Tag Archive for: cryptocurrency

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.

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.

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.

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.

Banking for a Cryptocurrency Exchange
Christian Reeves

Banking for a Cryptocurrency Exchange

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In this article, I’ll look at where to form an international bank for a cryptocurrency exchange or FinTech group. That is, where to license and operate a new bank to provide FIAT to crypto exchange. Where to form a new bank for the cryptocurrency industry. Where to set up an offshore bank for the FinTech industry.

Puerto Rico is quickly becoming the center of the banking for cryptocurrency world. If you want to form a bank for the cryptocurrency industry, you have two options: 1) Puerto Rico with $550,000 in capital top-tier jurisdictions like Switzerland and Panama with $24 million or more.

So, it’s easy to see why so many new banks are setting up in Puerto Rico. This is also why the existing international banks on the island are growing incredibly quickly.

Per the  data published by the Puerto Rico Financial Institutions Commissioner’s Office indicate that bank deposits by international finance entities (IFE) category jumped by 248 percent to $3.3 billion in the fourth quarter, while total assets for these grew by 161 percent.

From Caribbean Business, “As BitMEX noted, the surge in deposits correlated with the cryptocurrency markets dramatic upswell, and Tether’s market cap grew by 215 percent during the same period.”

This growth is staggering, especially in an industry that has been contracting over the last couple of years. For example, the number of offshore banks operating from the Cayman Islands has decreased from 250 to 150 over the last 24 months. This is due to the increasing costs of compliance, higher capital requirements ($10 million, up from $1 million), difficulties finding and maintaining correspondent partners, and increased regulatory oversight.

At the same time, Puerto Rico issued 24 permits in 2017 and we expect the same number or more this year. This, combined with lower operating costs, relatively easier access to correspondent banks (because Puerto Rico is a US territory, and the fact that Puerto Rico is the only significant jurisdiction not a party to FATCA and Common Reporting Standards, are driving this significant growth.

Note that, when I say lower operating costs, I do not mean less regulation. I mean that the cost of labor and legal expertise is significantly lower in Puerto Rico than the Cayman Islands. As a US territory, it’s financial entities must comply with all US laws, anti money laundering rules, and know your customer rules.

As such, Puerto Rico is the place for a well run, well funded, compliant and professionally managed offshore bank or international financial entity. For more on compliance in Puerto Rico, see: Act 273 Compliance Requirements.

If you don’t want US oversite, then look to a lesser jurisdiction such as Dominica… but good luck getting a correspondent bank. For more information in the various offshore bank licenses, see: Top International Banking Jurisdictions in 2018.

I should also note that this article is focused on banks operating as FinTech businesses, blockchain financial entities, and cryptocurrency to FIAT facilitators. I am not talking about ICOs here. As a US territory, IFEs should avoid ICOs as they are subject to US oversite. The US government has been very hostile to ICOs of late.

As stated above, an offshore bank structured in Puerto Rico under Act 273 will pay only 4% in tax. Run the same bank from New York and you might pay 35%, even after Trump’s tax break. Move to Puerto Rico and swap that rate for a real tax break.

You’ll find that Puerto Rico doesn’t tax dividends to residents from the IFE. So, if the owners move to Puerto Rico under Act 22, they pay zero on capital gains and zero on dividends from their offshore bank. For a list of all of Puerto Rico’s tax incentives, see: A Detailed Analysis of Puerto Rico’s Tax Incentive Programs.

In order to form an offshore bank in Puerto Rico to manage cryptocurrency, you’ll start with the permit to organize. This first step can take 4 months and the average cost is $130,000. Once you have your permit to organize or preliminary license, you have the regulator’s approval to build out your business on the island. See: Here’s the process to start a bank in Puerto Rico.

Your permit to organize allows you to use the word “bank” in your materials. For example, you might issue a US compliant ICO, a Reg D offering, or raise money under the $50 million crowdfunding exemption. It’s only after you have your permit to organize that you should raise money and are allowed use the word bank in your name.  

I hope you’ve found this article on banking for a cryptocurrency exchange to be helpful. For more on forming a bank in the US territory of Puerto Rico, please contact me at info@premieroffshore.com or call us at (619) 483-1708. We’ll be happy to assist you to negotiate an International Financial Entity License.

You might also like to read through my 300 page book on this topic. For the kindle version, see: Offshore Bank License Guide.

Crowdfunding a Cryptocurrency Exchange
Christian Reeves

Crowdfunding a Cryptocurrency Exchange

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Cryptocurrency exchanges are now starting to raise money under the SEC’s crowdfunding rules. The US crowdfunding rules allow a cryptocurrency exchange to raise up to $50 million with various disclosures. Also, the solicitation rules for a crowdfunding campaign offer a lot more room to maneuver than a Reg D offering. In this post, I will explain how to raise money for a cryptocurrency exchange through a crowdfunding offering.

There are two types of crowdfunding permitted under the SEC rules. The first is limited to $1 million and focused and small businesses. The second allows you to raise up to $50 million and is being used by cryptocurrency exchanges in 2018.

In 2016 and 2017, cryptocurrency exchanges were self-funding through ICOs. Those days are gone and the SEC is targeting those who raised money without sufficient consumer protections and without registering their offerings with the agency.

In 2018, cryptocurrency exchanges are focusing on the $50 million crowdfunding exemption, sometimes referred to as a “mini IPO.” Here are the basic rules for a $1 million crowdfunding campaign and a $50 million crowdfunding campaign for a cryptocurrency exchange.

