Petri Basson from Hash Directors on Web3 Directorship Services

[00:00:00] Petri: I think the real thing for a web2 director coming into this space is their personal education. I mean, we are signatories on wallets. We have Ledgers. You need to figure out how do you store seed phrases? That's a rabbit hole that you need to go through. How do you build in backups for everything?

[00:00:15] Petri: Redundancy in terms of other directors, because in crypto we move very quickly. 

[00:00:21] Umar: Petri Basson, a Chartered Accountant, is the former Director and Technical Lead of KPMG, Cayman Digital Assets Team. 

[00:00:28] Umar: In 2021, he founded Hash Directors to provide directorship services to Cayman Foundation, Virtual Asset Service Providers and Digital Asset Funds.

[00:00:40] Umar: Petri is also the Chairman of the Blockchain Association of Cayman Islands or BACI, and the organizer of the Cayman Crypto Week, the leading Cayman Islands conference for all finance and legal professionals working with digital assets.

[00:00:55] Umar: Petri, are there any requirements to become a director for VASP? 

[00:00:59] Petri: I think CIMA has said this publicly as well.

[00:01:01] Petri: They want directors with practical crypto experience, who understand custody, have some background in custody as well. 

[00:01:09] Umar: Welcome to The Accountant Quits podcast, where we help accounting and finance professionals learn how to manage a business using crypto.

[00:01:17] Umar: On this episode with Petri, we discuss directorship services for companies using digital assets, notably across Foundations, Non Token Projects, VASPs and Funds.

[00:01:31] Umar: The Accountant Quits is the official podcast of the Onchain Finance Institute (OCF), the leading educational provider for finance teams using digital assets.

[00:01:41] Umar: Their programs, the Crypto Accounting Academy, and the Crypto Treasury Management Academy focus on practical knowledge, including tools required to work with digital assets.

[00:01:54] Umar: Inside their platform, you can connect with peers working with web3, join focused chat groups, access job opportunities, and attend practical workshops on onchain finance. 

[00:02:06] Umar: You can join the community for free by heading to onchainfinanceinstitute.com/community . The link is also in the show notes.

[00:02:16] Umar: Now, enjoy my conversation with Petri.

[00:02:24] Umar: \Petri, welcome and thanks, making the time to be here. 

[00:02:28] Petri: Thanks, Umar. Really looking forward to the conversation. I think we've got some really good topics coming up. 

[00:02:33] Umar: That's right. So before we get into web3 directorship, Petri, I just wanna go back to how you got into blockchain. So I mentioned you're a Chartered Accountant originally from South Africa, started working in audit at EY, and then in 2014 you moved to the Cayman Islands to join KPMG, where you were part of the team building tools to audit digital assets. Then you later led KPMG Cayman Blockchain practice before going on to found Hash Directors in 2020.

[00:03:03] Umar: So what do you see happening at the time in the governance and directorship space that led you to start your own firm? 

[00:03:10] Petri: Yeah, no, I think it was a very interesting time.

[00:03:13] Petri: I mean, I mean 2016/17 we saw a lot of hedge funds, that were invested in Bitcoin, Ethereum, and had to figure out how to audit that. So, how do you prove someone owns Bitcoin in a self custody wallet? And then through working with funds, exchanges, different custodians, we were dealing with the board as well.

[00:03:31] Petri: And working with the individuals that were on there. And I mean, I have to tip my hat to some of the directors. They were, you know, traditional fund guys taking on these clients. They were doing their best. But, any crypto client is different than a traditional hedge fund, traditional entity.

[00:03:47] Petri: So we saw, especially on custody, configuration, self-custody, et cetera, questions that people just didn't know what they didn't know, in terms of what to ask at the board level, things to look out for. Also just managing your risks. I mean, cyber risk with crypto involved is much larger than any traditional organization, so that's where we sort of saw a gap in the industry, realized that you need someone with digital asset specific experience at your board level.

