Jonathan Turnham from NXT Law on A Guide for Token Launches

[00:00:00] Jonathan: This idea, this sort of taxonomy of a token of a governance token versus utility token versus security token Cayman and BVI doesn't have that, right? It doesn't sort of have that MICA esque type approach of trying to, you know, everything fits in a neat tidy bucket.

[00:00:12] Jonathan: Cayman and BVI's definition of a virtual asset, it's basically anything issued on a blockchain that's transferrable. And so you end up in this world of, well, a stablecoin yeah, falls into that bucket. A meme token falls into that bucket. Governance token, utility token, they all fall in that spectrum.

[00:00:27] Jonathan: This is where that relationship between development company on the one side of the diagram, owned and operated by founders versus this independent foundation.

[00:00:35] Jonathan: And again, the foundation is unique 'cause there is no shareholders. It's not owned and operated by anyone. It really is orphanized in the Cayman Islands.

[00:00:42] Jonathan: Foundation doesn't own or operate devco. Devco doesn't own or operate the foundation. And I think seeing them as sort of co-equal, almost joint venture partners with those contractual relationships explaining how they build a business together.

[00:00:54] Umar: Welcome to The Accountant Quits podcast, where we help accounting and finance professionals learn. How to manage a business using crypto. Today's topic is a legal masterclass on token launches.

[00:01:06] Umar: Before a token ever hits the market, before it trends on X or gets listed on an exchange, founders face a maze of legal, tax and regulatory decisions that can make or break the success of their project.

[00:01:20] Umar: For example, where should the foundation be incorporated or in which jurisdiction should be issued their token? What kind of token is even being launched, a utility, governance or security, and perhaps most overlooked, how does your personal residency as a Founder put your project at risk from a tax perspective?

[00:01:41] Umar: To unpack all of this, I'm joined by Jonathan Turnham, Managing Partner at NXT Law. Jonathan's resume is impressive. He's helped launch more than 350 Cayman Foundations, more than any other offshore law firm.

[00:01:56] Umar: Since 2017, he's been advising crypto projects since the early ICO days and has worked with everyone from Layer1s, Layer2s, DeFi protocols, metaverse projects, trading platform, prediction markets, and even meme tokens.

[00:02:12] Umar: If you are involved in a token project or planning one soon, this episode could save you a legal headache or a visit from the regulator.

[00:02:21] Umar: Lastly, if you're new to this channel, I'd really appreciate your support to help us grow by liking this video and subscribing. Now, enjoy my conversation with Jonathan.

[00:02:31] Umar: Jonathan, welcome and thanks for taking the time to be here.

[00:02:34] Jonathan: Yeah, thanks, Umar. A pleasure to be here.

[00:02:37] Umar: To start. I mentioned in the intro that you've helped incorporate more than 350 Cayman Foundation, but can you share a little bit more about your background, how you became interested with blockchain and a few years ago, how, like that number started from zero and now, it's at 350?. 

[00:02:54] Jonathan: Yeah, it's a good question. And I must admit when I discovered it was as high as that, I was surprised. I knew I'd been busy, very, very busy, for busy for a number of years as well. But I've been in the Cayman Islands about 13 years.

[00:03:06] Jonathan: I was in Sydney, Australia for a few years before that, I came across like many lawyers do as a sort of fund formation, fund registration lawyer. I also had a technology background. I had acted for a lot of startups back in Australia and technology companies. One of my first legal exposures to crypto was launching some of the first crypto funds in Cayman 11 plus years ago now, I guess it was. I call them crypto funds, but really Bitcoin was the only crypto at the time. And so they were just Bitcoin long funds. You know, they were charging 4 and 40 management performance fees to just hold Bitcoin. people that invested in those did exceptionally well.

[00:03:42] Jonathan: Obviously you buy Bitcoin for 20 or 200 bucks a pop, you wait 10 years and sell it for 108,000. It was a pretty good strategy. Those early funds also then became some of the early sort of venture capital private equity funds that started investing more broadly into projects. I'm, I'm talking post Ethereum world, when all the utility token craze and all the ICO craze of 2016, 17, 18 era came along.

[00:04:08] Jonathan: That's where we sort of cut our teeth and I got involved in some of those early projects. It would've been early 2017, some of the first ones that we got involved in. I was the associate on some of those files cause I was the only one that knew anything about crypto. Again, from my technology background, from having launched some of those first, again, Bitcoin funds, it was natural that it fell on my plate.

[00:04:27] Jonathan: The truth of it is we turned away probably the first 20 or 30 that came along because my position was I've got a good fund book, more traditional practice. Even if there is some crypto funds in there, there was no need to sort of dip into the wild west or frontier territory of ICOs. The truth of it is we had clients pushing us continually saying, well, you are a crypto lawyer.

[00:04:47] Jonathan: Which I'd say, well, I'm a fund lawyer that did a crypto fund. And they said, well, that's a crypto lawyer in our world. You need to help us out.

[00:04:53] Jonathan: Finally got to a deal where they had the right dev team, they had a product, they had good onshore council and there was kind of no polite way to say thanks, but no thanks.

[00:05:02] Jonathan: And so we did that deal way back when. They raised $42 million. It was a seven minute online crowd sale. Right? This is early, early days.

[00:05:10] Jonathan: Once that happened, they told two people, and those people told two people, and those people told two people and before he knew it, I had done probably 10 of these right within a couple months after that and became the token token token expert.

[00:05:23] Jonathan: All those deals were different, right? And it was early days, early territory in terms of how they were doing it. But word got out that a, we were responsible grownup lawyers that understood some of the risk involved and understood the structures, and understood putting this together in a bit of a regulatory vacuum.

[00:05:38] Jonathan: There was no crypto laws, there was no VASP, Virtual Asset Service Provider laws or other rules around this. So structuring those deals in the early days was quite easy. You know, 10, 20 became 30, 40, 50 pretty quickly. You go through crypto winter, 1, 2, 3, and 4. It didn't really make a big difference for us cause we had so many clients that had raised in a hot market.

[00:05:58] Jonathan: They were continuing to do stuff. They were seeding other deals. They were sending deal flow our way. And so we just had a huge head start and say we, it was substantively me doing all those deals. And so it didn't really matter whether the markets were up or down. There was always activity going on. I think that was the, the greatest thing for me is that I could become a full-time crypto, deep crypto lawyer.

[00:06:18] Jonathan: And again, not doing crypto funds anymore. At that point, it was just doing token launches, protocols, platforms for, you know, video games, DeFi clients, layer zero, layer one, layer two, layer three networks, metaverse projects, derivative trading platforms to full fledge predictions markets, right.

[00:06:34] Jonathan: And so the full spectrum.

[00:06:36] Jonathan: The common thread to all of those is yeah, they all had a foundation at the top and they all had a BVI token issuer.

[00:06:42] Jonathan: You know, we'll get into it further down the road questions of, you know, who runs the product side of the business, you know, the video game, is it there, there who runs and operates that? But just from experience and, you know, I think I was one of the few lawyers, certainly in the offshore world, even onshore that spent full time all the time going back to 2016, 2017 in the space.

[00:07:01] Jonathan: And lo and behold, one thing after another comes out that, yeah, I crunched those numbers and you see some of the stats that came out. But yeah, it's, it's about 350 at this point. 

[00:07:09] Umar: Wow. All right. So, I wanna start the episode by, going through some of the legal questions that, perhaps you'll be asking your client like on that first onboarding call. For example, what would be the client's actual use case?

[00:07:26] Umar: What kind of project are they building? How are they planning to raise capital? Where's the team based? and also to understand what's the type of token being issued. So, I wanna ask you, how should founders actually start thinking through these questions prior to a token launch? And how would those answers basically help you determine what's the most appropriate jurisdiction to then register, the entity?

[00:07:50] Jonathan: That's a great question. And I think the way I like to organize my thoughts around this and try and push clients down that path is really looking at, generally speaking, there's three separate businesses on every one of these transactions. They'll typically be a for-profit onshore development company.

[00:08:05] Jonathan: The founder team in a, a Delaware C Corp. If they're based in the States or depending on where they're in the world, they could be a very decentralized team. They may not even have that sort of development company side of the diagram yet. That's one piece of the business that's the for-profit, privately owned, founder led side of it.

[00:08:22] Jonathan: They may have outside investors and they may not, it may just be a bunch of kids living in their mom's basement, right? They, depending on the level of, you know, the complexity and how far down the path they are.

[00:08:31] Jonathan: Sometimes that could be a very sophisticated business. It could be a very traditional web2 gaming business with a 100, 500 employees, and they're like, yeah, we've been making games for 20 years.

[00:08:40] Jonathan: We want to add this thing on, bluntly, how do we do it?

[00:08:43] Jonathan: Typically that Devco is not our client. They've got their own lawyers, their own representation. They're often not based in Cayman or BVI and so we don't need to look out for them. The next piece of it is, is yeah, they, they, they've got a token that they wanna launch.

[00:08:56] Jonathan: And again, those questions is, what is this token? And you know, this idea, this sort of taxonomy of a token of a governance token versus utility token versus security token, Cayman and BVI doesn't have that, right? It doesn't sort of have that MICA esque type approach of trying to, you know, everything fits in a neat, tidy bucket.