Section 4(a)(6) of the Securities Act, the “crowdfunding exemption”

Offers of securities to the public (which includes offers made over the internet) must be registered with the SEC under the Securities Act of 1933, unless an exemption from registration is available. In 2018, basically all ICOs are considered security offerings by the SEC.

The JOBS Act added a new exemption to the Securities Act, Section 4(a)(6), commonly referred to as the $1 million crowdfunding exemption.

This small crowdfunding exemption allows you to raise up to $1 million over a 12 month period without registration. As you will see below, this exemption is meant to allow you to raise small amounts from many different investors.

The $ million exemption can be combined with any other available exemption or offering. So, you could raise a seed round of $1 million under the crowdfunding exemption and then a traditional Reg D offering of any size.

An investor is limited in the amount he or she may invest in a crowdfunding offering in any 12-month period:

  • If either the annual income or the net worth of the investor is less than $100,000, the investor is limited to the greater of $2,000 or 5% of the lesser of his or her annual income or net worth.
  • If the annual income and net worth of the investor are both greater than $100,000, the investor is limited to 10% of the lesser of his or her annual income or net worth, to a maximum of $100,000.

That is to say, anyone, no matter their net worth, is allowed to invest in these offerings. What is limited is the amount that they can invest. But, you can market to everyone, not just accredited investors.

These small crowdfunding offerings may be made by any business corporation organized in the United States or a US territory. Thus, the offering can be made by a corporation in Puerto Rico using one of this islands tax incentive programs.

Regulation A Crowdfunding or Mini IPO

Regulation A is broken into two tiers: Tier 1, for offerings of up to $20 million in a 12-month period; and Tier 2, for offerings of up to $50 million in a 12-month period. An issuer of $20 million or less can elect to proceed under either Tier 1 or Tier 2.

Tier 2 issuers are required to include audited financial statements in their offering documents and to file annual, semiannual, and current reports with the Commission on an ongoing basis.

And investor protections are more strict under the Mini IPO than the small crowdfunding exemption. Regulation A+ only allows investors to invest 10 percent of the greater of their annual income or net worth in these securities. The SEC has also implemented other strong investor protections such as background checks on the companies offering the securities, and disclosure of the company’s financial information as part of the offering.

That is to say, purchasers in Tier 2 offerings must either be accredited investors, as that term is defined in Rule 501(a) of Regulation D, or they are limited to the 10% limit above.

You are allowed to “test the waters” under Reg A. You may solicit interest in a potential offering from the general public either before or after the filing of the offering statement with the SEC, so long as your materials include the appropriate disclosures and statements.

Tier 1 issuers usually file once with the SEC after the sale. Tier 2 issuers must file annual and semiannual reports, as well as current reports and, in certain circumstances, an exit report on Form 1-Z, with the Commission.

Conclusion

I hope you’ve found this article on crowdfunding for a cryptocurrency exchange to be helpful. To read the SEC’s statements on these exemptions, see: Jumpstart Our Business Startups (JOBS) Act. Get ready, these laws are hundreds of pages long!

For more information on building, licensing, and funding a cryptocurrency exchange, please contact us at info@premieroffshore.com or call (619) 483-1708.  We’ll be happy to assist you to build a cryptocurrency exchange.

ICOs are abandoning US investors
Christian Reeves

ICOs are abandoning US investors

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FinTech companies are abandoning US investors. As the US government moves to eliminate ICOs to protect the financial status quo, companies that would issue an ICO in the US are falling in line. The vast majority of quality ICOs have moved offshore in 2018.

Issuers are now filing their initial coin offerings in the Cayman Islands, Switzerland, or elsewhere. Those who want to sell to US investors, are selling to accredited investors only under Reg D.

Reg D is an SEC regulation governing private placement exemptions. Reg D allows smaller companies to raise capital through the sale of equity or debt securities without having to register their securities with the SEC. As of 2018, nearly all ICOs are considered a security under US law.

To be an accredited investor, a person must demonstrate an annual income of $200,000 single or $300,000 married for the last three years with expectation of earning the same or higher income in the future.

The purpose of the US accredited investor system is to prevent the sale of high risk securities to those who can’t afford the loss should things go badly. Considering all the scams out there, this is a worthy goal.

However, Reg D also comes with a holding period. When a US accredited investor buys into an ICO, they must hold the token for at least one year before they sell. This puts them at a great disadvantage to foreign investors who don’t have such a limitation.

What’s an ICO issuer to do? Tell everyone they must hold for a year? That won’t sell. Non-US persons will never agree to such a lock up period.

For these reasons, plus the fact that legal and compliance costs for a Reg D offering can be very high, most ICO issuers are abandoning US investors. It’s neither cost-effective nor fair to combine US and non-US investors in an ICO.

These actions by the United States have chilled the ICO market. The amount of money raised by ICO fell by 43% to $726 million in January and February of 2018 compared to November and December of 2017.

Examples of companies blocking US investors include Estonia-based iOlite, Scotland-based CaskCoin, UK-based Celsius Network and Auctus. Even US companies like portfolio platform CoinSeed are blocking US investors.

And the SEC is taking these limits on US investors very seriously. The government has initiated “dozens” of investigations of previous ICOs and is targeting anyone doing business in the United States.

As a result, foreign ICO issuers must actively screen out US investors. It’s not sufficient to have a form and check the box saying you’re not a US person. Investors must affirmatively prove that they are not living in the United States and money must be sent from an international bank account.

The takeaways from this are:

  1. Any company wanting to issue and ICO should do so offshore.
  2. Any US citizen that wants to invest in a foreign ICO should set up a foreign company.