[00:04:16] Petri: I mean, sometimes we still share boards with more traditional directors. It's a really good, complimentary factor, but having that real digital asset knowledge, that's where you can add value. And because we work in the industry, we see what's going on. So we work with a wide range of clients from foundations, funds, private wealth, et cetera.

[00:04:34] Petri: So we can actually add value at a board level to say, listen, this is what we're actually seeing in the industry, where someone else might not have that range of experience and exposure.

[00:04:42] Umar: Now before we get into the meat of the episode today, which is on web3 directorship, I also wanted to compare maybe for like web2 directors how this role compares and contrasts, to a web3 directorship role. So in the Cayman Islands, where you're based, the bar to becoming a director of a foundation is deliberately low.

[00:05:04] Umar: There's no residency requirement, no mandatory professional qualification, and no restriction on who can serve. But correct me if I'm wrong here.

[00:05:11] Umar: Now, any individual of legal capacity, they can take that role. So in theory a web2 director could step into a web3 foundation, director role tomorrow. But in practice this role is different, right?

[00:05:26] Umar: Because you're implementing decisions made by token holders through onchain votes. And in the Cayman Islands, this foundation, it's an ownerless foundation. That means your fiduciary duty is to the foundation's object clause. And not to the shareholders, right.

[00:05:42] Umar: So to the web2 director, how would you explain the most important differences, between a web2 and web3 directorship role?

[00:05:51] Petri: I think in a web2 directorship, if you're thinking about funds, any traditional companies, it's a very well trodden path. A lot of the time. It's very regulated. There's a lot of service providers in there that are also looking after things. If you're working in a fund, it's most of the time audited. You've got a fund administrator, multiple corporate service providers.

[00:06:11] Petri: When you're moving into web3, you need to understand how the industry works. I mean, the foundation company itself is a unique structure. You need to understand the nuance of exactly how it interacts with a DAO. But then also all of the crypto specific items.

[00:06:26] Petri: We recently saw some very large hacks, very sophisticated, attack vectors. So I think a director really needs to understand those risks, know what to talk to the client about on that side. But I think the real thing for a web2 director coming into this space is their personal education. I mean, we are signatories on wallets.

[00:06:45] Petri: We have Ledgers. You need to figure out how do you store seed phrases. That's a rabbit hole that you need to go through. How do you build in backups for everything? Redundancy, in terms of other directors, because in crypto we move very quickly. I mean, communication is all the time on Telegram, on Slack, on Signal.

[00:07:04] Petri: I think a lot of web2 directors wouldn't be used to the pace, but the thing that gets more interesting, and I think that's where you need someone that's been in this space and understands interacting with the community, is when you have community votes. How to navigate that.

[00:07:18] Petri: Because we have seen it where web2 directors who don't understand that you've got this dynamic of, yes, I'm running a project and I've got a community.

[00:07:27] Petri: They just wanna make, this is the best decision, so I'm gonna make this decision, no questions asked. And in principle, as the foundation, sure that's the best decision, but you have to be thinking about the project because if you make a decision that upsets the entire, you know, community, that is very detrimental to a project as well.

[00:07:45] Petri: So I think you need a director that understands how everything works, how community interacts with these projects, and then also just how the ecosystem actually fits, in terms of ways to navigate it. How do you actually make those decisions. In the end we're still getting to the same thing. I mean, you said it perfectly.

[00:08:02] Petri: The memorandums and articles guide us. That's what we are bound by and that's what we have to ensure we do. And most of the time that says it's for the benefit of the protocol. So we need to make sure we're acting in that specific for the benefit of the protocol and then figure out what that really actually means.

[00:08:19] Umar: Yeah. Now we'll go a little bit deeper on those operational workflows in a bit, but, I also want to go through the services that you offer at Hash Directors to provide more context to the listeners here. So could you explain, what kind of services, directorship and other types of services that you'd be offering at Hash Directors for web3 companies?