[00:09:12] Jonathan: And the question then becomes, does there 1, 2, 5, 10, or 50 different categorizations.

[00:09:18] Jonathan: Cayman and BVI's definition of a virtual asset. It's basically anything issued on a blockchain that's transferrable. Falls into that category. And so you end up in this world of, well, a stablecoin yeah falls into that bucket.

[00:09:29] Jonathan: A meme token falls into that bucket. Governance token, utility token, they all fall on that spectrum. And so I always ask the client, well, what is the business? Right? Yeah, this token is great, but why would I want a token? What does it do? What does it power? What does it govern? And what's the utility in that token? Right? Why am I gonna spend a hundred dollars or a hundred million dollars buying your token?

[00:09:50] Jonathan: Sometimes the answer is because this is a cool meme token, and we'll catch some emotional drama out there in the right time, right place. And you know, it's a great example on a meme token project. There isn't a sort of third pillar.

[00:10:03] Jonathan: There's a development company and there's the token, but we don't say that it does anything, that it has any utility that powers anything. So there is really sort of two dimensional, and obviously those are some of the simplest deals you'll ever do. You know, pump.fun, made that very accessible. And you know, to be honest, I've issued my own meme token four years ago because clients were like, I bet you can't do it.

[00:10:23] Jonathan: And then five minutes later, there you are. Do you want some, you know, here's a million in my, my bullshit meme token.

[00:10:31] Jonathan: It's not worth anything, but there it is, you know, it exists. But the truth is, I'll spend 45 minutes of that first hour call with a client or a potential client not wanting to talk at all about their token.

[00:10:42] Jonathan: So don't distract me with that. The focus is what's the product? And again, are you building a video game that's gonna have a token integrated into it. Is it a network, layer zero, layer one, layer two, layer three, whatever it may be? Is it a DeFi platform? Is it a launchpad? Is it derivatives trading platform? Is it a predictions market? Kind of gaming, gambling end of the spectrum?

[00:11:04] Jonathan: The product side of these deals is the really hard question, right? The nice easy analogy I give to clients is the token is akin to sort of an air mile. And an air mile when you and me can magic up some air miles, they just happen to be traded on a blockchain.

[00:11:19] Jonathan: The air mile is useful because there's an airline that's going to accept that and that product side of the business of building the airline is complex. And that's why I say to them, like, who's got the product here? And again, the meme tokens, you put that aside 'cause there is no product, it's just developer plus tokens.

[00:11:35] Jonathan: But for those other ones, figuring out what that product is and understanding that spectrum of risk. And you know, my video game clients are some of my favorites because for two reasons. They generally own and operate the video game. And so I can say, well, it's not my problem. You know, I can effectively close my eyes from a legal standpoint.

[00:11:52] Jonathan: I'm not acting for that onshore side of the diagram where that video game sits. And it may be because they've already got access to Google Play app stores. They might already be across various platforms. They've already got a team of developers. They already own all the intellectual property. They just wanna add a token to that game.

[00:12:08] Jonathan: Again, a bit like an airline that's existed for 50 years, wanting to then have air models to kind of build the loyalty or build the next dimension around that. Those are some of the easiest deals that I do. Cause I can just be sort of token council. I don't need to worry about the product side of it other than to the extent to say, well, a BVI token issuer SPV creates a token.

[00:12:30] Jonathan: We make it clear to the world. Don't bring it back to BVI 'cause there's no utility or governance or aspects here. If you wanna spend it, use it, engage with the platform. Again, bit like the air mile, bring it to the airline, bring it to the platform side of the business.

[00:12:43] Jonathan: You know, if a client comes to me and says, I wanna build an adult content website, or I wanna build a gaming gambling website, those are the sort of the bright lines in Cayman just from a regulatory law standpoint.

[00:12:55] Jonathan: There's some stuff that just doesn't fit well in Cayman or BVI and it tends to be around sort of the adult content side of it. Again, just fairly traditional laws that were substantively drafted 50 years ago. It's not really the right venue for that. The other ones are some of the gaming gambling laws.

[00:13:11] Jonathan: Cayman's very antiquated when it comes to that. BVI is a bit more permissive, but still very early days. And so I'll often say to clients, well, hey, you've got your development company. We can do a token that can empower that platform. But if you want it to be a gaming, gambling, or an adult content platform.

[00:13:27] Jonathan: Let's go off to Cyprus, let's go off to Seychelles, let's go off to Mauritius. Let's go off to Curacao, right? We will find the right jurisdiction. We know the right people. The benefit of having done 350 of these deals, there's no learning on our time, right? The client just gets the advice and sometimes that advice is we can't help you, but we'll help you find the people that can and putting that team together.

[00:13:49] Jonathan: And it's funny, we can spend 45 minutes on a client call, not even talking about the token, because it really forces them to understand what their product is, why this is unique. And for me, it's not a commercial question. I'm not like, do I wanna back this client? Do I think they're gonna make billions of dollars?

[00:14:04] Jonathan: It's a regulatory question. Does this operate in this jurisdiction? Where can we position it? Who's running that business? Who's got the risk on it? And if they say, well, it's their business, they own it and operate it, I say, well, we should talk to your lawyers as well and make sure that integrating this token into your nice, boring traditional business doesn't blow it up.

[00:14:21] Jonathan: And again, that those were lessons learned from the early days where we had some clients with very traditional businesses that wanted to incorporate tokens into it, and I'd say to them, are you sure you wanna do this? I know tokens are the big fad trend. You know, this is back 2018, something like that.

[00:14:36] Jonathan: Do you really wanna do this? The reason I'd ask those questions was what those founders were planning for their business. You know, what is their exit path? Right? If it's an IPO or trade sale, how do they get outta this business? Some of 'em said, we don't have a plan. We don't wanna do that. We wanna run this thing forever.

[00:14:52] Jonathan: Fine. Other ones say, well, we got a plan to IPO. I said, do you really think you're gonna be able to IPO in any of the main exchanges? If you've got tokens integrated into this platform and you may or may not have funded some of the development of that business with token sale proceeds, it's probably a bright line.

[00:15:09] Jonathan: Other clients say, well, we wanna make ourselves an acquisition target. We want a JP Morgan to buy us. All right, great. Good luck. Sure. Their due diligence process, you know, certainly back in those days if you'd funded the development of a business with a bunch of token sale proceeds. They're just not gonna touch it.

[00:15:25] Jonathan: It was like it was too hard to handle. They didn't know where that money came from. Was it a bunch of, you know, sanctioned Russian oligarchs that funded the entire operation? The answer is, it was tough to tell, right? We don't think so, but you're not gonna get a traditional, large incumbent top 100 business kicking the tires on any of these to that level of risk.

[00:15:44] Jonathan: Long way of saying no two of these deals are the same. And understanding your product and why it's unique, and again, hey, we've got a DeFi platform. Okay, well great, well why is that better than 50 other DeFi platforms? What's your unique selling point? And again, it's not for me to say I should take this client or not take them.

[00:16:01] Jonathan: It forces 'em to answer some tough questions. And ideally all the founders are on that call and you can like force them to confront some of these issues that they may not have even discussed themselves. And think about these things. If I've done my job right, we can have very, very intense initial two or three hours of calls.

[00:16:19] Jonathan: Figuring out the infrastructure, figuring out that architectural design for what the project's going to look like, right? And I've got notebook after notebook that just has nothing but diagrams of client deals on it.

[00:16:29] Jonathan: Once we get those architectural drawings done, the actual building of the project is pretty straightforward, right?

[00:16:35] Jonathan: It's pretty mechanical at that point there 'cause we've addressed all the concerns from a regulatory standpoint, from a tax standpoint, from a securities law standpoint, and from a, whose risk is this standpoint. And I know we can unpack those a bit more, but those first client calls are usually way more intense than the client expects.

[00:16:52] Jonathan: And they come off of it thinking it was just gonna be a meet and greet. And lo and behold, we've like torn apart and restructured their business in usually about 55 minutes. 

[00:17:00] Umar: Moving on to the company structures, that a project launching a token would typically have. So based on my understanding, these would involve like three separate entities, a token SPV, you've, you've mentioned this earlier and for the listeners, SPV just stands for special purpose vehicle. That token is usually used just to mint and issue the token. Then you have the foundation company that would receive the proceeds from that token sale. And then you have the lab company, which typically is like a devco where the team is employed.

[00:17:34] Umar: So can you walk us through the purpose of each of these entities, but also how funds would flow from the SPV to the lab company and whether any of these entities actually hold a controlling interest like in one another?

[00:17:49] Umar: Sure. That's a great question. 

[00:17:50] Jonathan: The division of labor and effort between, like you say, sort of pillar one, the development team, pillar two, very much the sort of Cayman Foundation, token issuer, and then pillar three, that product side of the business.

[00:18:03] Jonathan: Again, the main variable to solve for is, is the product side of it. Whose business is it? Is it gonna be owned and operated by the development company? And again, classic video game type clients, that's a very easy position to put it in.

[00:18:15] Jonathan: If it's a derivatives trading platform, if it's a predictions market, if it's a, let's say a spicier business on that regulatory spectrum, oftentimes that will fall within the foundation side of the diagram and figuring out, again, the jurisdiction where that sits.