The most popular jurisdictions for large ICOs are Caymans and Switzerland. While compliance (KYC, AML, etc.) are strict in these countries, they are the top choices for quality offerings. While expensive, these are the most respectable options for 2018.

However, you’ll find a lot of junk on the internet about issuing an offshore ICO. For more, see: The Offshore ICO Scam and Cayman Islands Corporations.

As for US citizens, some ICOs will accept your money if it’s sent from an offshore company and an offshore account. Their logic is that the foreign company is making the investment and not you, the ultimate beneficial owner.

These international ICOs won’t be marketing in the United States. So, if you want to find them, you will need to do your homework. For this reason, many ICO conferences are now being held offshore.

You can set up an offshore company for your personal savings or for your US retirement account. If you have a vested IRA or 401-K, you can move that into an offshore IRA LLC and invest in crypto. For more, see: Take your IRA offshore to invest in ICOs and Bitcoin.

I hope you’ve found this article on how ICOs are abandoning US investors to be helpful. For more information on setting up your company offshore, please contact us at info@premieroffshore.com or call us at (619) 483-1708. We’ll be happy to assist you with all aspects of structuring your business or your investments offshore.

The Offshore ICO Scam and Cayman Islands Corporations
Christian Reeves

The Offshore ICO Scam and Cayman Islands Corporations

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There’s an offshore ICO scam going on and it’s focused on Cayman Islands Corporations. If you’re planning an ICO, here’s what you need to know to avoid the offshore ICO scam and Cayman Islands Corporations.

First, note that I use the term “scam” very carefully and intentionally here. I truly believe there is an offshore ICO scam going on and it’s being perpetrated by lawyers and incorporation agents, many of them in the Cayman Islands.

Second, this article is about an offshore ICO scam that affects those issuing ICOs out of the Cayman Islands and most other offshore jurisdictions. I’ve seen this ICO scam in Belize, Nevis, Cook Islands, and in a number of offshore countries.

Third, this article is for those who are looking to fund their businesses with an “offshore” ICO. I’m not talking about ICOs in regulated jurisdictions such as the United States. Also, this scam does not generally affect ICO investors. I’m speaking only to those who wish to issue an ICO.

With all of that said, here’s the offshore ICO scam often found in the Cayman Islands:

Those hoping to issue an ICO call up a lawyer or an incorporator and say, “hey, I need an offshore corporation in the Cayman Islands to issue an ICO for my new business.”

The sales agent say, “sure, no problem. Send us $9,500 and we’ll set up your corporation.”

Buyer pays and gets his or her Cayman Islands corporation. Scam complete.

Now, you’re thinking, what the heck? The buyer got exactly what they paid for. How is this an ICO scam perpetrated by the lawyer or incorporator?

This is an ICO scam because the agent knows full well that the buyer won’t be able to get a bank account. They know that the buyer doesn’t have the legal structure or documents necessary to issue an ICO. They know that it will be a cold day in hell before this client gets a bank account opened for his ICO.

They know the Cayman Islands corporation can’t be used as intended. These lawyers are intentionally selling a useless structure to make a buck. They’re taking advantage of a buyer who has no idea what they’re doing and doesn’t have the financial backing to issue a proper ICO.

Even if the buyer could get a bank account opened, it would be closed after the first few deposits… and the ICO would probably be blacklisted by the industry.

The only way to open an account would be to lie to the bank about how you intend to use that Cayman Islands corporation. You say that the company will sell a service such as internet marketing or whatever. You won’t get an account in the Cayman Islands, but you’ll get one in a smaller offshore jurisdiction.

Now you issue the token and deposits start coming in. You’re converting bitcoin into FIAT and transferring that to your offshore account to fund your business.

Do this a few times and the bank will get suspicious. Send a large transfer, and the bank will get suspicious. They’ll want to know the source of funds and to see your sales agreements if you’re saying these are business transfers.

Let’s say you skirt past the bank’s KYC, AML and compliance systems (this won’t happen), what are the Cayman regulators going to say? If in some alternate universe, you somehow manage to raise a few million bucks, regulators will be all over you.

The bottom line is that these Cayman Islands corporations are useless for an ICO. At least, they’re useless without all of the legal and planning work that goes into a proper ICO.  

Sure, Cayman Islands is a top-tier jurisdiction for offshore ICOs and crypto funds. I recommend Cayman to clients all the time… clients who can afford the high costs associated with issuing a proper ICO from the Cayman Islands.

Back in the early days if ICOs, you might have been able to start in Cayman for $10,000. Today, you can’t get anywhere spending less than $50,000 on the front-end, and with most spending $100,000 on the back-end (success fees). Even low cost lesser jurisdictions are $35,000 in 2018.

The typical components of an offshore corporation in Caymans that will issue an ICO are as follows:

  1. Corporate entity,
  2. Financial Services Entity,
  3. Anti Money Laundering Manual (AML),
  4. Know Your Customers (KYC) procedures and systems,
  5. Dedicated Money Laundering Reporting Officer or Chief Compliance Officer with several years experience, and
  6. Sufficient capital to entice a correspondent bank to take you on as a client.

Setting up an ICO in 2018 is not cheap and any shortcuts will likely wind up causing massive headaches down the line.

Unfortunately, there are a lot of folks offering services in this area who haven’t got a clue or who know that what they’re selling is worthless. Sure, I can set up an offshore corporation for you in Cayman for less than $10,000, but it won’t be good for anything.

The choke points are the banks and international correspondent banks. They simply won’t accept anything that is not whiter than white in‎ the crypto arena.  That means proper licensing, approvals, and conformity with laws and regulations, especially US Securities laws if US persons are involved.

