How do you choose the best jurisdiction for your crypto business? From strategy to legal pitfalls, this article will help you navigate the complex global crypto landscape. With CryptoMap as your compass, you’ll find the most favourable jurisdictions tailored to your project’s needs, ensuring legal compliance and strategic growth.
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Over the years, Digital & Analogue Partners have assisted many companies in establishing and operating crypto businesses legally. Our extensive experience with numerous projects has allowed us to identify the key strategic questions and factors that need consideration when selecting a jurisdiction. The right choice is a balance between strategic project goals and adherence to regulatory requirements.
To simplify this complex decision-making process, CryptoMap comes into play. CryptoMap guides you through essential questions about your business and, based on your responses — alongside insights from the global crypto regulatory landscape and industry best practices — recommends the most suitable country for your needs.
Selecting the appropriate jurisdiction is crucial for several reasons. Each country imposes its own requirements on businesses, including taxation, labour relations, and intellectual property protection. The jurisdiction you choose will affect contract enforcement, tax benefits, regulatory environment, and legal stability, all of which influence operational costs and profitability. Additionally, the reputation of the jurisdiction can enhance trust in the company, particularly if it is registered in a major business hub. A well-considered choice of jurisdiction can be the defining factor for a project’s success, providing legal protection and operational advantages.
STEP 1: ANSWER FOUR STRATEGIC QUESTIONS ABOUT YOUR BUSINESS
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1. What is the Essence of the Project?
The first and most crucial question to answer concerns the project’s core essence. You need to clearly define what the final product will be, who your target audience is, and what problem the project aims to solve. This will help set the primary direction for business development, choose an appropriate business model, and understand the way forward. For instance, are you planning to create a crypto exchange, provide custody services, issue tokens, launch a decentralised autonomous organisation (DAO), or engage in mining? Each of these types of crypto businesses has its unique characteristics and requires an individual approach.
2. Background and Goals of the Founders
The founders’ background plays a pivotal role in choosing a jurisdiction for a crypto business. Factors such as citizenship, place of residence, asset holdings, and experience in similar projects must be considered. Another crucial aspect is understanding the founders’ values and priorities. What markets do you plan to operate in, and what business connections do you currently have or will need in the future? If you already have reliable partners or assets in a particular country, this can significantly influence the choice of the company’s registration location and simplify the business’s subsequent development. It’s important to note that some countries may require a local partner or director to register a company.
3. What Are the Project’s Timelines?
Defining the project’s timeline is the next step. To plan effectively, you need to understand how much time will be required to launch the business and achieve key objectives. For example, obtaining a licence in some jurisdictions can take up to six months. Timelines can also vary depending on the project’s complexity and the necessary technical infrastructure. Therefore, it’s vital to set realistic timeframes and account for potential delays related to regulatory processes or technical aspects.
4. What Is the Project’s Budget?
Lastly, understanding the financial aspects is a key factor for the project’s success. The budget should include expenses for licensing, company share capital, legal support, operational costs, marketing, and technological infrastructure. This will allow for the efficient allocation of resources and help avoid financial difficulties during the early stages of development.
As a business founder, it’s essential to grasp the answers to these questions. Every answer paints a distinctive picture of the venture, and when combined, these details form the very DNA of your business endeavour. It’s essential to recognise that there isn’t a one-size-fits-all guide on how specific answers alter potential jurisdictions. The myriad combinations of these responses can lead to various outcomes, each with advantages and challenges.
Therefore, as you embark on your CryptoMap journey, we encourage you to keep these pivotal questions at the forefront of your considerations. Revisiting them after your exploration will act as a compass, guiding you towards selecting the ideal jurisdiction that not only meets but enhances all the other criteria vital for your project’s success.
STEP 2: EXPLORE THE TYPES OF DIGITAL ASSET REGULATION IN DIFFERENT JURISDICTIONS
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After addressing the strategic questions, you will likely have a preliminary list of suitable jurisdictions. The next step is to determine whether crypto business activities are permitted in these jurisdictions and which of them would be the most conducive to your operations. There are four primary approaches to the legal framework for digital assets:
Positive Regulation
This approach fosters growth and innovation in the digital asset sector by establishing clear principles and standards that encourage crypto businesses. Jurisdictions such as the United Kingdom, the EU, Singapore, Hong Kong, Kazakhstan, and Belarus adopt this model, creating favourable conditions for both companies and individuals to thrive.