[00:18:29] Jonathan: It is an important question. None of these entities own and operate each other. And so I think look at it as almost more of a joint venture, right? You as the developers, you've got some skill, you've got some ability, and the foundation has the ability to build product and sell tokens and run the platform side of the business, but it doesn't have the right technical skillset to do that.

[00:18:52] Jonathan: And so we know each other, right? Trying to pretend we're just like two strangers. Ships that pass in the night and build a billion dollar business together is, is not right. I go the other way and say, well no, we've got the ability to issue tokens or run and build a product, but we need your skillset. We need the nerds for hire.

[00:19:09] Jonathan: We need the ones and zeros, the lines of code to do that. And this is where that relationship between development company on the one side of the diagram, owned and operated by founders versus this independent foundation. And again, the foundation is unique 'cause there is no shareholders. It's not owned and operated by anyone.

[00:19:26] Jonathan: It really is orphanized in the Cayman Islands. And that's why the foundation structure works so well. The foundation says we've got a great idea that we wanna deploy, but we need to hire the right people to do it. And so that relationship between development company getting hired under a development agreement, master services agreement, effectively we pay you to build stuff for the foundation.

[00:19:45] Jonathan: That agreement is arm's length, right? It's separately negotiated. Anything that the dev team receives under that agreement is gonna be subject to tax and whichever jurisdiction they're in. That level of tax depends on which jurisdiction they're in and where those founders are. And again, typically moving an allocation of tokens over to that onshore development company is pretty traditional, right?

[00:20:05] Jonathan: And whether that's because that development agreement or master services agreement negotiated for an allocation of tokens, generally very early in the process. Because they're gonna wanna rely on a very low valuation for those tokens, to say, well, yeah, development company did some development work for this foundation.

[00:20:23] Jonathan: It considered it a very risky client because it was very early days, it wasn't an established business, and the development company was willing to take payment in tokens once those tokens are generated. And so they might say, well, we've done $50,000 worth of work. We might get 20% of the token supply, or 30%, whatever that number ends up being.

[00:20:43] Jonathan: But they're not worth hundreds of millions of billions of dollars at that point because they're not out there on exchanges, out there on markets. There's no market price with investors. And again, some of the order of operations around putting those relationships in place is important. So that's how the dev team is motivated to support the project, not because they own it and operate it, but because they are receiving tokens and the value of those tokens if they do their job right hopefully increases over time, often subject to lockup, vesting periods, that sort of thing.

[00:21:12] Jonathan: And again, those are commercially negotiated terms. But yeah, back to your question, the foundation doesn't own or operate devco. Devco doesn't own or operate the foundation, and I think seeing them as sort of co-equal, almost joint venture partners with those contractual relationships explaining how they build a business together.

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[00:23:10] Umar: I also wanted, wanted to ask you around like, what are the best jurisdictions? But at the same time, I mentioned that you've helped to incorporate more than 350 Cayman Foundations, so you might be biased, but I wanna ask you, like the clients when they come to you, I'm sure they should be asking, should I go to Switzerland or should I go to Cayman?

[00:23:30] Umar: What's like the pros and cons maybe of choosing the Cayman Islands and, yeah is BVI the only really jurisdiction, that's currently being used as the token SPV vehicle?

[00:23:42] Jonathan: Sure, That's a good question and I appreciate you throw it out there. Obviously, treat those as a grain of sand, and there's a heavy bias in this.

[00:23:49] Jonathan: Equally, I've sat on probably hundreds of hours of client calls with various onshore and offshore lawyers across easily 50 jurisdictions, as everyone in the very early days up until today tries to unpack the best place to do this and thinking they've got some new wild wave doing it that solves some problem that may or may not exist.

[00:24:10] Jonathan: Yeah, in the old days it was Swiss either foundations or now Swiss associations are more popular. There was some projects outta Singapore back in the old days, there was projects outta Malta, Estonia, right? Some of those early jurisdictions that were like, hey, we see an opportunity. We're gonna try and support some of this.

[00:24:27] Jonathan: The truth is a lot of those jurisdictions have either high barriers to entry, just the cost of doing business there is high. The time to do a project in some of those jurisdictions could be long, right? 2, 3, 4, 5, 6 months, something like that, to literally to form a foundation or form an association, there would be often tax uncertainty, right?

[00:24:49] Jonathan: Those are not tax free jurisdictions. They're not necessarily tax free. Yes, I appreciate you might be able to apply for tax exemption certificates and get waivers, et cetera, but none of that's guaranteed. Cayman did well because it gives certainty on some of those points. It's got the nice ownerless orphanized foundation.

[00:25:06] Jonathan: Cayman has been and always has been tax free. And so there's not a discretionary, you don't have to apply for it. You don't have to opt into it. It just is inherently tax free in the Cayman Islands.

[00:25:16] Jonathan: And there's a sophistication of service providers, and again, I'll blow my own horn, myself being one of them, alongside other lawyers that have deep experience in the space alongside some of the independent director firms that have a lot of experience in the space, along with some of the sort of foundation administration firms.

[00:25:33] Jonathan: They're all based here. Those businesses didn't exist 3, 4, 5 years ago, right? They've grown because of the demand on the Cayman Islands, and you know, it's positioned itself as sort of the market leader. A lot of that is also linked to, there's been so much business inherently going through the Cayman Islands for the last 30, 40 years, whether it's traditional insurance business or traditional investment fund business, right?

[00:25:57] Jonathan: Cayman's been the offshore lead for investment funds for three or four decades now, which meant there was a familiarity already with the jurisdiction. So some of those large venture capital funds that were invested in this space already had their footprint here, already understood the legal jurisdiction, already had lawyers here that could help them out doing some of these deals.

[00:26:17] Jonathan: They didn't need the sort of exotic uncertainty of going off to Estonia or Latvia or Lichtenstein. You know, again, take your pick of, maybe that works, but there's a lot of uncertainty around cost, complexity, skill, et cetera. Why would we bother? You know, there's some projects we looked at, some of these Guernsey trusts.

[00:26:37] Jonathan: It seemed like a good idea at the time, but a lot of those have been dismantled. It just, just didn't work out. A lot of the Swiss models, and I work with Swiss lawyers all the time. What used to work in Switzerland 3, 4, 5 years ago doesn't necessarily work now, right. As some of the laws became more sophisticated, some of the product side of the businesses that used to be in some of those jurisdictions, those, those windows shut.

[00:26:58] Jonathan: So in the last couple of years I've been involved in a handful of large restructures where some of these projects that used to be based in here, there, and the other place just didn't work anymore either from a tax or risk or regulatory standpoint, or they brought in crypto laws that made their business no longer viable.

[00:27:15] Jonathan: Cayman's done really well in not just grabbing sort of new market share, but also sort of fixing, being a safe haven for projects that might have been set up elsewhere. Those are some of my favorite because they're a lot harder and they're usually an established business and they've already got a treasury and they're getting the right advice to try and protect the players involved while trying to maintain a seamless user experience.

[00:27:37] Jonathan: Right? They can't say, well, we're gonna shut off our blockchain for 24 hours while we like transition this stuff. And so relying on about 20 years of legal experience and doing a lot of cross-border M&A activity, it's been a great opportunity to try and build out some of these structures. 

[00:27:51] Umar: And regarding the, the token SPV in BVI what's really the purpose once the token has been minted, issued, transferred to the foundation, does that entity become defunct? Sure. 

[00:28:05] Jonathan: The classic model of a Cayman Foundation, an ownerless Cayman Foundation owned a BVI subsidiary really came about in the last few years where Caymans VASP, Virtual Asset Service Provider laws, which came in before BVI's did, they brought token issuances into scope.

[00:28:24] Jonathan: And so if you just had a foundation and you did a token issuance, you know, a sale of newly issued virtual assets to the public for consideration, which is the language there of what a token issuance is. If you did that in Cayman today, you would be looking at a probably four to six to eight month registration period to get your VASP registration, which you can do, or you can drop a $4,000 subsidiary in BVI underneath the foundation.

[00:28:51] Jonathan: It's also tax free in BVI. Most of the firms can handle BVI and Cayman Law at the same time. I. And so you can cut out six or eight months of uncertainty in the cost and complexity of a registration under the Cayman VASP regime by having that BVI subsidiary.

[00:29:08] Jonathan: BVI also has a VASP regime, that came in a year or two after Cayman's regime.

[00:29:14] Jonathan: There's a lot of similarities between them. If you're a custodian, if you're a transmitter, if you're an exchange, then you get caught under both, right? And if you say, I wanna build Binance outta Cayman or BVI or Coinbase, it's gonna be the same. Those VASP laws are very, very similar between them. A token issuance is different.

[00:29:31] Jonathan: And again, if you ran the black line of the Cayman VASP versus BVI VASP, BVI just doesn't regulate a token issuer. And so that became very popular to drop that BVI subsidiary below it.

[00:29:40] Jonathan: BVI post token issuance. There's two schools have thought on this. Some say, well, we minted the token today. We then distributed the token up to the foundation or under contractual obligations. We paid it to devco or paid it to early investors, et cetera, et cetera. And we say, well, we'll just kill off BVI, right? It did its job. It was there for a day, a week, a month, whatever it is, and then it disappears. I'm not a huge fan of that structure to my mind, BVI is the blast shield.

