How to find a good home for your crypto-asset business

Although most crypto services are provided remotely on a cross-border basis, centralised finance (CeFi) businesses providing crypto-asset services are required to have a company or other legal formation and a stable base of operations. This structure is often required by jurisdictional authorities and governments as it creates an identifiable, regulatable and taxable entity.

Businesses need directors and employees to run the company and bank accounts to pay staff, rent and other expenses. In many jurisdictions in the world, this results in the need to be authorised or registered with a regulator or other authority.

The jurisdiction where a crypto business establishes its base and provides services to clients globally will significantly affect how one runs and operates the business. Deciding which jurisdiction to operate from is crucial to long-term success.

Here are key factors to consider when finding a home for your crypto business.

Avoid regulatory uncertainty

Over half of the 209 jurisdictions that are members of the Financial Action Task Force (FATF) or FATF-style regional bodies do not have a regulatory regime for virtual assets (VAs) in place^[1].

Operating in a jurisdiction where VA services are unregulated gives a business the temporary freedom to operate outside of regulatory scope, but this must be weighed against the uncertainty of when and how regulation will eventually be applied. It also makes it more challenging to secure access to bank accounts and other financial products and may deter clients from acquiring services, especially if such services involve taking control of their assets.

For a business to be successful long-term, it will have to contend with some form of regulation. Operating in a jurisdiction that has unfavourable or insufficiently clear regulations presents the risk of regulators taking enforcement action for non-compliance.

Find a favourable regulatory framework

Crypto businesses should prioritise establishing in jurisdictions with good regulatory frameworks that balance the need to achieve positive regulatory outcomes and foster innovation that brings benefits to the consumer.  

Good crypto regulation has a clear definition of a crypto-asset and makes clear which crypto-asset services are in scope and which are not. It will explicitly acknowledge the risks associated with specific products and services and impose reasonable obligations on regulated entities that are designed to mitigate these risks effectively. It should be flexible enough to allow for the evolution of new products and services.

Consider long-term political stability

Clear and consistent government policy on crypto-assets is an important factor in creating a stable environment in which your business can flourish and meet its long-term goals. Crypto-asset businesses will frequently encounter adverse and costly changes if they incorporate in jurisdictions where there are constant changes to the political environment.

Choosing a jurisdiction where the government and regulator see eye-to-eye on crypto is critical.

Choose a knowledgeable, accessible and pragmatic regulator

The regulator’s attitude, appetite and general understanding of crypto will also have a bearing on your business. A regulator who is familiar with crypto-asset services and the risks associated is more likely to apply regulation pragmatically and proportionately. In a fast-paced and novel industry, it is important to have a regulator that is willing to engage openly with the industry.

Regulatory engagement from crypto businesses helps foster legitimacy with relevant authorities, and trust and understanding when businesses encounter unexpected challenges.

Access the market quickly

The time it takes to obtain a licence or authorisation from a regulator is an important consideration. It is also important to consider the ease of extending the scope of your authorisation in a timely manner as your business develops and you bring new products and services to market.

In some cases, establishing a business in a smaller jurisdiction may ensure swift and ongoing dialogue with the regulatory authority.

Abide by regulation in countries where clients are based

Crypto businesses servicing clients around the world need to monitor regulatory developments in jurisdictions where clients are based. It may be possible to service clients through reverse solicitation exemptions or necessary to become registered, licenced or authorised in a jurisdiction to access a market. This will depend on whether the services provided are regulated, whether the business has a physical presence and how the business is marketed. In some jurisdictions, even if the service you provide is regulated, there may be exemptions if you don’t provide services to retail clients.

As regulation continues to develop, there will eventually be more passporting rights between jurisdictions, like in Europe, or the regulator of one jurisdiction will recognise the equivalency of a foreign regulatory regime and permit cross-border business. However, the crypto-asset sector is less mature than the traditional finance sector, so fewer of these cross-jurisdictional market-access arrangements currently exist.

Make an informed decision early

For crypto businesses with global client bases, making an informed decision as early as possible on the right jurisdiction to operate from can be the difference between success and failure. Understanding the pros and cons of operating in different jurisdictions will save time and money in the long run because the consequences of this choice will inform most other strategic considerations for your business and its lasting success.

A good home is not a jurisdiction with lax or non-existent regulation, but one that will provide the regulatory and operational stability that is necessary to focus on what really matters: developing great products and servicing your clients so your business can flourish.

XReg Consulting is a team of policy and regulatory experts that helps governments formulate sound policy, regulators supervise effectively, public authorities build capacity and crypto businesses thrive and follow the rules. For help finding the right jurisdiction for your crypto-asset business, contact Nicky Gomez at nicky@xreg.consulting.

^{[1] Verified by VASPnet on 5 February 2024.}