At the time, bitcoin was far less well known and was regarded by the mainstream as a fringe asset class.
GABI’s regulatory approval as a Jersey Expert Fund was regarded by many industry commentators as a statement of intent from the Island.
Crypto funds in Jersey
Jersey’s Expert Fund regime is the sweet spot of Jersey’s regulatory regime in the alternative funds space, with many widely marketed alternative funds (including the $100 billion Softbank Vision Fund) seeking this regulatory stamp of approval. This type of fund can be marketed to an unlimited number of ‘expert investors’, the most common category of which is any person investing a minimum of $100,000.
In an asset class where regulators have often been criticised for failing to adapt existing regulatory regimes to suit the advance of ‘crypto’, the JFSC sensibly focused on some key concerns and investor protections when approving GABI:
- the source of the fund’s bitcoin.
- how the fund was going to ‘custody’ its bitcoin.
These issues obviously present their own challenges in the digital asset space as regulators grapple with the conceptual difficulties of how to regulate something with no physical properties. To guard against money laundering and to safeguard the integrity of both the fund and Jersey’s reputation as an international finance centre, the JFSC sensibly required that the fund source its bitcoin only from either ‘miners’, sovereign governments or regulated exchanges.
Also, the fund could only appoint crypto custodians who were regulated in their home jurisdiction and who were subject to regulatory capital requirements equivalent to Jersey’s. In this way, the JFSC was able to grant the ‘Expert Fund’ regulatory kitemark to GABI when other jurisdictions were still struggling to get up the knowledge curve.
The launch last August of Coinshares Fund I – the closed ended venture capital fund investing in ICOs and other digital assets – was particularly notable in that, as a Jersey limited partnership, the fund could accept subscriptions in Ether and the fund was denominated in Ether. This meant the fund could then invest subscriptions directly into ICOs without any complicated conversion valuations to change investors’ money from fiat currency to crypto. Coinshares Fund I also took advantage of the ‘Jersey Private Fund’ regime which is proving incredibly popular with managers looking for a quick route to market.
Initial Coin Offerings (ICOs)
There has been an explosion in the number of ‘initial coin offerings’ (or ICOs) in the last year. Founded principally on the Ethereum blockchain, the use of the ‘smart contract’ allows an ICO promoter to mint his own coin or token in exchange for Ether subscriptions. Tokens can be ‘utility’ in nature, allowing the holder access to new software or to a particular platform, or they may give the holder certain economic rights. In essence, ICOs are cryptographic crowdfunding and regulators are understandably nervous because they do not conform to traditional ways of raising capital around which the word’s capital markets and securities regulations have been crafted.
All jurisdictions have scrambled to get up to speed with ICOs, with varying degrees of risk appetite. While some regulators have prohibited ICOs entirely, as others have given carte blanche to almost any ICO promoter, the JFSC have sensibly recognised there is a middle ground; ICOs are here to stay and ICOs with proper substance which are backed by a credible promoter should be nurtured.
Against this backdrop, in December 2017 we saw the launch of Jersey’s first initial coin offering (ICO),the ARC Reserve Currency. ARC is an asset backed ‘stablecoin’ crypto currency which is designed to act like a currency without the volatility spikes one sees in other crypto currencies, like bitcoin. Against a very tight timeline – and with other competitor coins about to be launched – the JFSC ensured that the ARC coin launched ahead of time and with a degree of regulatory scrutiny which should give prospective purchasers a degree of comfort not available in other jurisdictions. Very recently, an ICO designed to raise capital for investment in a crypto currency mining operation based in the UK –AX1 token – also required the JFSC’s attention.
In both instances the JFSC adopted a pragmatic approach to approving the ICOs, focusing on consumer protection and anti-money laundering and having regard to the fact that ICO promoters want to use a Jersey incorporated issuer because of Jersey’s reputation as a well-regulated and reputable jurisdiction.
Accordingly, in order to give prospective ICO investors a degree of protection and comfort that may not be available in many other jurisdictions – and being mindful of the guiding principles pursuant to which the JFSC discharges its functions as the Island’s financial services regulator – the JFSC has imposed on the ICO issuing company some core sensible requirements, including:
- To appoint and maintain a Jersey resident director on the board of the issuing company.
- To appoint a Jersey licensed administrator.
- To prepare and file annual audited accounts with the Jersey Companies Registry.
- To maintain and adopt adequate AML/CFT policies and procedures.
- To prepare an Information Memorandum which complies with certain content requirements required of a prospectus issued by a company under Jersey company law.
- To include in any marketing material certain prescribed consumer warnings.
Virtual currency exchanges
At a very early stage, the JFSC saw that the volume and value of trading in crypto currencies was increasing hugely, as people sought to convert their crypto into real world fiat currency and vice versa. Recognising that there was a regulatory gap, the JFSC brought enterprises providing so-called ‘virtual currency exchange’ (VCE) services under Jersey’s regulatory umbrella back in 2016, requiring that VCEs comply with Jersey law and regulation aimed at preventing and detecting money laundering and terrorist financing.
At the same time, the JFSC recognised that many promoters of VCEs need time to road test their product without being burdened by the full weight of regulatory compliance. The JFSC therefore allowed VCEs with turnover of less than £150,000 per calendar year to test VCE delivery mechanisms in a live environment without the normal registration requirements and associated costs.
As such, Jersey’s VCE regulation balances the need to provide robust regulation with a desire to foster the development of the Island’s burgeoning crypto credentials.
Established digital environment
From GABI in 2014 to AX1 in 2018, Jersey has been leading the way in its approach to crypto and digital assets. The regulator’s forward thinking attitude – coupled with Jersey’s flexible range of corporate vehicles –means the jurisdiction has naturally developed an exceptional pool of resident expertise to deal with the exciting opportunities opening up within the funds space through digital innovation.
The development of solutions, whether technical, legal or financial, is a key part of Jersey’s ability to remain competitive and innovative and we are now reaping the rewards of that approach with a surge in crypto and other digital asset vehicles and funds choosing Jersey.
Christopher Griffin, Partner, Carey Olsen.
Christopher has broad experience of general international corporate and funds work, particularly in private equity and hedge funds. He spearheads Carey Olsen’s crypto practice, advising on the launch of Coinshares Fund I and ARC Reserve Currency, Jersey’s first initial coin offering (ICO).
Christopher also advises on all aspects of fund and corporate transactions, including the legal and regulatory aspects of fund launches and joint ventures, having considerable experience in dealing with the Jersey Financial Services Commission in navigating investment vehicles through Jersey’s regulatory approval process.