[00:30:13] Jonathan: It's kinda your bulletproof vest in these structures where we can all collectively say, who issued the token? Well, BVI did, and it might have hired people to help it do it, but the risk of the token issuance stays in that BVI entity.

[00:30:25] Jonathan: In a world where that BVI company doesn't exist, some people will say, well, too late, so sorry to a tax authority or to a regulator, or even to an investor.

[00:30:34] Jonathan: Well, it's not here. It's gone. You killed it off. I think the reality is, and I think most lawyers would generally accept that they're gonna follow the money, and certainly if it's a tax authority, if it's a regulatory matter, they're gonna say, well, I don't care that you killed off this $2 company and that it ceased to exist yesterday.

[00:30:50] Jonathan: Where did the dollar or a hundred million dollars go? We will quite happily follow that. The problem then becomes is that you've then sort of poisoned the foundation and what's meant to be a governance entity as sort of a safe place to hold treasury assets is now directly confronting potential litigation or regulatory claims.

[00:31:07] Jonathan: Whereas if BVI is there, we can say, well, that's its problem BVI can go to court. It can battle it out, and it may or may not win depending on the facts and circumstances, but at least there's a theoretical fighting chance that that issuer could cease to exist and die off while the treasury exists, while the community can continue.

[00:31:24] Jonathan: And so, you know, it's a bit of a hedge, right? Maybe you keep an entity alive for the next five years or 10 years and maybe it's never required. Equally you might kill it off and think, well, you're a genius for saving 3 or $4,000 a year, but the one bit of insurance that you had to help protect the business, you know, you may regret that decision.

[00:31:41] Umar: Very interesting. Now, BVI and Cayman, they often referred to as being tax neutral jurisdictions. I wanna ask you, are there any kind of tax implication for the token SPV in BVI and the foundation in the Cayman, both at the point of the token sale and during the transfer of funds between these entities?

[00:32:02] Jonathan: Yeah, tax neutral is a polite way of saying they're tax free. Let's just just call a spade a spade. There will be no tax. And again, if BVI sells a hundred dollars worth of tokens or a hundred million dollars worth of tokens at day zero, those proceeds land there in that BVI entity. Again, whether it's pursuant to a token warrant or a SAFT, or a presale agreement, what have you, they all land tax free in BVI.

[00:32:27] Jonathan: Cayman and BVI both have those same zero tax regimes. So we could pay a dividend up to the foundation, we could recapitalize BVI, we could move assets up and down all day every day with zero tax implications. Where you can have some tax concerns is the mind management control of those otherwise offshore entities, right.

[00:32:47] Jonathan: And that's basically looking at who's driving that bus, right? Who is the directors on the foundation? Who do those directors act for? Right? Who's really got the ideas? Who's driving that ship? And this is where it doesn't become a Cayman or BVI tax question. You know, just as a simple example, if you put a UK person, a US person, Canadian, Australian, or probably 150 onshore jurisdictions, if you start putting directors from those places onto that board, you may well create a tax nexus to their home territory, wherever that is. It makes perfect sense, right? Let's assume you're Revenue Canada and you've got someone in Toronto, because I was there last week for Consensus that says, yeah, I'm a director.

[00:33:32] Jonathan: I'm the sole director of an offshore foundation that has a hundred million dollars and its BVI subsidiary raised that through a tax free token sale. Revenue Canada is gonna say, well no, you may not own the foundation, but you were driving the bus, right? You were controlling that thing. You were the mind management control.

[00:33:49] Jonathan: And you look at the CFC laws Controlled Foreign Corporation laws of 150 plus sort of mainstream jurisdictions. They've got some version of this and you know, shout out to PWC that puts out global tax guide policies. You can go and read this stuff and clients are like, well, what if my brother in Estonia does it?

[00:34:08] Jonathan: I'm like, well, it's an Estonian tax question, but here, go read that link and you can figure it out for yourself. You know, it's an important point. Just merely having Cayman based directors doesn't necessarily guarantee that you're not gonna fall into those onshore tax nets because those tax regimes look at the substantive ownership and control.

[00:34:26] Jonathan: And we say, well, no one owns this thing. But that control question, and if you just have a sort of stooge director that will sign anything that's put in front of them, you could run a real risk of, well, who's telling 'em to sign those documents? Where did that arrangement come from? And that point that we spoke about, about sort of joint venture light between a dev team and a foundation, that relationship starts to fall apart.

[00:34:48] Jonathan: It's not sort of co-equals on that you end up having almost a defacto subsidiary. Where some of the dev team could arguably be driving the foundation, which yeah, would be very problematic. Not as a matter of Cayman or BVI law, because our laws don't care. You know, as long as those directors can pass KYC, they can be appointed.

[00:35:05] Jonathan: It's really a question of not bringing foreign tax risks into an otherwise offshore structure. 

[00:35:10] Umar: Hmm. Yeah. This is a good segue onto my next question. So we've touched on where to incorporate the token SPV and Foundation, but I wanna speak about the founders, so about their own residency and how their tax profile profile can create some other risk.

[00:35:28] Umar: So rules like the Controlled Foreign Corporations CFC regimes can mean founders are taxed on their offshore company's profits, even if nothing is distributed. There's also the concept of place of effective management where basically your company might be taxed in your home country if you're seen as making key decisions from there.

[00:35:51] Umar: So I wanna ask you, how should founders be thinking about their own personal tax exposure when structuring a token launch and yeah, what's the right way to avoid some mistakes? 

[00:36:04] Jonathan: Yeah. Well, I think the reality is, is accepting that when we talk about a founder. That they're the founder of the development company, right?

[00:36:10] Jonathan: That is their business. They own it, they operate it, and it's usually an onshore entity, right? And yes, they could raise outside capital, they could bring an outside investors into it. They could do a classic, safe, simple agreement for future equity to help fundraise, let's assume an onshore development company.

[00:36:25] Jonathan: there's no doubt they own and operate that side of the business. And there's no doubt if that development company and the team is in an onshore jurisdiction, any dollar of revenue or dollar worth of tokens or a hundred million dollars worth of tokens that may or may not get paid over to it, is gonna get subject to tax in their hands.

[00:36:42] Jonathan: Not because they own and operate the foundation, but because they were service provider to it. And if someone pays them in apples, oranges, bananas, or tokens, that's where some of these valuations come into question. Where, yeah, well you got paid in kind for doing some work and let's assume the IRS in the states, they don't allow that devco to file its tax returns with, I got paid in apples and oranges and bananas.

[00:37:06] Jonathan: They say, well convert those to dollars and tell us what you actually got paid on an in-kind basis. So the tax considerations for those founders, owners and operators of the devco is understanding that, yeah, when they provide services and they get paid in tokens, that that will be a taxable event for them.

[00:37:23] Jonathan: Again, generally speaking earlier in the process, at a lower valuation is generally the operating procedure where it's a higher risk transaction for them to take on a risky client to say, well, yeah, I might have committed $50,000 worth of team time to do this in exchange for some tokens that. Are worth very little, right?

[00:37:41] Jonathan: They're worth $50,000, even if it's a huge number of them because that's the true value of the services that they provided. The question for those founders is then, do they keep those tokens that the devco earned within development company? Do they distribute them up to themselves? Do they distribute them out to investors, et cetera?

[00:37:57] Jonathan: And again, I'm not a US tax lawyer, but again, I spent hundreds of hours on these calls figuring out what the most efficient tax path is for the founders as well as for the various employees of that development company. The kind a classic 83(b) tax election allows them to prepay a portion of the tax on those, put a line in the sand to say, well, I paid tax on this thing that might've been worth a dollar.

[00:38:19] Jonathan: Hopefully a year from now it's worth a hundred dollars, but don't make me pay it on a hundred dollars value. Make me pay it on the time I received it. Other jurisdictions have similar regimes in place, right? The UK's got a similar regime. Canada's got a similar regime and this is where development teams really need to get their own tax advice as to what is most efficient for them.

[00:38:38] Jonathan: And it can be a complex question 'cause you might have a UK devco that's owned by one UK person, one French person, and one German. Just random example, you have a UK corporate tax question. You've got a UK personal tax question for that founder. You've got a French personal tax question for the second founder and you got a German personal tax question for them.

[00:38:58] Jonathan: And then God help you. You've got 30, 40, 50 employees or contractors across another dozen jurisdictions and everyone's getting some allocation of tokens. Again, that's part of their compensation as part of their package to be working there for the development company. Those are the complex questions, right?

[00:39:14] Jonathan: I can't answer them. I know enough to be dangerous until my client go get some in that case, UK, French and German tax advice. If everyone says we're all based in Dubai. It's a simpler question 'cause again, it's a tax free jurisdiction. But understanding what that liability is, understanding when that liability accrues, understanding what's going to be the most efficient for founders on the one side as well as for a lot of their employees or contractors.

[00:39:40] Jonathan: And understanding that ability to be tax efficient after the fact is impossible, right? You can't sort of unwind some of these transactions and have a second chance at it. So getting that advice early in the process and understanding even if it's six months out, right? Like figure out the step plan. And that's where a lot of these clients, they wanna move really, really quickly.