[00:08:42] Petri: Yeah, definitely. So we are fully regulated by CIMA, as a company manager, which means we can do company incorporations, so we can do full incorporations, secretary, and be your registered office, do all the annual filings, et cetera. Then Hash specializes in providing directors, where we've got a team of very experienced individuals, people who've been working in the space since 2016/17 with legal, accounting and regulatory experience.

[00:09:08] Petri: Samuel, who's part of our team wrote, the VASP legislation in Cayman, so very big team, and that's really what we're doing is we're helping clients, giving them that advice. And then Hash can be a Supervisor, but one of the things we do is if we're a director, we won't be supervisor as well, just because we think that's really good corporate governance.

[00:09:26] Petri: But we have sister companies. I mean, you mentioned the entities that we advise. So Lemma, for example, will help with operational support. Provenance with compliance. exTreasury, with managing the treasury.

[00:09:37] Petri: So we try to provide a single solution for our client. So we, a lot of the time we'll tell a client we take care of all the boring stuff.

[00:09:44] Petri: So we will make sure regulations are complied with, accounting is done, payment runs, all those kinds of things are, happening, so that they can focus on building. Because in the end, you are building a product, but you're also building a community, and that's a lot of work, so we take care of the rest of it.

[00:10:01] Umar: And you would usually be the first person that this client reaches out to. And basically then you would guide them through the ecosystem of service providers? 

[00:10:11] Petri: Yes, exactly. So I mean, normally you must begin with incorporating the entity. So you'll have legal counsel. I mean, the lawyers will be advising you on structuring, how to plan through everything, et cetera.

[00:10:21] Petri: But then that first step is setting up the legal entity, appointing your director. And then we've actually internally got a whole roadmap for our clients. So we take them through the whole process up to TGE, if it's a foundation, then operationalizing everything and then stable state operations after that.

[00:10:37] Petri: Then we sort of walk them through that lifecycle. 

[00:10:39] 

[00:10:40] Umar: Perfect. Now, for this episode today, I want to go through four different categories of directorship. The first one is for projects that have a token, and with the foundation structure, we'll also cover for a project without a token later, for projects that have a VASP license, and the last one will be for funds.

[00:11:01] Umar: But starting with the projects that are launching a token. Now on previous episodes, notably Episode 89 with NXT Law, we've covered token launches in the Cayman Islands in some depth. So for the listeners, if you want to check that episode out.

[00:11:16] Umar: But for this episode today, we are focusing purely on the director's role. Now for projects with a token, it's common to see this double entity structure, right? So this BVI entity that acts as the Token SPV for the initial token distribution, and then you have the Cayman Foundation, responsible for the long term project development and the treasury management.

[00:11:38] Umar: Now, once the token is live, in the hands of the community, the foundation takes over. And with that, the director's job of implementing all the resolutions passed by token holders through onchain governance. 

[00:11:51] Umar: So what I want to understand with you, Petri, is how that process actually works. So once a decision has been taken onchain, what's like the operational workflow to implement it offchain. And where are you involved, as a director, and if you have like some examples to give, maybe it's moving treasury funds or signing a new contract with a market maker or getting listed on exchange, or anything else that you'd like to walk us through. 

[00:12:21] Petri: I think, I mean, this was almost a very good example of your previous question of web2 versus web3, because you have the community, you have this process.

[00:12:28] Petri: So the reality here is the director should actually be involved before the vote even goes out to the community. We like to always review it. We always flag it with our teams, because then we can review it and see if there's anything that is concerning. We'll always, also tell our clients that in the governance guidance, we cannot approve anything that's against the law in the Cayman Islands.

[00:12:49] Petri: We will require KYC for certain payments, et cetera. So you almost have to have that in the, vote when it's going out so that people know that there are some blockers. This also gets into governance design. I think governance design is very interesting. You've seen governance move from everything is a vote to where we have specific things that the community should decide on.

[00:13:09] Petri: And we potentially have steering committees and other groups that are responsible for specific things because I think over time we realized that a bunch of people on the internet aren't great at making decisions, and could potentially make bad decisions as well. But to get to your question, I think when there is a vote.