You’ll need to also address issues such as utility token or security coin right from the start. If a security, we’ll need to start as an exempt offering under 506(D) if any US persons are involved. Otherwise, we will still need a proper offering document wherever you want to set up shop that’s compliant with whichever countries you plan to sell into.

If you’re currently speaking with a promoter offering to form a cheap Cayman Islands company for your ICO, here’s what to do. Simply ask them to guarantee in writing that they’ll open a bank account in Caymans that will be allowed to receive ICO funds. Also, let them know you plan to visit the bank to discuss your ICO. This will shut them down very quickly.

I hope you’ve found this article on the offshore ICO scam and the Cayman Islands corporations. If you would like assistance with a proper and legal ICO out of Cayman, please contact me at info@premieroffshore.com or call me at (619) 483-1708  for a consultation.

We can also help you clean up your legal structure if you’ve already done some pre-sales. The only thing we can’t fix is sales of tokens or deposits accepted from non-accredited US investors. The only option there is to refund these buyers or face the ire of regulators.

And no, we can’t form an offshore corporation in the Cayman Islands for an ICO, allow you to do some pre-sales, and then get you into compliance. There’s way to much risk in that for you and us. Plus, the costs to fix a mess always outweigh the costs of doing it right the first time. If you’re already in trouble, we can help you get back on track, but we can’t go down that road with you.

Cryptocurrency Banks for Sale
Christian Reeves

Cryptocurrency Banks for Sale

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The demand for offshore cryptocurrency accounts has exploded in 2018. Likewise, the demand for offshore bank licenses and correspondent accounts has increased dramatically. In 2016 I got a call a month asking about cryptocurrency banks for sale. Now we get a call a day asking for an international crypto friendly banks for sale. 2018 is shaping up to be the year for offshore bank licensing.

Why the increase in demand? With countries like the United States and China pushing out cryptocurrency exchanges and crypto traders, the demand for offshore banks has increased dramatically. If an offshore bank has US and EU correspondent accounts that allow funds to flow in and from crypto, that bank has a gold mine.

And the same goes for ICOs. They’ve been forced out of the United States, which means an offshore bank is a perfect vehicle to act as the investment bank and issue an international ICO. See: The Best ICOs for 2018.

Wanting to cash in on this new attention, a few of cryptocurrency banks are for sale. If you’re operating a crypto exchange, an ICO platform, or are a bitcoin billionaire, you might consider buying an offshore cryptocurrency bank for sale.

First, let me define what I mean by an “offshore” bank for sale. An offshore bank is a financial institution licensed in a zero or low tax jurisdiction. In most cases, an offshore bank can provide all manner of international banking services to persons and companies outside of its country of licensure. Conversely, it is prohibited from competing with local banks and may not offer services to locals.

The top offshore banking jurisdictions are Belize, Dominica, St. Lucia, Cayman Islands, Puerto Rico, Cook Islands, Gibraltar, and others. Banks that want to focus on the US often set up in Puerto Rico. Those who want to keep their distance from US regulators prefer Dominica and Belize. For more on this, see: The best offshore bank license jurisdictions.

Second, let me define what I mean by a “cryptocurrency” bank for sale. A cryptocurrency bank is one that has the necessary correspondent and other relationships to send and receive wires from cryptocurrency exchanges. The most important component of an offshore bank providing services to crypto clients is its correspondent banking relationships.

A crypto friendly bank is not necessarily a bank that issues its own token or one that operates on a blockchain. In fact, it may not have any FinTech components at all. The FinTech side of the equation is handled by the exchange and the offshore bank is focused on converting coins to FIAT and back again.

Third, let’s consider some of the issues that arise when you buy a cryptocurrency bank. There are two options when you buy a bank: take over an existing bank with an operating history and a book of business or buy an existing license and include correspondent banking services in the purchase.

When you buy an offshore bank that’s been operating for a few years, you buy its industry reputation and its client base. As with any major acquisition, you’ll need to audit its clients and loan portfolio. When buying an offshore bank, you must also look at its FATCA and CRS compliance to ensure you have no risk of fines from your regulators.

When you buy an offshore bank charter with new correspondent accounts, rather than an operating bank, the risk is that the correspondent banking has not been proven. In that case, you must check out the promoter and his or her experience in correspondent banking. And, of course, include such accounts in the transaction.

A few of the cryptocurrency banks for sale will accept bitcoin for 100% of the purchase price. You will need to replace the bank’s corporate capital with dollars, but the purchase can be completed in bitcoin.

Corporate capital for an offshore bank ranges from $550,000 to $10 million depending on the bank and the jurisdiction. New banks typically have $550,000 to $1 million in capital to support their license plus the amount held by their correspondent bank.

Let’s look at one cryptocurrency bank for sale.

The largest cryptocurrency bank I know of for sale has both US and European correspondent accounts which allow funds to flow in and out of crypto exchanges. Thus, it’s “crypto friendly” for multiple currencies. This bank also has a physical gold program which some investors use as a hedge against crypto volatility.

The keys to its value are:

  1. US and EU correspondent accounts which are crypto friendly,
  2. 15-year operating history and audited financials,
  3. Clean FATCA and CRS history,
  4. Relationships built over the years with regulators and correspondent partners,
  5. Diverse account portfolio with thousands of customers not heavy on crypto,
  6. Moderately profitable in 2017,
  7. Sellers are willing to take back the loan book if required,
  8. Supports US Dollar, Canadian Dollar, Euro, Pound Sterling and Swiss Francs,
  9. Gold purchase and loan programs popular with crypto investors, and
  10. Willing to accept bitcoin for the purchase price.