[00:40:01] Jonathan: I mean, I say, well from my offshore Cayman and BVI standpoint, yeah, we can move as quick as you want. The difficulty is is that some of the tax positions and what might be most efficient, the order of operations doesn't necessarily always fit into build it tomorrow, launch the next day after that. Let's move quick.

[00:40:17] Jonathan: You know, we can manage that, but there's often some inefficiency there. 

[00:40:20] Umar: Now we are still at the pre incorporation stage. So we've touched on, jurisdictions, we've touched on, liability protection, for the founders. Is there anything else worth mention mentioning at this stage? 

[00:40:35] Jonathan: I think it's really having that strong grasp, again, back to that question of three separate businesses, a devco, a token issuer group and the product, and understanding who's responsible for these.

[00:40:44] Jonathan: Understanding the risk position, understanding that while we all tend to focus on the tax consequences of a token, there's also that product side of the business, right? And if that product, let's say it is a video game, people spend tokens to play the game. We've got a revenue model there, right? And understanding who owns that business, where does that money go?

[00:41:03] Jonathan: And I'll often have that conversation with those clients to be like, well, let's assume you build this platform. I dunno, a derivatives trading platform. Let's say it earns a hundred million dollars in trading fees. Whose money is that? And like this is where you get like the ultimate founder sort of dust up where half of 'em say it's mine.

[00:41:19] Jonathan: Half of 'em say it's the communities. Half of them say it goes to the token holders and it's like, you guys need to figure this out, right? Like, this isn't the kind of discussion we wanna have down the road. And this is where front loading those questions and understanding the sort of the tokenomics model of like where that flow goes, what that looks like, and making sure you've got the right legal advisors covering off those jurisdictions at a minimum to say from a regulatory standpoint, yes we can run this type of business in that jurisdiction.

[00:41:47] Jonathan: And then on top of that, understanding the tax position, you know, obviously plan for a world of success where this thing makes a hundred million dollars, what does that mean? Where does that go? What's the risk profile for each of these people? And again, that order of operations, right?

[00:42:00] Jonathan: Going A B C down an organized path is very important to try to maximize efficiency. And you know, I, it's a nice problem to have, but I often get clients that are like, oops, we sort of accidentally minted a token that became $500 million market cap. How do we fix this? And it's like, if you called me a month ago, we could have been a much different outcome and we could have structured this in a much different way.

[00:42:26] Jonathan: And this is where I think we're still in the early days of these markets, right? The sort of, I don't wanna call it immaturity, but maybe some of the naivety of like, just because we can do this and launch this platform, mint, this token, the barrier to entry is nothing, right? Get a Metamask and put $3 of ETH into it and you can go and launch your own token.

[00:42:43] Jonathan: You can launch your own platform. I often say to my clients, let's just pump the brakes a little bit. I know your dev team's ready and rearing to go, but like there's a sequencing here that we wanna go through and understanding that all the right pieces are in the right place at the right time. It doesn't need to be 6 or 12 months to do this, right?

[00:42:59] Jonathan: I've done some of these deals in as little as a week or two, but it's figuring out who's on the risk for each piece of this business. And ultimately, in the worst case scenario, if this blows up in a tax regulatory investigation, we should all know where the risk sits. What I don't want is, you know, three independent teams all pointing the finger at each other, saying it was them, it was them, it was them.

[00:43:18] Jonathan: It's kind of standoff position, right? That's, that's just the last way that we wanna try and structure one of these deals. 

[00:43:24] Umar: So now at the incorporation stage, if you had to, walk through a practical checklist at this stage from, I mean the company has been set up, then you have to appoint other key service providers, the directors, company secretary, there's a token valuation expert, obviously an accounting firm.

[00:43:43] Umar: So what should founders be prepared for and what often gets missed or understood at this early stage? 

[00:43:52] Jonathan: Yeah, well, that's it. I think the minimum requirements are, is we need to understand bluntly who's initially paying for the fees to set some of the structure up. And it's a few different paths to do that.

[00:44:03] Jonathan: Sometimes it's a gift from the community, sometimes it can be a loan arrangement from some of the dev team members. Sometimes it can be a loan from the devco itself, understanding how the funding gets into it. Second question is, who's the director of the foundation? Right? And again, this goes back to the tax question, mind management control where they sit.

[00:44:20] Jonathan: What's that going to mean? Yeah, we could send introductions to probably 10 different director services firms in the Cayman Islands. And we work with all of them, right? They've all got strengths and weaknesses. Some are former lawyers, some are former accountants, some are former technologists.

[00:44:35] Jonathan: And I say to clients, you should speak to all of them, right? You need to understand their skillset. Where your blind spots are, where their blind spots are. And again, back to this idea of a joint venture. Like what can they bring to the table to be the ying to your yang and try and make this business work. Write down to a personality clashes like I just, the guy's smart, but I just don't like 'em.

[00:44:53] Jonathan: Right? That happens. And trying to figure out what that structure looks like. 'Cause they become very important, particularly joint venture partners, right? And you wanna try and build a business over the next 3, 5, 10 years, whatever that is, and maintaining those relationships. And I'm fortunate I've become, you know, I'll be honest, good friends with a lot of those directors.

[00:45:10] Jonathan: 'Cause we work with them on a regular basis. And I say to them, no, I'm not gonna go sole and exclusive. I'm not gonna introduce just you. 'Cause I want to make sure every dev team has a chance to speak to a broad number of people. Those are sort of the day zero requirements. The registered office, the supervisor, the secretary of the foundation, a lot of the service providers can just do that to kind of just fill those roles.

[00:45:31] Jonathan: It shouldn't be too much thought really thinking about it. The director question is really the main one. The next steps beyond that, once that foundation exists, is generally getting that development agreement or that master services agreement in place where the devco is formally hired by the foundation group entities.

[00:45:47] Jonathan: And that's important from a timing standpoint. A, to put that line in the sand of what that token payment is going to be once those tokens get generated, and again, earlier is better than later. And also understanding is that services agreement going to be pure technology ones and zeros, or is there gonna be broader marketing sort of advisory type work going on under that?

[00:46:09] Jonathan: And again, that's where you often see more of a master services agreement. Foundation team will often call Devco. And again, Devco is probably not quite the right word 'cause it assumes they're only doing development, but they can also ask for them sort of broader guidance and advice. And it might be on tokenomics it might be on some of the marketing activity.

[00:46:25] Jonathan: Some dev teams are geniuses on the development, but to be honest, hopeless on everything else. And so they would not be the right people to outsource for the foundation. And so building that broader team, like you say, bringing in the right outsourced accountant, bringing in the tokenomics firm, bringing in the valuation firm, bringing in the marketing firm, kind of building that broader motley crew of service providers that are each gonna contribute and collaboratively work together, ensuring that they've all got, I guess, bluntly similar risk profile in terms of backing the project and understanding what the project is trying to achieve.

[00:46:59] Jonathan: Understanding short, medium, and long-term goals of the project. Right. And again, a meme token has a different sort of shaped return than some wide derivative trading platform clients or they might say, well we spend a lot of money up front and it's a slow burn, but we're getting users and we're gonna go down this sort of hockey stick position.

[00:47:19] Jonathan: Meme token clients are like, well, if we haven't made a million dollars in the first five minutes is never gonna happen. Sort of tend to agree with that. And you know, right down to then the next layer of do we need custodians on this? Do we want to go and hire an Anchorage or a Copper or something like that to do that?

[00:47:33] Jonathan: Some clients say, yeah, this is great from a security standpoint. Others say, that's a terrible idea. We've now got counterparty risk. Why would we do that? We're a bunch of crypto degens, you know, trust no one. Multisig multi key wallets for everyone. Try to build that all out. And this is where getting the flavor of the client, right, are they coming from a deep crypto degen world and you just have to accept.

[00:47:54] Jonathan: It's a different way from some of the Wall Street folks that have come at it from, I've already got a 20, 30, 40 year career. I want to use blockchain in a more traditional business. I like both of those types of clients, but it's a very different relationship, very different lawyering, very different vocabulary.

[00:48:10] Jonathan: Right. I know when I'm talking to a degen client when I'm wearing one of my Monero t-shirts and they're like, yeah, anarchy, yeah. Rock on. There's other clients would've no idea what it's, right. They, there's a different type of business, different background. And I think the benefit of having done 350 of these deals is understanding the weaknesses, their blind spots, and having those awkward conversations to be like, you guys haven't thought this through.

[00:48:31] Jonathan: There's something missing here. You need to add something on. Either you need to hire the right person, you need to build that skill set out. Or we're fortunate, you know, oftentimes we already know some of those people. You can make those introductions, whether it's administrative firms to help 'em on some of the admin, whether it's tech developers to build some of the product side out, whether it's auditors, tax advisors, and other foreign jurisdictions or foreign lawyers.

[00:48:53] Jonathan: Right. Again, in the course of 350 of those deals, there's probably a hundred plus jurisdictions that we've worked with over that period of time. And so we can really offer, it's almost like an outsource general counsel service to our clients where, you know, bring us your problem no matter where that is, and we'll, we'll fix it whether we do it ourselves or we find the right people, we, we can help.

