The Capital
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The Capital

Singapore’s New Fund Structure & What It Could Mean for Cryptocurrency Hedge Funds

Singapore, despite its relatively small physical size, punches well above its weight, especially when it comes to the financial services. Recently ranked one the fourth most important financial center in the world, behind New York, London and Hong Kong, the city state can be proud of its achievements in the financial services sector. Another area where Singapore also manages to punch well above its weight is in the cryptocurrency space. With an enlightened light-touch approach by Singapore’s regulator, the Monetary Authority of Singapore, the country has managed to navigate the Scylla of over regulation and stifling of fintech innovation and the Charybdis of a laiseez faire approach with its potential for harmful scams. This has led to Singapore becoming one of the world’s top three jurisdictions for the launching of Initial Coin Offerings (ICOs). And although the momentum of public ICOs has cooled somewhat, the vehicle still remains viable for companies and startups seeking to raise capital from private investors by way of private pre-sale agreements.

Singapore is one of the world’s top financial centers as well as a leading hub for initial coin offerings (ICOs).

But until now, hedge funds, private equity funds and mutual funds have chosen to domicile their funds in offshore tax havens such as the Cayman Islands, Bermuda, British Virgin Islands, Jersey and Guernsey. These jurisdictions have profited tremendously through the provision of services ancillary to fund formation, including legal, consultancy and advisory as well as fund administration services.

Now it seems like Singapore is set to get in on the game as well.

In a move to lure funds managed from Singapore (of which there are many), to also domicile in Singapore, Singapore’s government is creating a new corporate structure that will allow for ease of fund formation on the island republic. The new law, set to come into force next year (and anyone who is familiar with Singapore will know how efficient the institution of new laws can be), will allow for a new type of corporate entity called the Variable Capital Company or VCC (Singaporeans love our acronyms).

The Monetary Authority of Singapore has taken an enlightened approach towards cryptocurrencies and blockchain technology.

Singapore’s fund management industry has enjoyed robust growth in assets under management (AUM) in recent years. The fears of Brexit have also caused some funds to consider relocating their operations to the balmier tropical climates in the south as well. But while many funds are managed out of the island, most of them are domiciled in islands far away on the other side of the planet.

Singapore is looking to change that trend by offering the VCC — a bespoke corporate entity for funds which is a one-stop shop for both domiciling and managing funds in Singapore. There are some obvious advantages to that.

  1. Funds who choose to domicile and manage in Singapore will enjoy the ease of only having to transact in one law. Instead of having a distinct and separate set of laws for the fund entity and the fund manager, only one set of laws — Singapore law will be required. This will help dramatically decrease legal, administrative and operating costs.
  2. Accounting standards for fund formation and fund management need only to adhere to Singapore’s accounting standards, which are also in harmony with the International Financial Reporting Standards (IFRS).

The VCC will be very similar to the structure which most fund managers are already familiar with from the other island jurisdictions and includes flexibility in the distribution and reduction of capital. The VCC will also ensure that the financial statements and register of members will not be publicly accessible as well (as opposed to the current corporate regime which allows anyone with internet access and S$5.35 to do a BizFile check on who a company is owned by).

Good for Cryptocurrency Funds

The VCC may also prove useful for ICOs and cryptocurrency investment funds. Currently, the majority of ICOs which are raised in Singapore, issue tokens out of Cayman Islands entities, for both tax and privacy reasons. With the increased activity in the cryptocurrency and blockchain space on the island, stakeholders can now consider the VCC as a viable alternative to ICOs out of the Cayman Islands. Beyond the greater surety such a structure would provide for investors, thanks to Singapore’s well-run judicial system, disputes can be more readily resolved using the country’s well-established legal and arbitration avenues.

Islands in the sun, not just great for beaches!

During the ICO boom towards the end of last year, many cryptocurrency funds were raised. These ranged from purely long-biased ICO funds, to venture capital funds to private equity funds and to a lesser extent, hedge funds. As the cryptocurrency market approaches maturity, there is a potential for more hedge funds to form and the VCC then becomes a possible vehicle to do so.

But what is less clear however is the tax regime which VCCs will fall under. While Singapore has extremely favorable corporate tax rates, 17% at last count, this is still substantially higher than places like the Cayman Islands, which is tax-free. However, Singapore has no capital gains tax, nor does it have withholding taxes, which means if properly structured, VCCs could potentially enjoy the same tax-free status in Singapore, while enjoying the certainty of the Singapore regulatory and legal landscape and its status as the world’s fourth most important financial center.

VCCs for cryptocurrency hedge funds?

Finally, there is the issue of the legal status of cryptocurrency. Singapore’s financial regulator the Monetary Authority of Singapore (MAS) has thus far declined to categorize the legal status of cryptocurrency. MAS Managing Director has said publicly that cryptocurrencies in their current state are not “money,” by any stretch of the imagination, but has contemplated a future where they may become “money.” If not “money” than does it form an asset, and more importantly, is it taxable? This is not so clear, but what we can gather is that since it’s not “money” according to the MAS, if you make more of it, it shouldn’t (for now) constitute something which is taxable. For instance, if you gave me 1,000 BTC (thank you) and I invested it for you and paid out to you 1,500 BTC (after a period of time and not as long as you would imagine), that additional 500 BTC, at least for MAS in its current status, would not be taxable. Of course this was the position albeit somewhat unofficial, taken by MAS in March of this year and as we know, a few months in real time can be an eternity in the cryptosphere (which is why I constantly stress that crypto is unlike anything you’ve ever seen before).

For that reason (and based on the current regulatory environment in Singapore), a cryptocurrency hedge fund organized as a VCC and domiciled and managed in Singapore, may have all the tax advantages of a Cayman or the British Virgin Islands domiciled fund, with the added advantage of the reputation of a global financial center.

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The purpose of ALTCOIN MAGAZINE is to educate the world on crypto and to bring it to the hands and the minds of the masses. This article was written and composed by Patrick Tan on ALTCOIN MAGAZINE.

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Patrick Tan

Patrick Tan

CEO & General Counsel of Novum Alpha, a quantitative digital asset trading firm with regulated funds catering to accredited and institutional investors.