[00:13:26] Petri: For us, it's very important to then look at that vote, see exactly what it's achieving, make sure it doesn't break anything, or contravene any laws. And then after it is fully approved by the community, that will usually come to the directors. The directors in the end are responsible, for signing off and doing final approval.

[00:13:45] Petri: So that will then come to our desk, we'll likely do a resolution, approve whatever action it might be and then after that, someone like Lemma will implement it. So whether that is a new vault, new transactions, et cetera, that you have to do, for transactions, we always have payment policies in place.

[00:14:04] Petri: Lemma will normally do execution. In Cayman, the directors will a lot of the time be signatories on it as well. But you also have to have a director who understands this industry and is able to navigate it. So I think interesting things we've seen before is, I had this probably two years ago. We were appointing a steering committee. And one of the requirements for the steering committee was that you had to do KYC before the vote, and of course some people didn't do KYC. We ended up having our top five people who were gonna sit on the steering committee, and the guy that was number three hadn't done his KYC. And then on the morning that the vote was going to close.

[00:14:40] Petri: He completed his KYC, unfortunately had a fraud conviction against them and we had to decide what to do. So I mean, that's a very difficult situation. The vote is closing in a few hours, so we sort of had to do war room, jump on with the client. Eventually had a conversation with the specific individual.

[00:14:57] Petri: Sort of said, you know, this is a difficult thing. We don't wanna dox you. How are we gonna handle this? They decided to step back from the position, but I think you need to have someone who can have those difficult conversations, is monitoring it, can jump into things. Because another thing we've had, and this is in the last few weeks, is where we had a potential hostile governance takeover.

[00:15:18] Petri: At the moment, token prices are down. You can potentially buy a controlling interest of tokens to govern a treasury that's much more valuable. So we've seen some people trying to do that, and you need to think about, do you need cool down periods? Do you need veto rights, everything else in place? And then step in and actually take those actions when you need to. 

[00:15:41] Umar: There are many prominent projects, web3 projects, in the Cayman Islands. Projects that come to mind, like Lido, Ethena, Etherfi, ENS. So is there any one that comes to mind that they've been able to like perfect their governance system? Are there any good examples of such projects?

[00:16:02] Petri: I wouldn't specify anyone. I think it's so flexible and it's so unique in terms of each and every single project. I'll give you a easy example. We had a project where it was a lending protocol. And this was in the, you know, token holders can make any vote, time period. And we had a token holder who went and put a vote in that said, let's decrease collateral requirements increase the token reward amount, which as a token holder, that's amazing. I'm making more money, but it fundamentally breaks the protocol. So I'd say it really depends on your protocol, what you are doing, and what the decisions are and what should be governed. In that scenario, we then appointed a specific council that was responsible for sort of the technical specifications and how everything works.

[00:16:45] Petri: So it is a very custom process, that you need to understand what's this protocol actually doing, what are the levers and who should be making those decisions?

[00:16:54] Umar: Now those were for projects with a token and the Cayman Foundation. Now, there's a lot of web3 projects, obviously, that don't have a token, like infrastructure providers, IP holding structures, exchanges, market makers, et cetera. But these projects, they don't use a foundation structure, right? The foundation structure was designed specifically for this ownerless, no shareholder model we just spoke of for DAOs. So let's say outside of funds and VASP registered businesses for now, what other legal structures would non token web3 projects typically use the Cayman Islands for. And how would your director role then change on one of those structures? 

[00:17:38] Petri: I think it's interesting, you are seeing some people use foundations for non-token structures where, for example, we're holding a treasury. It's purely just for grants, et cetera. So you're seeing very specific and narrow purpose foundations.

[00:17:52] Petri: But then yes, to your point, I think an exempt Cayman company is probably the one that's more popular than if it's an infrastructure play. If it's purely providing those services, and I mean, a lot of those clients will then also go the regulatory route. Where they will register with CIMA, be, become a VASP, et cetera.