The purchase price of this offshore bank is $100 million or about 12,000 bitcoin at today’s exchange rate.

By comparison, the cost of a new offshore bank for sale is about $10 million or 1,200 bitcoin. Such a bank would include the permit to organize, permit to operate, compliance, AML and KYC documentation, and correspondent relationships. The buyer would need to install his or her core banking software and connect into the correspondent banks.

The purchase of an offshore cryptocurrency bank is essentially the acquisition of a turn-key operation. Once you install your people and systems, you can begin offering services. This will save you 6 to 12 months compared to starting from scratch and eliminates all of the risks and hurdles of building an offshore crypto friendly bank.

Keep in mind that each and every shareholder will need to be approved by government regulators. We’ll need detailed information on all shareholders, including a clean police or FBI report.

The cost to purchase a new offshore cryptocurrency bank ranges from $10 million to $20 million depending on the jurisdiction. The cost for an offshore bank with an operating history and accounts ranges from $70 million to $100 million. There are very few operating banks sold (I see 1 or 2 per annum). On average, there are 4 new operating crypto banks sold and 30 new licenses (permit to incorporate) issued each year.

Let me end with a comment on starting a new bank with an ICO. This article on cryptocurrency banks for sale is for those who have completed an ICO or have raised the necessary capital. Starting a new bank on a budget is a very different matter and no seller will negotiate with someone pre-ICO (before you can provide a proof of funds).

If you’re pre-ICO and require an offshore bank license, you’ll need to start at the beginning. That means applying for a permit to organize from an offshore jurisdiction like Dominica or Puerto Rico. Once you have the authorization to incorporate a bank in hand, you can raise capital using the term “bank” in your offer documents.

The usual cost of drafting a business plan, preparing basic compliance documents, and negotiating a license from an offshore jurisdiction is $150,000. For more on what it takes to build an offshore bank, see: Four Steps to Build an Offshore Bank.

For an article on funding an offshore bank with an Initial Coin Offering, see: How to start an offshore bank with an ICO.

I hope you’ve found this article on cryptocurrency banks for sale to be helpful. For more information on purchasing an existing offshore bank or setting up a new financial entity, please contact me at info@premieroffshore.com or call us at (619) 483-1708.

The usual process to acquire an international bank is an initial consultation to learn about your requirements and objectives. Then we’ll need a proof of funds for $10 to $100 million and the resumes or background information on each shareholder. And, of course, we’ll need a retainer to represent you in the purchase of an offshore bank. Only when this information is provided will the offshore bank open its books to examination.

How to trade cryptocurrency and manage investments for others without a license
Christian Reeves

How to trade cryptocurrency and manage investments for others without a license

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I get a number of emails from readers each week asking how they can manage money for friends and family offshore. They want to trade cryptocurrency and make investments for others without going to the expense of setting up a licensed and regulated exchange. So, here’s how to trade cryptocurrency and manage investments for others without a license.

When you want to trade crypto or other assets for anyone other than yourself, you need an account that allows you to hold other people’s money. Banks are very cautious when it comes to those trading on behalf of others or managing investments without a license.

First, banks don’t want to be fined for facilitating money laundering. Banks paid hundreds of millions in the last few years for “allowing” their customers to avoid taxes and launder illicit gains. The bank might not have had any idea what was going on, but their due diligence procedures weren’t stringent enough to catch the wrongdoers, so they were fined big time.

Second, banks and governments don’t want anyone without a license managing other people’s money. Brokerage and investment management licenses and regulation is big business. If you don’t want to pay, you won’t be allowed to play.

Third, banks must follow strict Know Your Client (KYC) rules. When you open an account, the bank checks you out and thereby knows you, their customer. If you then receive friends and family or customer money in your bank account, the bank doesn’t “know” the true beneficial owner of the money. The actual owner is one level removed from the person the bank “knows.”

Setting up an offshore corporation and hoping for the best is not a good idea in today’s world. Banks are watching for the source of funds on most wires. They will check outflows and for anyone using their account to manage OPM. If you try to hide, you’ll be caught and kicked to the curb.

Against that backdrop, here’s how to trade cryptocurrency and manage investments for others without a license.

When you don’t want to set up a regulated exchange, which can cost $35,000 to $250,000, depending on the country, you can use offshore LLCs and a trading corporation to accomplish your goals.

You, the trader form an investment corporation and a management LLC. Then, each and every client forms an offshore LLC. Yes, every single client, friend, or family, must have their own offshore corporation. Only a husband and wife can have a joint LLC.

Next, all of these structures open offshore accounts at the same international bank. In this way, the bank has done its due diligence on you and your customers. Everyone has been reviewed and approved by the bank and transfers will be permitted between the group of companies.

Once everyone has been approved, the client LLCs can issue a Power of Attorney to your management LLC. With this Power of Attorney on file with the bank, you will be allowed to manage the investments of these clients and transfer funds into your investment corporation.

This multi LLC offshore investment management structure ticks all the right boxes. It allows you to manage client funds and for the bank to do its KYC on everyone involved. Because all the accounts are at the same bank, transfer costs are minimized and the source of funds won’t be questioned.

A separate LLC system to trade cryptocurrency and manage investments for others without a license works well with large investors. Because of the setup costs, it’s not efficient for smaller clients or selling investments to the general public.

This practical limitation is positive for banks. They don’t want someone operating an unregulated offshore hedge fund selling to mom and pop investors. This will only bring trouble and litigation to the bank. They like larger accounts, larger deals, and sophisticated investors.

This system also allows sophisticated investors to put more advanced structures in place. For example, they might want to trade within an international trust for estate and asset protection reasons. High net worth investors might want to hold the LLC inside an offshore life insurance company to eliminate US tax on the capital gains.

