The offshore edge: Why crypto fund managers choose BVI and Cayman

As the crypto market matures, investors and institutions are increasingly seeking structured, regulated ways to gain exposure. One of the most effective routes is through a crypto fund. Launching such a fund involves various considerations, particularly around jurisdiction. Offshore structures in the British Virgin Islands (BVI) and the Cayman Islands (Cayman) have become the go-to choices for crypto fund managers. This article explores why and how to choose between them.

One primary reason these jurisdictions are popular for crypto funds is their pragmatic regulatory environment. While both have sophisticated investor protection frameworks, they are flexible and proportionate, allowing smaller start-up funds to operate more cost-efficiently than in jurisdictions with a one-size-fits-all approach. This is particularly attractive to digital asset managers, who often need to move quickly on fund structures as the market evolves.

BVI and Cayman each have regulatory frameworks in place which cover both open-ended and closed-ended funds with their own distinct licensing regimes. While in the TradFi space open-ended vs closed-ended is usually a straightforward distinction, managers in the crypto space are increasingly looking for opportunities to offer their investors a form of blended exposure, and many strategies are becoming hybrid between the two. For example, managers are often looking to offer their investors exposure to both liquid  algorithmic trading on exchanges, as well as more illiquid  venture positions. Both BVI and Cayman offer a great deal of flexibility around specific fund terms, allowing us to accommodate such blended strategies.

The Cayman Islands Monetary Authority (CIMA) regulates financial services in Cayman, while the BVI Financial Services Commission (FSC) oversees the BVI. The BVI has proven particularly popular for start-up managers due to its tiered licensing approach, from the Incubator Fund licence through to a fully retail Public Fund, ensuring regulatory burden and operational costs proportionate to the size of the offering.

Setting up a crypto fund in BVI or Cayman is often faster and simpler than in onshore jurisdictions. Each has streamlined formation processes and regulators with particular expertise in digital asset funds, enabling them to process applications quickly - often in weeks rather than months.

The volume of crypto fund launches has also driven growth in supporting infrastructure: fund administrators, corporate services providers, compliance professionals, banking providers and custodians. This increasingly sophisticated ecosystem offers strong support for fund managers. Identifying the right industry partners for your specific needs - from bespoke custodial solutions to navigating in-kind contributions - is essential.

Both jurisdictions have well-established legal frameworks offering protection and certainty to investors. The Cayman Islands is widely recognised for its stable legal system and investor-friendly regulations, while the BVI has earned a solid reputation, particularly for start-up managers. Both have legal systems rooted in English common law, drawing on its extensive body of precedent.

Both BVI and Cayman offer tax-neutral structures: crypto funds incorporated in these territories are not subject to local taxes on income, capital gains, or dividends. This allows funds to retain more earnings for reinvestment.

Tax neutrality also allows investors from different jurisdictions to participate without complex multi-jurisdictional tax reporting at the fund level. While investors remain subject to tax in their home jurisdictions, the offshore structure avoids an additional tax burden on the fund vehicle itself.

Many key advantages apply to both jurisdictions. For managers seeking to attract institutional capital, Cayman may offer greater familiarity to institutional investors, particularly those from traditional asset classes entering crypto.

The BVI is generally more cost-efficient and may offer practical efficiencies in launch timelines. For smaller fundraises, funds focussed on private investors who are jurisdiction-agnostic, and funds seeking rapid launch to capture market movements, BVI may be preferable.

Structure also matters: BVI may offer advantages for managers operating deal-by-deal SPVs, as certain safe harbours may allow each SPV to fall outside the regulatory sphere, minimising operational costs.

The following table summarises the key differences between the two jurisdictions:

While certain structures allow operation without a management company, the vast majority of crypto fund structures include one. A management company allows managers to segregate liability, structure arrangements between them (e.g., through a shareholders' agreement), and structure fees more tax-efficiently. A regulated management company also helps newer managers build a track record and may reassure prospective investors.

Both jurisdictions offer solid solutions, but BVI has a particularly cost-effective, light-touch regime allowing managers to set up a fully licensed vehicle efficiently. A BVI Approved Manager can manage both BVI and Cayman funds, and is often used for separately managed accounts.

Take a look at our related article on BVI Approved Managers for more information on this regime and option.

Some managers operating in the digital assets space will launch (at least initially) with a standalone structure in either the BVI or Cayman, with a focus on non-US investors only. Managers looking to expand to accept US investors (or launch with an offering available to both US and non-US from the outset) will need to work with both US counsel and BVI or Cayman counsel to optimise the fund structure for all investors. Often, this will include both US and offshore entities in a “master-feeder” structure.

Launching a crypto fund in BVI or Cayman offers significant advantages: regulatory flexibility, smooth setup, legal certainty, tax efficiency, and access to global capital. As the digital asset market continues to mature, these jurisdictions will remain at the forefront for fund managers. Understanding offshore structures and choosing the right jurisdiction, and the right advisors, is key to building a successful fund.

Please feel free to reach out for a free, no-obligation consultation on how Harneys can assist with launching your crypto fund.