[00:18:09] Petri: So it completely depends on, you know, activity. That's why we always get a regulatory memo from our legal counsel because that will help you to understand, you know, these are the activities, this is what you need to comply with, and then we can help the client navigate that and figure out how everything's going to work.

[00:18:25] Umar: Before we continue, let's take a quick commercial break from our sponsor.

[00:18:30] Umar: If you're serious about running your business using crypto, you need tools built for crypto.

[00:18:35] Umar: One of my favorite apps, and yes, one that I use multiple times a month is Request Finance. This app has been a game changer in how I invoice my clients and receive stablecoins and crypto directly in my wallet.

[00:18:50] Umar: But hey, there's so much more to it.

[00:18:52] Umar: Request Finance is the all in one platform for crypto operations, accounts payable, accounts receivable, expenses, and even accounting. Plus they've got a killer multi-payee off-ramp to over 190 countries, meaning you can pay someone with crypto and they get fiat in their bank account. Request Finance connects to over 20 blockchain networks, including: Ethereum, Solana, Base, Arbitrum, Near, and more.

[00:19:22] Umar: Here are some features that I love. Batch payments using your preferred wallet of choice. A single dashboard to track all invoices with real time updates. All invoices contain the transaction hash for easy audits.

[00:19:38] Umar: But hey, don't take my word for it. Try it out for yourself. Head over to requestfinance/partners/theaccountantquits and get two months for free with all the pro account features.

[00:19:51] Umar: Join 3000 finance leaders today using Request Finance and make crypto operations simpler, compliant, and less stressful.

[00:20:03] Umar: Now. I wanna move on to speak about VASP license projects. So I went through CIMA's Public Register, while preparing for this episode, and I saw that there are currently over 20 active VASPs in the Cayman Islands, which tells you it's still a small, heavily scrutinized group, right? So some of the companies I saw on that list was again: EtherFi, B2C2, Ripple, Blockchain.com.

[00:20:30] Umar: So well known companies, and to date, you only have three entities that have cleared this full VASP license, which is the tier required for custody and trading platforms, and it comes with stricter governance requirement.

[00:20:44] Umar: Now, with this low number on its VASP register, it probably means that Cayman was never really competing for VASP registered businesses, but correct me if I'm wrong here, and, its dominance today lies in fund vehicles, and foundation, and DAO structures. So for these entities that do choose Cayman for VASP registration, what is it they actually doing from that entity? What triggered the need for VASP?

[00:21:09] Umar: And again, but maybe you can touch on that as a follow-up question, would be the directorship role. 

[00:21:16] Petri: Hmm. No, definitely. I think what we've seen with the VASPs is Cayman had a phased approach. So we started out with just VASP registrations, where there were specific activities and you just register.

[00:21:28] Petri: And we've now rolled out phase two. So I mean, through the Blockchain Association, but Hash also did some consulting with the regulator, to get to that. Where you now have exchanges and custodians where you've got a full license, and you're seeing a lot of the previously registered entities. They're busy moving through that process now, depending on their activities.

[00:21:47] Petri: But we've definitely seen a large increase in interest in full VASP licensing in Cayman. So just talking to the lawyers from what we've seen ourselves, there's a lot of people that are considering Cayman as a jurisdiction. I think it's twofold. The one side is Cayman is a leading international financial jurisdiction, so we're very well known, people understand the KYC compliance requirements, et cetera here are very strict.

[00:22:11] Petri: The legislation is very clear and then now the licensing is also very clear. And our regulator has really skilled up. I think to your point, I mean there are a lot of other places where you can potentially register as a VASP. At CIMA we have a very good lead of CIMA. The rest of the team there are very educated, and I've had this conversation with clients where they're like, I'm not explaining blockchain 101.

[00:22:33] Petri: These guys are asking good questions. They're actually getting into the detail. So I think we're now in a very good position to get these clients and almost, I look at this as a new pillar for Cayman as a whole new industry that we're gonna start pulling into the island. But this is the very regulated, side of things.