You can also use this structures to create private entities in countries with public registries. For example, let’s say you want to invest in Panama. That country has a public registry of corporate shareholders and directors and a list of beneficial owners of foundations (their version of a trust).

To keep your name out of the registry, you can set up an offshore LLC in a country like Nevis or Belize that doesn’t have a public registry. Then, this LLC can be the founder of a foundation or the officer and director of a Panama corporation. In this way, the beneficial owner (you) won’t be listed in the registry.

When someone searches the Panama database, all they’ll see is the name of your Belize LLC. When they go to Belize for more information, they’ll hit a brick wall.

Whether this offshore LLC structure is cost-effective will depend on how many clients/friends and family you plan to manage. In most cases, the base corporation might cost $3,500 and each LLC $2,000 to $2,900 to set up (not including bank fees).

The largest structure I’ve seen like this was 3,400 LLCs and two management corporations in Switzerland. Why, you ask, would someone spend that kind of money on LLCs? Because they don’t want to go through all the compliance and regulation that comes with a fully licensed exchange.

Had they decided to operate as an investment manager in Switzerland, they would have had to hire someone with the necessary Swiss licenses and go through a very arduous registration process. The multi LLC model eliminated both of these requirements.

Plus, once you have a license, you have quarterly filing, KYC and AML compliance, and all manner of regulations to contend with. When you use separate offshore LLCs, it’s a private transaction between you and your friend/client.

Finally, this system allows some clients to move their retirement accounts offshore. They could form an offshore IRA LLC and transfer some or all of their vested retirement savings into that entity. Then, that LLC could issue a POA to you, the trader.

As you can see, this multi offshore LLC approach to trading cryptocurrency and managing OPM for others without a license can be a very powerful tool.

I hope you’ve found this article on how to trade cryptocurrency and investments for others without a license to be helpful. For more information on setting up a regulated or unregulated crypto trading business, please contact me at info@premieroffshore.com or call us at (619) 483-1708. We’ll be happy to assist you with an offshore structure and banking.

Take your IRA offshore and invest in cryptocurrency
Christian Reeves

Take your IRA offshore and invest in cryptocurrency

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I expect cryptocurrency to remain a hot IRA investment in 2018. Almost every call we get these days is about investing in cryptocurrency offshore. Clients want to manage their crypto offshore in private and avoid the IRS audits we all know are coming. So, here’s how to take your IRA offshore and invest in cryptocurrency.

When I talk about cryptocurrency, I don’t mean only bitcoin and ethereum. What’s hot are all the altcoins and forks. Altcoins like AAC, ACT, Bitcoin Cash, Monero, Ardor, sia coin, and others. And, we see about 20 forks coming in 2018. A few exchanges, such as OurDax.com, guarantee that they’ll pass along all of these forks to their users.

The best way to avoid IRS audits of your crypto account, and the coming war in the United States, is to setup your account offshore. The way to gain access to the best trading platforms is through an offshore company. The best way to gain access to altcoins and forks is to take your IRA offshore and invest in cryptocurrency. The way to participate in top ICOs is to invest through an offshore structure.

So, here’s how to take your IRA offshore.

The first step is to move your account(s) to a custodian that allows for international investments. This is usually a US custodian that supports offshore LLCs like Midland IRA or Entrust. The most popular custodian for crypto investors is Midland, but there are several which offer this service. Neither of these companies is associated with Premier.

The reason I say you’ll probably need to move to a new custodian is that none of the big firms support offshore investments. The big guys, like Fidelity and Merrill Lynch, make their money by selling you their investments. When you go offshore, the custodian no longer is in control and doesn’t earn a commission on your trades.

And not all self-directed custodians allow for international investments. Firms like IRA Services in California allow US LLCs but not offshore LLCs. In order to move your retirement account out of the United States, you need a US custodian that is experienced in offshore structures.

Once your account is with the right custodian, we can form your offshore IRA LLC. We will work with you to select the best jurisdiction, form the company, draft the operating agreement and other documents, and open your bank and/or crypto accounts.

In most cases, we’ll open both a bank account and a crypto account. You will sell your US investments and transfer cash offshore. It’s rare that a US custodian allows for like-kind exchanges. Though, we have seen some with self-directed accounts move offshore by transferring crypto, thereby avoiding tax on the sale.

Once your IRA LLC is set up and funded, you can trade cryptocurrency in private. You’ll also have access to a number of smaller altcoins that are not available in the United States.

The same goes for ICOs. The US SEC has pushed most ICOs out of the country. Only the very largest and best-funded companies can issue a US compliant ICO. This means that US ICOs will be from companies that have already gone through many rounds of funding, with venture capitalists taking big bites of the pie.

If you want to invest in a true startup, then you need to do so offshore. If you want to invest as a VC, and get in on the ground floor, you need to invest offshore using an IRA LLC.

And, of course, you’re not limited to investing in cryptocurrency. You can buy gold, hold multiple currencies, invest in foreign real estate, and just about anything else you wish. You must follow all US IRA rules, but you’re in control and you select the investments that fit your risk tolerance.

Note that you can’t buy a house and live in it with retirement money. You can invest in rental properties, with the rental profits and gains flowing back into your retirement account. For more on this, see: Can I buy foreign real estate with my IRA?

One popular hedge offshore is to purchase physical gold in your IRA. You can buy gold through a bank, such as Caye Bank in Belize, and hold it as a hedge against crypto and fiat currencies.

