
    • Market value management outsourcing
    • 7*24 hours hosting
  • Special Services
    • Global compliance and license application consulting
    • Fiat currency exchange and correspondent banking introduction
    • Token issuing support
    • Advertising and marketing support through trade shows, press releases, and other resources.
    • Supports both cloud-based systems (AWS, etc) and traditional hardware.

As far as I can tell, there’s only one core platform for sale that allows you to issue your own token and a USD coin. There is only one source code available that includes these features. Tokens are valuable tools and permit you to create unique pairs, allow you to differentiate your exchange out of the gate, and offer a variety of benefits.

In my opinion, an anchored currency or coin is a required feature in 2018. You must find ways to reduce outflows and wire fees. You must try to reduce compliance costs from you correspondent banks. And, of course, you’re always looking to increase trading by making it easier and faster. One way to accomplish these goals is to convince your clients to hold more their funds on your platform.

A USD coin allows your clients to keep their non-trading funds on your platform. Those who are attempting to time the market, or want to move in and out of a volatile market, will find a FIAT coin very beneficial.

Of course, an anchored coin has other benefits on a successful international cryptocurrency exchange. For example, they can be sent between users to purchase goods and services at no cost (no wire fees).

Such coins can also be used in cross border transactions at zero cost and with no volatility. Let’s say you have one user in the United States and one user in Mexico (a country with 53 million unbanked persons). Your customer in the United States could send USD coins to Mexico at zero cost.

The user in Mexico could then withdraw these funds in Pesos by having them deposited onto a debit card. As stated above, these cards can be purchased at over 140,000 convenience stores throughout Mexico.

These are just two uses of an anchored coin. As you build your business and your unique client base, you’ll find many more. My point here is that any platform you purchase should have these features.

Turnkey Solutions

When it comes to building an international cryptocurrency exchange, the word “turnkey” is used in two different ways.

First, turnkey can mean a core software platform with all the necessary bells and whistles. Such a platform should provide a turnkey system on which to run your exchange. No custom programming should be required (at least, none from the buyer’s side).

In this case, the seller will have a sizeable team of programmers, developers, and designers to customize the platform for your use. They’ll also handle deploying the system on your hardware or the cloud.

Second, turnkey can mean a complete software, licensing, and compliance solution. This type of turnkey solution truly allows you to launch a new international cryptocurrency exchange in a matter of weeks rather than months or a year.

For example, a large FinTech company has licenses in multiple jurisdictions. They sell the software for a fixed fee and charge a monthly fee that allows you to operate under their license or to issue a sublicense.

The same goes for correspondent banking, AML, KYC, and compliance. The FinTech has all of these components in place, with millions of dollars on deposit at various banks. They allow you to transact through these accounts for a fee.

When the seller offers correspondent banking, they’ll generally also handle account openings, KYC, and AML. The bank trusts their client’s compliance systems, and is holding millions in security should something go wrong, so the seller (which is the bank’s client) will be the one to ensure that all the bank’s rules are followed.

Outsourcing account opening and compliance are relatively new in the cryptocurrency industry. However, it’s been the standard in credit card processing for decades. The vast majority of e-commerce accounts, and most swipe accounts, are handled by agents called Independent Sales Organizations or ISOs. These agents send the account to the bank for approval. Once approved, the bank handles account opening, KYC, AML and chargeback compliance.

In my experience, most clients are looking for self regulated and unlicensed options in the beginning. I expect sub-licensing to become the norm in 2019. Therefore, I suggest you purchase your core software from a firm that offers sub-licenses, even if you don’t make use of them now.

Conclusion

I hope you’ve found this article on how to build an international cryptocurrency exchange to be helpful. For more information on turnkey solutions, software platforms, or to negotiate licenses and correspondent banking, please contact us at info@premieroffshore.com or call us at (619) 483-1708. Will be happy to assist you to build a new international cryptocurrency exchange.

I have a 15 years experience planning, structuring, and building regulated entities. For example, I’ve licensed and built international banks around the world in 8 countries. For more on this topic see my 300-page book on Kindle, Offshore Bank License Guide. I bring a unique skill set to the cryptocurrency industry.

For my US expat tax guide, also available on Amazon, see International Tax & Business Guide 2018.