[00:22:51] Petri: So to your point about a director, I think CIMA has said this publicly as well, they want directors with practical crypto experience who understand custody, have some background in custody as well. That's specifically what they're looking for. There is a requirement that a VASP has to have an independent director, on its board as well.

[00:23:09] Petri: And the position as a VASP director is much more compliant. I mean, CIMA has very specific requirements. There are very specific AML, IT, cyber security, custody requirements, and as a director you're in the end responsible for that. So you are really spending a lot of time with the client, with legal counsel, everyone else going through everything, understanding the processes, and then making sure it's all implemented, because you know that you will be audited.

[00:23:38] Petri: So, I mean, CIMA will do inspections. They will, you know, go through all the policies, everything else with the client. And we've already seen it last year where they did take action against a VASP. So they did take regulatory action, but in that they also specifically took it against the director, who they said wasn't performing their duties.

[00:23:57] Petri: So I think as a director you understand that, you know, there's a higher bar of scrutiny on a regulated entity. 

[00:24:04] Umar: I was actually speaking with someone who was involved in the VASP registration of his entity in the Cayman Islands, and he was telling me that, yeah, it does take a really. It took him, I think, more than two years or something and until they got it, or maybe more than that.

[00:24:20] Umar: But is that expected now that process to accelerate. 

[00:24:25] Petri: I'd say, I think as with anything new, there was a learning curve. So especially someone who was very new, I think the regulator was still becoming comfortable with everything. Schooling themselves up, et cetera.

[00:24:36] Petri: At the moment, we're definitely seeing better sort of feedback cycles, quicker return times they've committed to certain timelines, that they work towards. So it's definitely much quicker, but it also depends on the quality of the submission. This is when, as Blockchain Association, we're catching up with the regulator.

[00:24:52] Petri: One of the recurring themes is if your business plan doesn't make sense, if you have products on your website that you haven't disclosed in your, business plan, if there are inconsistencies between documents, et cetera. That takes a lot of time. So I think it depends on, you know, who you are working with and the quality of that submission.

[00:25:09] Petri: Because I mean, we're all human beings. If you get a submission and everything's perfect and it all looks great, you get that warm and fuzzy feeling where if you start going through it and there's a lot of things that don't make sense, et cetera, you start asking more and more questions. And I think that's probably a symptom, of what's happening there is submissions that aren't that high quality, things that are unclear, et cetera. And then, I mean, a regulator will definitely dig down. That's their responsibility.

[00:25:35] Umar: I understand. Now, I wanna move on to the role of the supervisor. We've covered the role of the director. So the supervisor, he or she holds power similar to what a shareholder holds in a traditional company.

[00:25:48] Umar: They can oversee the director and also in certain circumstances, remove and replace them. So in a memberless foundation for this standard DAO structure, the supervisor is often the UBO for KYC purposes, because there's no shareholders right to play that role. Can you explain how the supervisor and director, actually work together and why it's important to always separate the two through independent entities?

[00:26:17] Petri: So I'd say the supervisor is in a very, very important role because they are that independent oversight. The directors are the senior managing officials, and a lot of the lawyers will also call this a director-led foundation. So the directors are working on a day-to-day, signing all their agreements, doing all their approvals, et cetera.

[00:26:36] Petri: But in the event that the director does something that's against the articles, something that you know is not in the interest of the entity. The supervisor is that external body that can step in and potentially remove directors. The other function here is if a director resigns, or let's say there's a sole director and the director passes away, for example, the supervisor can step in and appoint a new director.

[00:26:59] Petri: So your supervisor is that fallback and oversight role. And that's also why it's so important for that to be an independent party. So you can have the same individual or company as director and supervisor. But in that event, if the director is doing something, there's no checks and balances, because in the end, the supervisor is the same party.