And some banks, such as Caye, allow you to borrow against your physical gold. We have clients purchasing gold and borrowing against it to trade crypto. For more on the rules around buying gold with your retirement account, see: IRA Gold Rules.

But, watch out for IRA lending rules and UBIT. When you borrow in an IRA, you must use a non-recourse loan. Also, Unrelated Business Income Tax can apply if you don’t have a UBIT blocker corporation in place.  For these reasons, I recommend that only the most sophisticated IRA investors use leverage in their account.

The bottom line is that taking your IRA offshore will give you access to the best altcoins, ICOs, forks (IFOs), exchanges, and high yield investments. Add to this the max privacy and asset protection you get, and you see why offshore IRA LLCs are so hot in 2018.

I hope you’ve found this article on why you should take your IRA offshore to invest in cryptocurrency to be helpful. For more information, please contact us at info@premieroffshore.com or call us at (619) 483-1708 for a confidential consultation.

Cryptocurrency Mexico
Christian Reeves

Fintech and Cryptocurrency Law in Mexico

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As other countries wait for government officials to dictate what happens with cryptocurrency and Fintech Companies, Mexico just took a big step forward. After making several adjustments to the proposed bill, Mexican senators finally approved with 102 votes in favor and none against a law that regulates financial technology companies in Mexico. Delegates still need to vote to approve the measure, but this is a major step forward.  

Mexico has a lot to gain with the approval of the Fintech and Cryptocurrency Law and the mainstream adoption of bitcoin. About 44% of the Mexican population doesn’t have a bank account due to the mistrust that exists between citizens and financial institutions. That’s 29 million Mexicans that don’t have a bank account and live on cash.

The transparency that comes with cryptocurrency transactions might fix this problem. If the bill becomes law, and it’s not there yet, it will create a Fintech solution for the unbankable. Let’s take a moment to take a look at some of the most interesting key aspects of Mexico’s Fintech Law.

One of the main points of the Fintech Law is to increase the level of financial inclusion throughout the country, promote competition and provide legal certainty to participants in the sector, contributing to the improvement of the national financial system. There are over 158 Fintech companies in Mexico that will benefit from having an established framework from which to operate.

This is especially true for cryptocurrency exchanges. They require specific laws and quality regulation. In order to maintain banking and other relationships, cryptocurrency exchanges need to be in a regulated environment where their business partners know what to expect and that the exchange is operating within a specific legal framework.

When cryptocurrency exchanges began offshore a few years back, most were looking for countries with no regulation. Exchanges thought they could operate outside of the KYC, AML and compliance systems.

These exchanges quickly found it was impossible to get correspondent banking relationships. Also, it was difficult to transfer crypto from an unregulated exchange to a regulated exchange in a quality jurisdiction such as the United States.

As a result, international cryptocurrency exchanges began seeking countries with specific cryptocurrency laws and regulations. When operating from within these boundaries, the exchange has access to banks and other providers. Outside of the system, clients have no way to convert their bitcoin to FIAT money.

Today, these countries are Mexico in the Latin American region and Switzerland in the European region.

Article 36 of the Fintech and Cryptocurrency Law details the requirements that will be needed for a cryptocurrency exchange to be granted authorization to operate. The exchange will have to set a minimum capital to perform their activities in agreement with the provisions issued by the Comisión Nacional Bancaria y de Valores (CNBV).  The minimum capital may vary depending on the type of activities they perform and the financial risk they face can be read in the Fintech Law bill that was approved by Senate. The amount of capital has not yet been determined.

In order for a Fintech or Cryptocurrency Exchange to start operating, they must be authorized by the CNBV, be a Limited Liability Company, and have a domicile in Mexico. They must also have a corporate governance structure, operating systems, keep their accounting logs up to date, have a strong security system, as well as offices and operating and compliance manuals.

The bill permits banks and cryptocurrency exchanges to share their applications or technological interfaces, called API (Application Programming Interface), without violating the financial secrecy that is key for its function.

CNBV must receive authorization from the Bank of Mexico to approve a Fintech company, to give legality to its operations. A Fintech company in Mexico must inform their clients about the volatility and unpredictability of virtual assets, the risks of fraud, and that transactions may be reversed by governing bodies.

The Fintech Companies must inform their clients of the risk involved receive a signed contract from their clients indicating they understand. The law specifies that the government will not be responsible for any sort of financial reimbursement to users in the event of fraud, so businesses will be required to communicate this on their website and disclose this before entering into a contract with them.

A Financial Technology Council will be created that consists of 12 members, which will include representatives of the CNBV, the tax authority, and Banxico. Their goal will be to encourage the exchange of opinions and solve any problems that occur with the Fintech and Cryptocurrency Exchange Companies. They will meet at least once a year.

Article 44 of the Fintech Law, which refers to the limits that the authorities should set for this type of platform, states that limits in which these companies may operate will differ based on the type of client, type of project, type of transaction and when established by the CNBV or the Bank of Mexico will have to take into consideration at least the regulation of other figures of the financial system subject to compliance with established principles in this Law and the protection of the interests of investors.

So, like Switzerland, Mexico is building an efficient cryptocurrency law that will protect investors and allow the business to grow. The negative with Mexico is their corporate tax rate of 30%. With changes to the US system, Mexico now has one of the highest tax rates in the region.

In order to reduce tax in Mexico, you might set up an offshore division and minimize income into the country. However, international transfer pricing and audit rules are very strict in Mexico, so be careful where you incorporate.

For example, it’s nearly impossible to get a deduction approved for a payment to a tax haven such as Panama. While the US treats all counties the same, Mexico is known to disallow expenses to tax havens.