Restrictive Regulation
Restrictive regulation acknowledges the benefits of digital assets but imposes certain limitations on their use and circulation. While this approach allows for crypto business activities, it requires compliance with various requirements. Countries such as Russia, Qatar, and Turkey apply this regulatory model.
Prohibitive Regulation
This form of regulation strictly bans any activities related to digital assets. In these jurisdictions (e.g., China) crypto businesses face complete operational prohibition.
Absence of Regulation
Some jurisdictions still lack a dedicated regulatory framework for digital assets. In this case, the advantage lies in the following legal principle: everything not explicitly forbidden is permitted. However, this approach comes with its risks. Firstly, despite the lack of prohibitions, regulatory uncertainty can lead to unpredictable legal consequences. Secondly, there is a risk of sudden legislative changes, where the jurisdiction might introduce either permissive or prohibitive regulation, potentially threatening the stability and future of your project.
Once you have identified whether a jurisdiction is favourable for conducting a crypto business, it is crucial to evaluate how long the legislation on digital assets has been in place and whether there are successful crypto projects within that jurisdiction. This information is valuable, as an established regulatory framework often indicates a mature and stable environment and successful projects suggest favourable conditions for business development.
STEP 3: IDENTIFY REGULATORY PITFALLS FOR DIFFERENT TYPES OF CRYPTO BUSINESSES
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Virtual Asset Service Providers (VASPs)
If, in response to the first question — “What is the essence of your business?” — you decided to open a crypto exchange, become a crypto broker, provide custodial services, or offer any financial services involving crypto assets, you will be classified as a Virtual Asset Service Provider (VASP) in the crypto business world. Operating as a VASP in any country with crypto regulations requires obtaining a licence. While the specific requirements may vary across jurisdictions, there are common elements.
The licensing process for VASPs generally requires active engagement with the regulator. This involves submitting a comprehensive set of documents, including a business plan outlining the business model, risk management strategy, financial forecasts, and compliance plan. Regulators meticulously review these documents and may request further clarifications, so continuous communication with them is crucial for successfully obtaining a licence.
When registering the company, it’s essential to consider the share capital requirements. A company can distribute profits among shareholders, but it cannot return the share capital until liquidation. Therefore, regulators in most jurisdictions impose high minimum share capital requirements. For instance, in the Astana International Financial Centre (Kazakhstan), it is $200,000, while in Bahrain, it is $800,000.
The cost of obtaining a VASP licence also varies significantly depending on the jurisdiction, ranging from less than $10,000 to over $70,000, excluding annual renewal fees. Often, these annual fees are comparable to the initial licensing fee, an important consideration for financial planning. The licensing process can take anywhere from two to six months, depending on the complexity and specific requirements of the local legislation. However, in practice, the review of a licence application usually takes around six months in almost all jurisdictions.
Apart from financial requirements, the licence typically mandates the implementation of effective corporate governance and risk management systems, AML compliance procedures, and measures for client protection within the company.
Token Issuance
The first step in the token issuance process is to identify the legal requirements in your chosen jurisdiction. Successful issuance requires careful consideration of various factors. In many jurisdictions (e.g., EU and Bahrain) obtaining approval from the local regulatory authority is necessary. This can involve a lengthy approval process and active engagement with the regulator, which must be accounted for during the planning stage.
Another key aspect is the development of a white paper. This document outlines the project’s main features and objectives, including details about the upcoming Initial Coin Offering (ICO). While creating a white paper is not always a legal requirement, it is considered best practice, especially following the introduction of the EU’s Markets in Crypto Assets (MiCA) Regulation. The requirements for a white paper’s content may vary depending on the country, so its preparation requires a thorough analysis of the legal standards in the chosen jurisdiction.
Next, you need to determine the type of token you intend to issue. This involves applying the economic reality test, which assesses the economic substance of the asset rather than its name. Understanding the economic nature of your token is crucial, as issuance requirements differ significantly depending on the token type.
Types of Tokens and Their Regulation
1. Payment Tokens:
The regulatory framework for payment tokens varies significantly depending on whether the tokens are backed by assets. Examples of unbacked payment tokens include Bitcoin and Ether, while USDT and USDC are backed tokens. Some countries have specific regulations for these types of tokens, and in certain cases, one type may even be prohibited.
In recent years, regulators in many jurisdictions, including the EU, the UK, and Singapore, have begun introducing rules for asset-backed tokens (stablecoins). A notable development occurred in June 2024 when MiCA came into effect in part, governing the issuance of asset-backed tokens. Generally, stablecoin regulation imposes strict requirements on reserves and token redemption procedures.