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[00:50:52] Umar: I also wanna go through some of the legal implications when marketing a token. So basically how the token is positioned, which markets are targeted and the expectations set during the campaign can all basically determine whether regulators see it as utility or security. So how should founders think about marketing at the token distribution stage, especially in terms of their token positioning, jurisdictions they are, being exposed to and any consumer protection laws.

[00:51:23] Umar: And yeah. what was the common mistakes again that you've seen there? 

[00:51:27] Jonathan: Sure. That, that's again a good question. As a matter of Cayman and BVI law. There's not much to think about there. And the the short answer is, is because in Cayman and BVI, those tokens are not a security or generally won't be a security.

[00:51:40] Jonathan: And again, I, maybe two or three outta 350 of my clients would've been a security, Those tokens in Cayman or BVI, but that means nothing to the rest of the world. And I can give clean legal opinions all day long that X, Y, Z token is not a security under Cayman or BVI law because it's not. We've got old school, antiquated, 50-year-old law that says the security is A, B, C, and if you're not on that list, you're not a security.

[00:52:05] Jonathan: The question then becomes, well, we know is not much marketing in Cayman or BVI 'cause it's a small market there. It's really a push product onto other jurisdictions. And yeah, you start promoting those tokens in. Everyone looks at the US. Everyone you know, often looks at the UK, they look at Canada, they look where, well, where's the intensity of our potential community?

[00:52:28] Jonathan: I don't know if you're gonna do like a Sumo token, wrestler token. Japan's probably on your radar of like, I, I think Sumo is interesting, and I'm sure there's lots of fans all over the world, but Japan's quite clearly your target market. I don't know if you do a NASCAR token, you're probably looking at the US market more than anywhere else, given NASCAR is big in the US and not necessarily elsewhere.

[00:52:49] Jonathan: I'm sure I'll offend a bunch of people when I say that, but the point is, you end up bringing yourself into those foreign jurisdictions. You've exposed the product and the project to those foreign laws because that's where that community is. The very lawyerly answer for me is go get local counsel in that jurisdiction before you do anything and speak to them.

[00:53:08] Jonathan: Explain the product. Get a clean legal opinion as to what you can or cannot do. It's just not really a viable answer. Right? And so people took a more cautious approach, certainly in the US and you certainly look back in a sort of Gary Ginsburg, SEC territory, pre-Trump election. It was a very different risk profile than what we've seen in the last four months, right?

[00:53:33] Jonathan: Very, very different regime. And so the advice that from US council in the US six months ago was probably gonna be guys either register and go down a path and, you know, register this token, go down a 506(c), 506(d), et cetera. Again, I'm not a US lawyer, but I've done enough of these deals. Go and follow that path.

[00:53:52] Jonathan: Usually means sales only to accredited investors. You can't broadly market it. You have gotta verify their accredited investor status and generally you've gotta put a 12 month lockup, right? It was onerous, it was quite cumbersome to do that. But that was the trade off. If you wanna play in the US market, those are the rules you generally had to follow.

[00:54:10] Jonathan: Getting that local advice was key. Do my clients go off to Mongolia and get Mongolia legal advice for the person that may stumble onto the token and wanna buy it? No. You know, they don't, right? They say, well, we didn't actively market in that jurisdiction. We weren't trying to do this. I think your question is, you know, you know, this came up in the context of Token 2049 in Dubai a couple of weeks ago, right?

[00:54:32] Jonathan: People were posting like, be careful under the VARA regime, et cetera. And the other regimes, ADGM in UAE, like there is restrictions on marketing. And so this idea of like having your booth at an event and like shilling tokens to people, you know, you could easily cross that line because guess what?

[00:54:50] Jonathan: You're in their home turf, you're in their jurisdiction, you're marketing yes to a lot of international people that attend the event, but the fact is you're on their home turf. And so getting the right advice in the right jurisdiction and certainly jurisdictions where you're promoting it, any degree of advertisement, any degree of sort of targeted.

[00:55:05] Jonathan: Searching for those investors, or users of the community. And again, it, it varies on the profile, right? If it's a video game token that powers a broadly played video game that's already been established, it's generally a lower risk situation. 'Cause you're trying to say, well, it's a smaller transaction size, there's real utility.

[00:55:23] Jonathan: The project side of the business is already built out. This isn't being sold to people to fund the development of the game. And you take a view of, well, even in more aggressive jurisdictions, that wouldn't be a security. And you're right about consumer protection laws and money transmitter laws, and a lot of other second, third tier considerations around this, right?

[00:55:42] Jonathan: People think, is it a security? Yes no. And get opinions on that. That doesn't mean there's not 50 other laws that you may well fall into, right? You could be under the commodities laws, right? CFTC laws in the US as an example. You could be in stable coin legislation, right? If you're building stable coins, it's very different than a meme token.

[00:55:57] Jonathan: And this is where 350 projects, none of them are exactly the same, and there's no cookie cutter approach. And so unpacking each of these is, is part of the process. 

[00:56:07] Umar: Now going back to the Cayman Islands, I saw that, actually while preparing this episode, that the VASP framework in the Cayman has recently been updated early April, of this year.

[00:56:19] Umar: And they're now required to have at least three directors and one independent director like a foundation, right. in the Cayman Islands. So prior to that, there, there wasn't like this minimum number of directors to have nor a need to have an independent director. Could you, maybe provide an example, like in practice, who this independent director typically is and maybe what factors could generally threaten their independence?

[00:56:50] Jonathan:  Sure. The VASP regime in Cayman then effectively evolved. We knew what this regime was gonna look like, and when it came out four or five years ago, the initial version of it, there was always this language of there's a registration regime and there's a licensing regime. The licensing regime hadn't been turned on.

[00:57:06] Jonathan: And they said, well, until that regime, you know, that slab of the VASP gets turned on, assume that you have to get registered. And so there was a lot of registrants that came through that process and got registered. The change that happened there back in April was that that licensing regime came on and you needed to be moved across.

[00:57:25] Jonathan: And again, there's grandfathering regimes to allow transition, et cetera around that. As well as some of these directorship changes as well as some of the very basic application fee and sort of capital requirements, right? Sort of the nitty gritty and the regulations, some of that stuff changed.

[00:57:40] Jonathan: It's not that unusual for regulated entities in almost any jurisdiction. And certainly in Cayman, you look at the other licensing regimes, whether it's the company management regime, whether it's the fund administrator regime, et cetera, whether it's the mutual funds or private funds regime, a lot of those do require more than one director. And some of them do also require either in the law or as a matter of practice, a level of independence.

[00:58:05] Jonathan: And they wanna see that there's a safe degree of oversight. That it's not just a bunch of sort of YOLO founders running this business with a very different risk profile. They want to have kind of someone with some outside skin in the game. Right. That has some degree of responsibility in that business.

[00:58:22] Jonathan: And so in terms of those independent directors that can take on those roles, yeah, there's, there's various service providers, operators here in the Cayman Islands. And again, they didn't exist 5, 6, 7 years ago 'cause the market wasn't mature enough to support it. Now we're seeing quite a few of those providers come on board and some of them are specialized.

[00:58:38] Jonathan: Right. They don't necessarily do foundation token issuers, or that's not their core business. They have a concentration of VASP entities. They're regulated entities. Most of the VASP entities that are registered or licensed are, again, they're exchanges. They're custodians, they're transmitters, they're doing the regulated activity, they're an on ramp or off ramp or pinch point within the ecosystem.

[00:59:00] Jonathan: And to be honest, they, they should be regulated, right? They're the danger points within the ecosystem. And so you wanna make sure there's grownups. And so a degree of independence and oversight on those entities makes sense. And most of 'em are not foundations, right? An ownerless foundation could technically get a VASP registration, but you, you generally wouldn't do that.

[00:59:20] Jonathan: It's usually gonna be a for-profit, privately owned side of it. Again, you know, you wanna build a offshore version of Binance or Coinbase. That's the path you're looking down. You get licensed and, and go through that.

[00:59:30] Umar: I think it's time to speak about, NXT Law, Jonathan. So in light of what we've discussed around token launches, could you provide an overview of the services you provide at NXT Law?

[00:59:41] Jonathan: Sure. That's great. NXT Law was started earlier this year. really a need or a drive from the community generally to want smaller, boutique specialized firms that can adapt their business to suit their clients' needs.

[00:59:56] Jonathan: And I know that sounds like so trite to say that, but it came down to a version of larger law firms. And again, I came from a larger law firm, just don't have the sort of mobility and the nimbleness to cater to what some of these clients wanna do, whether that's literally taking payment in stable coins, taking payment in native tokens, being able to take payment in equity in some of the businesses, and the flexibility around that.

[01:00:22] Jonathan: Larger traditional firms, just, they're not positioned well to do that. And also the level of expertise. Clients are happy to pay premium rates for the right experience, but they also don't want sort of a wasteful approach to it. And, you know, if you show up with 3, 4, 5 associates on a call, clients are like, what's going on here?

[01:00:42] Jonathan: This is gonna be very, very expensive. Right. And I guess to my benefit the fact that I grew up in this space and I've been doing crypto deals for 11 plus 12 years now. Again, early funds days into some of the early token offerings. That learning curve has already been established. I've already built that up.

