International Finance Centres (IFCs) have always needed to be both adaptable in the face of change and forward-looking to drive innovation.

With the advent of a new era shaped by digitalisation, this has never been truer. Many IFCs are having their mettle put to the test, with managers and investors a like looking for the backing of the right ecosystem to enable them to see their ambitions flourish.

Similarly, fund and corporate service providers are also having to up their game and future-proof their offering by bolstering their teams and enhancing their technological abilities. The rise of tokenisation has, for instance, led to law firms establishing digital funds groups and administrators creating digital leads – or innovation committees – to meet the demands of a growing number of managers exploring opportunities in the virtual assets space.

Meanwhile, the increased accessibility of private funds to highnet- worth investors, traditionally the reserve of institutional players, has opened a significant trend towards democratisation – dubbed ‘retailisation’ – and is reshaping the capital-raising landscape.

It is an exciting time, but it is not without its challenges. IFCs that have earned a reputation for high-quality provision of fund and corporate services, like Jersey, need to work increasingly hard to establish the right regulatory framework to protect investors while not inhibiting innovation.

A regulatory sweet spot

From a jurisdictional perspective, the challenge for fund services jurisdictions has always been to stay relevant; those which fail to evolve and push the boundaries will simply regress.

Jersey has long sought to adopt a forward-thinking approach. A few decades ago, as financial centres within the EU began to move into the same retail area under the UCITS directive, Jersey’s fund offering gradually – but very deliberately – shifted towards alternative funds for institutional and expert investors.

This prompted the successful introduction of Jersey’s Expert Fund Regime in 2004, which helped position Jersey strongly within the alternative investment funds market and provided a platform on which to build Jersey’s reputation.

This ultimately developed into a full spectrum of fund solutions, from highly-regulated, widely offered retail funds, to lighter touch options for smaller groups of sophisticated or institutional investors, all backed up by highly experienced fund administration and corporate services capabilities.

Just over five years ago, the Jersey Private Fund (JPF) was introduced, offering up to 50 professional investors an efficient, cost-effective vehicle with lighter-touch regulatory requirements.

To date, more than 690 JPFs have been launched, with managers attracted by the versatility of the structure and the speed with which they can be established, allowing them to go to market in a cost and time efficient way.

More recently, the launch of a Jersey Limited Liability Company in 2023 has helped expand Jersey’s existing comprehensive suite of private fund vehicles, adding a new structure intended to be familiar to US private equity, venture capital and other alternative fund professionals.

The picture overall is one of proactive innovation, designed to support the long-term ambitions of a financial services jurisdiction focused on alternative fund service excellence.

The rise of tokenisation

Of course, the one concept that looks set to completely transform the cross-border private assets space is tokenisation. As the virtual asset landscape evolves, the requirement for robust regulatory frameworks will be crucial and jurisdictions will need to be well versed on the challenges if they are to offer an ecosystem that facilitates opportunity while being structurally sound. Jersey has taken a collaborative approach with its financial services industry, together with the Government of Jersey and the Jersey Financial Services Commission (JFSC), in order to set itself apart.

From the start, Jersey decided it would treat virtual assets as it would any other asset class and it was this approach that led to Jersey regulating the world’s first Bitcoin fund in 2017.

Following this milestone, the island also became the first jurisdiction to apply an AML control framework for virtual currency exchanges and to formulate ICO guidance in 2018.

Six years on and the JFSC’s Innovation Hub is now leading the simplification and updating of this

guidance. This guidance is set out in two tranches: the first focused on digital assets capital-raising and the second on the tokenisation of real world assets which will provide a high level

framework of the regulators’ approach to applications where an existing asset has been tokenised.

Such an approach puts the jurisdiction’s innovative edge and its core market competencies on a converging path with this flexible and pragmatic response to virtual asset regulation, already attracting leading players in the industry.

Securitisation

One recent example of this can be seen in Bank Frick’s choice of Jersey for the launch of its platform providing the securitisation of virtual assets and the issuance of Actively Managed Certificates (AMCs) to professional investors.

It is an example which highlights the way in which Jersey’s well-established service provider capability and proportionate environment is creating new and exciting opportunities in the virtual assets space.

Securitisation typically involves the ownership of a pool of assets where notes are issued as opposed to shares. Crucially, it is not regarded as a fund or an alternative investment fund under the AIFMD definition, which means that in Jersey, they are regulated only for AML purposes and are not subject to withholding tax.

Furthermore, while those buying notes or AMCs must be sophisticated investors, these can be held by authorised participants – such as banks – on behalf of their retail customers, paving the way for the retailisation and democratisation of virtual assets.

Other forms of securitisation, such as Collateral Loan Obligations and Collateral Debt Obligations, are also offering opportunities as a gateway to Europe for US markets, with more than 300 securitisation structures of this type registered in Jersey, including a number migrating from other IFCs.

This has created a distinct selling point for Jersey with other IFC regimes either proving too costly and regulatorily burdensome, or by reputationally being unable to meet the requisite high international standards, for instance when it comes to grey listing.

The rise of virtual assets is undoubtedly set to continue to reshape the funds industry over the coming 12 months, in terms of thinking, expertise and infrastructure. It is something that is explored in more detail in Jersey Finance’s recently published report – ‘The Evolution of Virtual Assets’ – which highlights the role of fund domiciles in the growth and success of the sector.

In a world where market forces continue to pull the global fund administration industry in all directions, there remains plenty of scope to push the envelope too. Jersey’s positioning as politically  and fiscally stable with a minimal change outlook from a regulatory, legal or economic perspective, combined with its world-class digital infrastructure and track-record in strategic innovation, should stand it – and its sizeable fund and corporate administration community – in good stead.

This article was originally published in The Drawdown.