2. Security Tokens:
Security tokens are subject to a more familiar regulatory framework, similar to securities regulation. If tokens meet the criteria for an investment contract under the “Howey Test” they typically fall under financial and securities law. This includes obligations for registration, disclosure of necessary information, compliance with anti-fraud laws, and investor protection measures. Recognising tokens as securities can simplify their issuance by using well-established legal norms. However, it also complicates the process due to the numerous stringent requirements.
3. Utility Tokens:
Unlike other tokens, utility tokens lack a universally accepted set of principles governing their issuance and circulation. The regulatory framework for utility tokens varies significantly depending on the jurisdiction.
4. NFTs (Non-Fungible Tokens):
Currently, most jurisdictions do not regulate NFTs. Despite the lack of specific legal provisions, many jurisdictions adopt a favourable stance towards NFTs. For those planning to work with NFTs, whether creating a marketplace or selling the token, it is crucial to choose a jurisdiction where cryptocurrency is allowed as a means of payment, as NFTs are typically purchased with cryptocurrency. For example, in Russia, it is illegal to accept digital currency as a consideration for goods or services. Thus, while it is possible to issue an NFT in Russia, selling it for cryptocurrency is not allowed. This highlights the importance of understanding and adhering to the legal framework of the selected jurisdiction for those planning to work with NFTs.
In addition to the four main types of tokens, there are also algorithmic tokens. These tokens are generally not recommended for issuance and are even banned in some jurisdictions, such as the UAE. Regulatory attitudes towards algorithmic tokens have deteriorated following the Terra/Luna scandal, raising serious concerns about their stability.
Decentralised Autonomous Organisations (DAOs)
DAOs represent a modern business model where governance is conducted through smart contracts on the blockchain. The legal recognition and regulation of DAOs are still in the early stages, but some jurisdictions already offer a legal framework for their registration. Currently, there are specialised laws for DAOs in a few countries, including the USA, the UAE, and the Marshall Islands.
Choosing the right jurisdiction for a DAO is a strategically important decision. Establishing a DAO in the USA provides access to a large market and a well-developed financial infrastructure. In the UAE, registration in the Abu Dhabi Global Market opens up access to the Middle East and North Africa (MENA) market. The Marshall Islands offer different advantages, such as tax benefits and strict confidentiality, typical of offshore zones.
Crypto Mining
The regulatory framework for crypto mining varies across different countries. In many nations, mining is unregulated, simplifying its execution but creating a risk of unpredictable legal changes. Some countries (e.g., China) have outright banned cryptocurrency mining, showcasing a strict legislative approach. Others, like Uzbekistan, permit mining but require special licences to comply with energy and operational standards.
A crucial factor in choosing a location for mining is the cost of electricity, which significantly impacts operational expenses. Therefore, a successful crypto mining business depends on balancing compliance with legal norms and optimising operational costs, particularly electricity expenses.
Conclusion
In the dynamic and complex world of crypto assets, selecting the right jurisdiction for your project is not just a choice but a strategic decision that can define the success and sustainability of your venture. As you navigate through the intricate maze of regulatory landscapes, aligning your business goals with the legal environment of the jurisdiction you choose is essential. This alignment involves understanding how different regions approach the legality, regulation, and support of crypto-related activities, from token issuance to crypto mining.
The CryptoMap guides this journey, helping you tailor legal requirements to your project’s specific needs and circumstances. It’s crucial to consider factors like the nature of your crypto business, regulatory stances on various crypto activities, operational costs, and even the broader reputation of the jurisdiction. Whether establishing a decentralised autonomous organisation, launching a crypto mining operation, or issuing tokens, your choice of jurisdiction should meet regulatory standards and resonate with your project’s vision and financial strategy.
As you embark on this venture, we urge you to think strategically. Assess the landscape, weigh your options, and remember that the decision you make today will shape the future of your project. Choose wisely, and set the course for a successful and compliant entry into the ever-evolving world of cryptocurrency. Take the next step in your crypto journey with confidence and clarity, and let the CryptoMap lead the way to a jurisdiction that enhances and empowers your digital asset venture.
This article was written by Liza Lobuteva of Digital & Analogue Partners. Visit dna.partners to learn more about our team and the services.
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CRYPTO BUSINESS: HOW TO CHOOSE THE RIGHT JURISDICTION FOR YOUR PROJECT was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.