[01:00:58] Jonathan: I've already gone down that path. And so clients can come to me and say, well, yeah, we know we're not gonna go to you for a litigation claim. We know we're not gonna come to you for I dunno, a local dispute that might arise or we're not gonna come to you if we need a divorce lawyer. And I'm like, yeah, of course not.

[01:01:13] Jonathan: Like what are the chances of you needing that? They just want the core business and they wanna say, well, hold on, we're happy to use you to go through this sort of launch process and be counsel to the foundation. But what happens if something does go wrong? What if we do any litigation advice? And I say, well, guess what?

[01:01:29] Jonathan: I can refer you out to 30 different law firms and we can find the best one that has the best skill, the best ability to do that. And I don't wanna say too hard a knock on some of the larger firms, again, onshore or offshore, that have every single department covered. And yeah, that one stop shop is convenient, that's great.

[01:01:47] Jonathan: But the truth is, the likelihood of you always getting the best lawyers across every single part of their business, it's non-existent, right? That's just not the case. And I like the, the ability for my clients to shop around to find the best people that have the best services, whether it's from a cost standpoint, whether it's from experience standpoint, whether it's from a responsiveness and capacity standpoint.

[01:02:07] Jonathan: The main difference with my web3 clients is that they sort of give client instructions in a matter of minutes or hours rather than days or weeks. And so the intensity isn't cut out for everyone. And so some of those other firms just aren't built for it. Right? And you know, the feedback that I get from clients is we can jump on a call with you and you give us answers.

[01:02:27] Jonathan: And I say, well, isn't that what all your lawyers do? They're like, no, no, no, no, no. It's lots of caveats, a lot of half answers. And let me bring this back and let, let's uh, let's take this offline. I'm like, that's not helpful, right? If I was a consumer of legal services, it would drive me crazy if that was the answer I kept getting.

[01:02:41] Jonathan: So I think for us it's knowing our expertise, knowing where we can leverage that skillset, and also knowing our limitations, saying, no, this isn't the right deal for us either 'cause we're jammed on a capacity standpoint, or 'cause there's a better jurisdiction. Go take this elsewhere. We'll make the introduction.

[01:02:56] Jonathan: And, you know, for every deal that we do, I'd probably give away one or two. It's like, well, 'cause there's a better place and this is how you should do it. Those non-clients remember that and they might send the next five deals my way. 'Cause they're like, well you were honest enough to send us down the right path and help us out.

[01:03:13] Jonathan: And that's where a lot of our workflow comes from. It's from existing founder teams. And they tell us about other founders and co-founders and those teams split and it's very grassroots, organic for us, which is great. It means we get to work with a lot of different onshore firms. We get a lot of different exposure to the market and get to be a nice sounding board.

[01:03:33] Jonathan: And this is where some clients then lean on us and say, well, you know, the crypto ecosystem as well as anyone. 'cause even living in this space across multiple jurisdictions, they say, well we want that sort of outsourced GC model, right? Put us on a retainer model. We'll pay X thousand dollars a month just to be able to ask you questions and help us build this business out.

[01:03:51] Jonathan: Even if only some of it may be based in Cayman or BVI and there could be other parts of the business elsewhere. For me, that's like the ultimate sign of success, right? That's the ultimate sort of compliment. It's not that you refer five more clients my way, it's that you start asking us questions about every other jurisdiction and you look to us for guidance, you know, being inside the tent with the client rather than the outside looking in.

[01:04:12] Jonathan: Right? And there is that moment where you sort of cross that bridge and become that effectively trusted advisor. Kind of the consigliere to the business, helping them build it out is, is generally the relationship that I build with my clients. 

[01:04:24] Umar: Now your clients are obviously web3 native clients, but have you been pleasantly surprised in recent times to see maybe traditional web2 players now being more interested on maybe some of the tokenization use case and they've approached you as a result?

[01:04:40] Jonathan: Yeah, for sure. Well, that's it. This is where the sort of, you know, people were talking about it at Consensus in Toronto and even Token2049 in Dubai, like a lot more suits and ties, right? Not just walking the floors. But even at the booths, right? And you'd think back to early stage Consensus in midtown Manhattan, you know, five Lamborghinis parked out front guys in sequin jumpsuits, cowboy hats.

[01:05:02] Jonathan: It was like, it was more of a rave party atmosphere than like a serious conference. And I, I miss a bit of that, and this is where I think I have always appreciated ETH Denver as being much more grassroots and still very much that flavor of it. But yeah is the traditional businesses coming into this space?

[01:05:20] Jonathan: Absolutely. And are they gonna keep coming into this space? Yes, absolutely. I think more sophisticated regulatory regimes in the US whether it's stable coin bills or otherwise, to kind of build the confidence into it. Obviously some of those businesses now under the Trump administration say, well, now's our chance, right?

[01:05:37] Jonathan: And, well, we might've been thinking about this. Well, we might've been building behind the scenes. Now's our opportunity to jump in, take advantage of this opportunity. But yeah, the, the, the then traditional businesses and to your point about whether it's sort of tokenized lending businesses, whether it's tokenized debt, whether it's tokenized real estate, yeah.

[01:05:57] Jonathan: Those are now use cases that didn't exist for some of this technology, you know, even 3, 4, 5 years ago. Those are hard clients, right? Those are difficult businesses to do because A, they could be very, very disruptive in terms of what they're trying to build. And bluntly, there's a real business to it, right?

[01:06:14] Jonathan: It's not a meme token here today, gone tomorrow. It's like we built this business, we're adding a crypto element to it to allow us to scale up to the next level or to allow us to bring down transaction costs or allow us to be more efficient, right? Everyone talks about sort of the tokenized funds. It's great, right?

[01:06:30] Jonathan: And there's still a lot of regulatory complexity around that. And we'll, we'll do another podcast when the time comes on tokenized funds, but don't get me started on that. If they succeed in building some of this, it will have repercussions for the broader industry, right? Some of those middlemen that built their entire businesses on managing bits and pieces of these and trying to be risk managers and administration, you end up cutting that out and so the cost and the barrier entry goes down.

[01:06:56] Jonathan: But there's also the fear that, you know, half of Midtown Manhattan would cease to have jobs, right? If there's a heavy adoption across this, and the ultra efficiencies are realized across these various platforms, you know, you could literally have a riot on your hand. So I think we're seeing slow transition down this path where traditional businesses are much more willing to kick the tires on this.

[01:07:17] Jonathan: And even right down to, you know, 20, 30-year-old video game companies, right? And they kind of looked at it from the fringes, were skeptical. They're now starting to move into this space. And again, some of the most easy to use, logical use cases, those are the kind of client projects that I really enjoy.

[01:07:31] Umar: Jonathan, I'm really enjoying the episode so far. And, but maybe it's time to wrap up. I'm looking the time, time is passing but maybe before actually we wrap up. I wanted to ask you about what are you actually looking forward to for this year? Maybe which could further accelerate the adoption of crypto, for institutions.

[01:07:51] Umar: Right. So, I mean, this could be anything around regulation, of course the Genius Act, of course new VASP regimes maybe around the world or yeah anything else that comes to mind? 

[01:08:02] Jonathan: Yeah, I think continuing maturity of the market generally is what I look forward to. And by that I mean more established players, traditional players moving into the space, right?

[01:08:15] Jonathan: And we saw surges of that in prior peaks and troughs in the market. But I feel like this may be where we've really crossed that line where traditional mainstream players fully embrace it and adopt it. And I think credit to the Trump administration to give them that confidence and to give them, well, whether it's two years until midterms or four years into the next presidential election, the confidence to really go into the space.

[01:08:41] Jonathan: And so again, this is where we see more activity on some of those traditional platforms in the last three or four months than we did in the three or four years before that. I think the other thing that also excites me is more use cases, like more products that will bring the next, I won't say a hundred million, I'll say the next a hundred people into crypto.

[01:09:01] Jonathan: Let's, let's be manageable here. I like those projects, right? And they're kind of the eccentric projects, kind of fringe use cases, but like they build new product and they're building in a space and they're being really inventive. For every one of those clients, I have three or four more traditional type clients.

[01:09:20] Jonathan: Layer zero, layer one, layer two, layer three network. And I say to myself, oh great. They'll do very well. They'll raise a lot of money. There'll be a lot of hype and excitement around them. But I also look at it from like a user standpoint. Do we really need 50 networks that can all do 500 million transactions per second?

[01:09:37] Jonathan: And you think about it from like a infrastructure standpoint. We've got all these beautiful highways, we've got all these bridges and tunnels and everywhere, and everyone can get zero to a million miles an hour and move on all this infrastructure that we've built. But again, back to that analogy, there's no cars, trains, or buses driving on a lot of these networks.

[01:09:56] Jonathan: And it's like, I get the stats are very impressive, but like, gimme some users, right? Like build in, integrate it back into this. And when I start hearing stories of, you know, Facebook getting back into stablecoin territory and looking at that again and again, you know. Seeing where they were three or four years ago were Libra first time around.

[01:10:15] Jonathan: That was an exciting moment. And obviously that didn't work out very well, but a use case like this where people don't even realize it's crypto, well, all of a sudden the technology under the hood of an app on their phone, they're like, oh, well this is powered by crypto. This isn't dangerous, this isn't complicated.