Possibly the best option for a large exchange is a license in Mexico and your primary operations in the US territory of Puerto Rico. The Mexican office would handle marketing and support, and operations would be done from Puerto Rico.

Income sourced to Puerto Rico will be taxed at 4%. If the owners of the exchange are foreign persons (not US persons), dividends paid from Puerto Rico will be tax free. If the owners are US citizens and residents of Puerto Rico, dividends will be tax free under Act 22.

For more on Puerto Rico for cryptocurrency, see: Tax efficient structure for US cryptocurrency exchange.

For more on Puerto Rico’s many tax incentives, see: A Detailed Analysis of Puerto Rico’s Tax Incentive Programs.

I hope you’ve found this article on fintech and cryptocurrency law in Mexico to be helpful. For more information on setting up an exchange, please contact me at info@premieroffshore.com or call us at (619) 483-1708. 

cryptocurrency exchange tax
Christian Reeves

Tax efficient structure for US cryptocurrency exchange

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Here’s how to cut your corporate tax rate for a US cryptocurrency exchange to 4%. If you’re operating a licensed exchange in the United States, and you’re willing to move some or all of your employees, we can get your corporate tax rate down to 4%.

This article considers a tax efficient structure for US cryptocurrency exchange and is meant for larger exchanges licensed in the United States. It can also apply to international exchanges that require a US presence and US banking services. The 4% rate is a great offer compared to Switzerland and 12.43% in Zug and higher in other cantons.

Note that this tax-efficient structure for crypto exchange doesn’t replace your US licenses. It’s an add-on to your current structure that allows you to pay only 4% tax on corporate profits. Nor does it change any of your compliance or regulatory requirements.

This 4% tax rate applies to corporate tax reportable in your state of operation. For example, let’s say your headquarters is in California and this is where all of your employees are located. Move this headquarters, including all the employees, and you can exchange the combined Federal and state rates of 30%+ (21% federal and 8.84% for a c-corp or 10.84% for a financial c-corp in California) for 4%.

If you’re paying tax in the states where you’re licensed but don’t have employees, these taxes will remain the same. They’re based on being licensed in the state and not corporate income from work performed in California (your state of operation).

Without any more ado, here’s how to create a tax efficient structure for a US cryptocurrency exchange and pay only 4% in corporate income tax:

Move your business to the US territory of Puerto Rico and operate under the International Financial Entity license, or Act 273. Your corporate profits sourced to Puerto Rico will be taxed at 4% and not taxed in the United States. This is not corporate tax deferral available offshore… this is a corporate tax rate of 4% replacing a US rate of 30%.

Income is “sourced to Puerto Rico” if it’s earned from work performed in the territory. Likewise, income is sourced to the United States, and taxable there, if earned from work performed in the US.

For example, if half of your workforce is in California and half is in Puerto Rico, about half of your income might be attributable to Puerto Rico. Thus, 50% would be taxable at 4% and 50% at 30%.

If you move your business and all employees to Puerto Rico, sourcing is a simple matter… all corporate profits will be sourced to the island and taxed at 4%. When you split work between the US and PR, a transfer pricing study and in-depth analysis are required.

  • In practice, sourcing of income will look and the quality of work performed in CA vs PR and is much more complex than this example.
  • For more on sourcing, see: What is Puerto Rico Sourced Income for an Act 20 Business. This post is about Act 20 and not 273, but the sourcing concept is the same.

The corporate profits of your cryptocurrency exchange operated from Puerto Rico will be taxed at 4%. Dividends from the Puerto Rico company to a foreign corporation or non-US person are tax-free. Likewise, dividends from your Act 273 business to a resident of Puerto Rico who qualifies for Act 22 are tax-free. Dividends from the International Financial Entity to persons in the United States will be taxed in the United States.

That is to say, US persons can move to Puerto Rico, qualify under Act 22, and pay zero US tax on dividends from an Act 273 cryptocurrency exchange. You will pay PR tax on the salary you take out of the business and zero on dividend distributions. Shareholders that live in the US will pay US tax on dividend distributions.

For more on Puerto Rico’s various tax incentives, see: A Detailed Analysis of Puerto Rico’s Tax Incentive Programs.

To set up in Puerto Rico under Act 273, you will need the following:

  1. Puerto Rico corporation with $250,000 paid-in capital and a CD for $300,000, for a total of $550,000 in capital.
  2. Minimum of 5 employees on the island.
  3. Detailed business plan with projections, operating manuals, and KYC, BSA and AML documentation.
  4. Resumes and financial reports on all key employees.

With this documentation, we can apply for an International Financial Entity license for your cryptocurrency exchange. You will be granted a permit to organize and given time to build out an office, IT systems, hire your employees, etc.

When you’re ready to go live, you will give notice to government regulators. They’ll come out and review your systems and documents. When you pass the audit, you’ll be given a permit to operate.

An Act 273 license will allow you to move the operation of your cryptocurrency exchange to Puerto Rico and exchange your 30% tax rate for a 4% tax rate.  

I hope you’ve found this article on a tax-efficient structure for US cryptocurrency exchange to be helpful. For more on International Financial Entities, see my 300-page book on Amazon.

An IFE license can be used to set up many different businesses. In addition to a tax-efficient cryptocurrency exchange, an IFE license could be used to operate an international bank, family office, brokerage and FX firm, etc. My book is focused on the international banking components of the IFE, but you will find it useful for a cryptocurrency exchange.

For more on building an International Financial Entity in Puerto Rico, you can reach me at info@premieroffshore.com or call us at (619) 483-1708. We’ll be happy to assist you to redomicile your exchange to Puerto Rico and offer a turn-key solution for Act 273 exchange.