The fund will trade cryptocurrencies and other tokens (or ‘coins’) and also participate in selected ‘initial coin offerings’ or ICOs. ICOs represent a way of raising capital that entrepreneurs in the crypto arena are using more and more, resembling crowdfunding.

Compliance Matters asked Byrne and Carlo Martinengo from JTC, along with Carey Olsen Counsel Chris Griffin, about the regulatory circumstances in which they are now operating. Their answers to the following questions are summarised as though one person were speaking. They use the term ‘retail’ as though it excludes HNWs, although the UK’s regulators in COBS rule 4.12.4 use the term to include them.

Q: Will HNW individuals invest in the fund?

A: Yes. Under the Jersey Private Fund regime, an investor must be either a person who is able to commit a minimum commitment/subscription of £250,000 or a professional investor, in other words only a very sophisticated investor. We’re not able to discuss individual investors, but there are investors already and the fund has just closed in a single closing round. It’s important to remember that this is very much a specialist fund; it is not a retail fund that would be open to the wider public.

Q: Which regulators have given it the go-ahead - just Jersey?

A: The fund is regulated in Jersey by the Jersey Financial Services Commission (JFSC) under the new Jersey Private Fund regime. This regime is another example of Jersey’s leading position as an international finance centre, although I am sure that other jurisdictions will follow as this type of business grows and develops.

Q: Why is it so useful to them? Why would they bother to use a Jersey fund?

A: The Jersey Private Fund regime provides a proportionate and efficient regime for this type of sophisticated fund. Under the regulations, the General Partner (GP) of the fund does not need to be licensed directly; instead, the onus to enforce and comply with the rules of the regime, including all AML and ‘due diligence’ on investors, falls on the fund administrator (in this case JTC) which is regulated very thoroughly as a licensed ‘Fund Services Business’. This arrangement, whereby an established fund administrator takes on the majority of the regulatory burden, is attractive and time-efficient for fund managers, allowing them to establish their funds in a relatively short period of time, while still qualifying for the Jersey ‘regulatory badge’, which is attractive to potential investors as a sign of high quality.

Q: Do the Jersey regulators think of cryptocurrencies as real money?

A: The vast majority of regulators have yet to formally proclaim on this subject as the area of cryptocurrencies is still so new. Differences exist between jurisdictions all over the world – some think of it as a currency, some as an asset. In Jersey, the regulator is clearly comfortable in treating cryptocurrency as an asset and therefore this fund is simply an extension of Jersey’s long-standing ability to provide an excellent platform for alternative asset classes, such as private equity, real estate and now cryptocurrencies.

Thinking of cryptocurrencies as a new asset class makes sense; they have a liquid value, which is not exceptional and is true of many other things, from stamps to vintage wine to classic cars, all of which are the subject of many successful funds.

The history of cryptocurrencies and Jersey is actually already well established as the Jersey regulator approved the first ever fund investing in the cryptocurrency Bitcoin (the GABI fund, also established by Global Advisors) back in 2014. The door to further development has very much been open since then.

Q: Say more about the Jersey private fund regime and why it's important.

A: The Jersey Private Fund (JPF) regime came in in April this year and take-up has been strong. The JPF replaced the Very Private Funds regime, which achieved many of the same things, but was limited to 15 investors per fund, unlike the 50 under the JPF. The attractiveness of the JPF is two-fold. Firstly, the regulatory burden is placed predominantly on the Jersey licensed administrator (firms such as JTC). This means that well-established, tightly regulated firms with substantial expertise, experience and scale are dealing with the important points of regulation, including the AML and 'due diligence' for investors and compliance with the maximum investor limit of 50. Secondly, because the regulatory burden is concentrated in this way, funds can be established relatively quickly (theoretically in as little as 48 hours) which enables fund managers to put their ideas into practice rapidly and also helps to keep overall costs of establishment competitive without compromising quality.

Q: What were the trials, tribulations and length of the authorisation process?

A: There was a tight timetable as, by their very nature, the developing cryptocurrency markets are relatively fast-moving. The JPF regime was the perfect tool for CoinShare Fund I as it allowed the fund to be established quickly through a process that – when compared with a retail fund, for example – is extremely streamlined and is tailored deliberately and specifically for specialist funds that are seeking investment from a small number of sophisticated investors. The whole process is very transparent and details of the regime, including the application documents, are available publicly on the JFSC website.

Again, the key point to remember is that, with appropriate legal expertise, the fund can be established quickly and cost-effectively and then the ongoing regulatory burden falls to the appointed fund administrator. This gives all parties – fund manager, investors, fund administrator and regulator – the access, information and comfort that they need to operate.

Q: What's Ether, what's Ethereum and what's an ICO?

A: Ether is the native cryptocurrency of the Ethereum distributed application platform, or blockchain. It is often referred to as the ‘fuel’ of the Ethereum network as it is a form of payment made by users of the platform to the machines (computers) that execute the requested operations.

Ethereum itself is a decentralised platform that runs so-called ‘smart contracts’ on a custom-built blockchain. The Ethereum network is supported and developed by the Ethereum Foundation, a Swiss-based non-profit organisation whose members include Vitalik Buterin, the creator of Ethereum.

An ICO, or Initial Coin Offering, is a way of raising funds for a new cryptocurrency or blockchain-based project. It is comparable to crowdfunding in concept and allows people to purchase units of a new cryptocurrency or crypto token in exchange for regular money or, more commonly, established cryptocurrencies such as Bitcoin or Ether.

The question over whether ‘coins’ can be described as securities is a very live one and goes to the heart of how regulators are likely to treat ICOs in the future. Today the US Securities and Exchange Commission released an opinion on this subject, which indicates that some ICOs could indeed qualify as securities – so watch this space!

More information is available here: https://www.skadden.com/insights/publications/2017/08/secissuesguidanceonregof-initialcoinofferings