[01:10:32] Jonathan: It's, you know, it's a transaction. Right? And it's transparent and the system just works. I'm excited for some of those projects where it's not crypto in your face, right? I think the opposite end of that spectrum is sort of meme token mania. And I think we're seeing that die down. You know, doing 4 or 5, 6,000 new tokens a day, I guess was fun while it lasted.

[01:10:53] Jonathan: But for me, that was beneficial that it showed the technology could survive. You know, Solana didn't break the system worked. Ultimately, I'm looking forward to more slower building, harder to build businesses, but ones that will still be here five years from now. Right. Building a, a real business based on blockchain technology is, you know, those are the kind of clients I love. 

[01:11:14] Umar: Is there any such projects that actually come to mind? Like these projects that are not shouting crypto, but actually there's crypto, under the hood. 

[01:11:24] Jonathan: We are working on a few of those. Obviously, I can't disclose who those are or what they're doing, but it is much more traditional businesses rebuilding their business around a better technology.

[01:11:37] Jonathan: And by that I mean you, if you had to recreate financial services and the way that our financial services industry operates, there's no way you would rebuild it today the same way it was built a hundred years ago. Right. We've evolved down this very bizarre path of like middlemen and checks and balances all through the ecosystem.

[01:11:54] Jonathan: There's no way you would accidentally recreate that if you had to start from scratch. And so I think this is where some of those projects doing what you and me might consider very boring business. But in a world where it's more accessible to people, it's cheaper, it's easier to use, it can scale, it can grow faster.

[01:12:11] Jonathan: And they're using the technology not for the hype of crypto, let's all get rich and buy Lambos. But like, because this is actually a better way of doing it, right? Like the infrastructure supports the way we're building our business. And obviously with various token protocols, that may mean locked tokens.

[01:12:26] Jonathan: That may mean it's locked down in a sort of fence walled city. It may not be freely transferable. The vision of crypto degens of own your stuff and trade it, sell it, do whatever you like with it. I think it's that real use case. It's right, it is building boring businesses where they've realized this isn't crypto for crypto's sake, it's crypto because this is actually good technology.

[01:12:47] Umar: Yeah. The flip side is that sometimes these projects don't get the the attention they deserve, right? See project that it's not the NFT or the Meme coin. 

[01:12:56] Jonathan: And that, and that's it. And this is where I think I see a bit of a pattern developing. The people building those sort of boring crypto projects are some of my, let's say older, more experienced founders, right?

[01:13:08] Jonathan: They've had one or two exits, they've already built it out. They don't do this bluntly to get rich, right? They will as a byproduct if it succeeds. But they also understand I don't need to go from nothing, $2 billion business in a week, right? Like, yeah, no, we could leverage AI and build the greatest thing ever.

[01:13:24] Jonathan: They're like, no, this is a slow burn, right? Like, we need runway, we need to build this out, but this is where we're trying to get to. And it's not sort of burn hot and fast and then flame out, right? They're like, no, we don't want that. We're trying to change that pattern. And so, you know, it's funny, I could take 3, 4, 5, 6, 7 calls in a day.

[01:13:42] Jonathan: And it can be polar opposites, right? And like, it's hard to imagine two clients that could be more opposite in their view around some of these things. But ultimately being able to support their businesses and have those conversations. What are you trying to achieve? Like, what's your goal here, right?

[01:13:55] Jonathan: Like, do you wanna go down as the guy in crypto that was known to build the greatest technology? Or do you want to not be affiliated with crypto? Right? The fact that it's under the hood, it's just powering this thing and allows you that little bit of 1% competitive advantage over every other player that might be enough to win you market share.

[01:14:11] Jonathan: Again, kind of, is it the dreamers or is it sort of the established establishment? Building, building in the space? 

[01:14:18] Umar: Perfect, Jonathan as closing thoughts, again, I'm really enjoying this episode, but, to wrap up as closing thoughts, is there anything else that, you'd like to share with the listeners or, how would you summarize, the main topic of today, which is around launching, around token launches?

[01:14:36] Jonathan: I think my main advice for them is two things. Have a plan, right? And I know that sounds incredibly boring, but like, let's be collaborative and let's figure this out, right? And that plan doesn't need to be a 10 year plan. And if you're talking anything more than three or six months, I'm telling you, you're probably planning too far ahead.

[01:14:59] Jonathan: Like, understand what your goals are, understand the order of operations and figure that out. I think the second one is, is don't be too ambitious. And I know that sounds like the most soul destroying bit of advice, but like figure out what your minimum viable product is and build it. Get it out there.

[01:15:17] Jonathan: Yes, you can have a roadmap. Yes, you can have a white paper with like, oh my God, this thing's gonna evolve and replace Visa and MasterCard and it will be the world's greatest currency. Fine. But like, that's not gonna happen at day zero, right? So understand what you need to do. And you know, I learned this from a client of mine that had a beautiful product that they had built out sort of in the entertainment space, but they were always like trying to follow market trends of like, we're not launching today because hey, this came out and that came up.

[01:15:42] Jonathan: We wanna build this feature onto it. They kept trying to like make it the be all and end all of everything. And they ended up building this sort of Frankenstein sort of zombie project that like kind of had bits and pieces of everything jammed into it, but it was like. It was like a cake that had every single flavor.

[01:15:57] Jonathan: And it was like, that actually tastes disgusting, right? Like, you've got too much built into this thing. No one quite understands what you're trying to achieve. And also they just never got to market because they're like, we're launching tomorrow. And then they were like, oh, meme tokens. Yeah, we need to have a launchpad built into this.

[01:16:11] Jonathan: And it's like, guys, it's like a consumer app for healthcare. Like, what the the hell are you doing? Like these, these things are not the same business. Don't do that. If you want to break it off into a separate project and spin this thing out, but like maintain your core business and understand what differentiates you from the others.

[01:16:27] Jonathan: Doing everything is not the answer, right? You can't do it and you'll just get spread too thin. So figure out what makes your business unique and focus on that, even if it is incredibly boring.

[01:16:37] Umar: Jonathan, there's a last question which I like to ask my guests before they leave, is, do you have a favorite quote or a maxim that you live by? 

[01:16:46] Jonathan: Oh my God, I saw that question. I was like, I'll figure something else out in the course of this call. I, I think for me it's find the right people you wanna build with. And I say that from my standpoint of a personal level as a lawyer. And it's the advice I give to my clients that like, you should enjoy this, right? You should surround yourself with other founders that share that vision. And if you guys don't have that today as a grassroots, bootstrap project, you're definitely not gonna have it as a billion dollar business.

[01:17:19] Jonathan: Right. And like cut your losses, move on. And it's funny 'cause I learned that from a few of my clients where they did build billion dollar businesses and then it wasn't outside investors. It wasn't regulatory or tax authorities that like attacked the project. It was founders that turned on each other.

[01:17:35] Jonathan: It was like this, like resentment within them either because they think the technology should go this way or that way or somewhere in it for short-term gains. Others were long-term positions and like this dysfunction. And it's funny 'cause I've had three or four of those clients and like we're talking household names in crypto, top 100 projects where I ended up being like divorce lawyers.

[01:17:55] Jonathan: Like negotiating on arguably both sides of it. Trying to be that consigliere of like, yeah, you guys could individually both blow this project up. Either one of you, just one tweet and it's the end of it, right? Like go for it. And you might think, great, look at me, I'm so proud. Look what I've done. But no, don't do that.

[01:18:11] Jonathan: Right? Like, let's figure out how to separate these businesses. And I felt, it's funny, I've done it four or five times now. Separating a billion dollar business into usually two, $500 million businesses and like understanding where that sort of demilitarized zone is, stay away from each other. You turn left, you turn right.

[01:18:29] Jonathan: Right down to the point where those clients then came back to me and said, well, can you act for us on that side of the project? And then a day later, the other one says, can you act for us on this side of the project? I sat there initially thinking, you know, I'm totally conflicted. And I was like, actually, no, I understand this.

[01:18:44] Jonathan: I understand their business, I understand their business, and more importantly, I can help police them to stay away from that middle zone. And also tell both of them. If you start battling again, I'm outta here. Like I've tried to fix your business once, I'm not gonna do it again. But yeah, the mantra of life is short.

[01:18:58] Jonathan: Like build with people you wanna build with, grow and scale that business. And if it's not working, I think move on. 

[01:19:04] Umar: That's a good one. Jonathan, thanks a lot for joining in today. For the listeners, we also kicked off our Pr1me dinner series a few weeks back, and it was fantastic to have you, Jonathan, join our first, dinner in Dubai.

[01:19:19] Umar: If people want to reach out to you, Jonathan, what's the best way to do so? 

[01:19:23] Jonathan: Just by email, jt@nxt.law. My initials@nxt.law or go to the website and you can hit us up there. Then we can then connect on 50 different social media channels if you like, and we can spend all day bouncing between Signal, Telegram, Discord, LinkedIn, take your pick.

[01:19:40] Jonathan: But I think email is probably best to get my attention. 

[01:19:43] Umar: Perfect. Well, thanks a lot for your time again, Jonathan, and we'll keep in touch. 

[01:19:47] Jonathan: Awesome. My pleasure. Take care.