[00:27:21] Petri: We always recommended at Hash we will never do both roles. And we have seen some instances where it has been misused unfortunately. We've had people call us saying, you know, this is the situation. And unfortunately the answer is yes, you saved a few dollars by having the same individual do both roles, but you're also in a very tough situation now.

[00:27:40] Petri: So I think it's very important there, and it's, it's a very important point to highlight for people. There's a lot of people who will sell the package deal. The, this is a very cost-effective model, but we always take the long-term view. And in the long term, I know we're all very friendly at the moment and everything is going great, but we also know that in the future things could go wrong.

[00:28:00] Petri: So you want those checks and balances in place when you need them. 

[00:28:04] Umar: Have you seen projects, maybe a DAO where a contributor from there would have that supervisor role and um, and also is it a legal requirement? 

[00:28:16] Petri: So, I mean, if you appoint a supervisor, yes, you have to have one. You can have more than one supervisor as well.

[00:28:22] Petri: For the supervisor role, we normally recommend that it's someone that's at least familiar with Cayman regulations because to the point, if you, for example, have directors resign, if there's anything else going on, that supervisor needs to understand it and understand their responsibilities. But you can have anyone in that role.

[00:28:39] Petri: So the main thing is that it's someone who understands the requirements. And then you also need to look at the powers of that supervisor, where they physically reside, et cetera, in terms of taxation. If they're controlling the entity, will they become the UBO for the entire foundation, potentially. 

[00:28:56] Umar: For a project where you're not acting as director, are you providing the supervisor role?

[00:29:01] Petri: Yep, we will do that. Yes. 

[00:29:03] Umar: Okay. 

[00:29:04] Petri: Mm-hmm.

[00:29:05] Umar: Fantastic. Now I want to go through like the full governance stack for a Cayman foundation. You have the director, which is what Hash Directors provides. Then you have the supervisor we just spoke about, held by an independent third party who oversees the director.

[00:29:21] Umar: You have the DAO administrator, which is what, Lemma provides. The company you're an advisor on, they would be doing the day-to-day operations, the bookkeeping. Now the director is ultimately responsible for what the foundation does, but the DAO administrator like Lemma is the one executing most of it now, given that Hash Directors and Lemma are sister companies.

[00:29:46] Umar: They were both co-founded by you. How do you think about managing the independence of the director role when the DAO administrator is sitting alongside a related entity? 

[00:29:58] Petri: I mean, it is something that we, I mean, we discuss a lot and we look at it a lot. So between Hash and Lemma, I'm not involved day to day at all.

[00:30:06] Petri: Lemma has a completely separate management team, et cetera. I'm just, a sort of seed investor over there, an advisor. I think in terms of the relationship, it is definitely a good relationship to have where you have a director and an administrator who are very familiar with each other and work well together. Because it, makes things a lot more efficient. So what we saw, this is back in the day, you know, 2020, early 2021 with a lot of clients is clients would be asking the director where we're supposed to be independent and only provide oversight to do operational things. So you start becoming executive director almost.

[00:30:42] Petri: And that's where we saw the need for someone to run operations and go through everything. So you saw that maturing of the entire industry. And I almost draw a parallel to the funds industry, where in the funds industry you've got a director, but you'll have a fund administrator. And the fund administrator is doing a lot of the operational procedures.

[00:31:00] Petri: They're doing the bookkeeping, execution of transactions, all those kinds of things. And you will see it. Whereas the same corporate provider of doing admin as well as director, but they're taking on very different roles. And as long as it's segregation, so I mean, if I was, you know, day-to-day the person running Lemma, that would definitely be a concern.

[00:31:20] Petri: But we are segregated and in the end, the director is personally liable. So if, let's say for example, I'm a bad actor, I'm doing both of those roles. If I'm doing things that are against the best interests of the protocol against the memorandums and articles, the director is personally liable. So, and that's something we take very seriously at Hash.

[00:31:41] Petri: So that's why we have that segregation as well. So the conflict in the end, it's a personal thing for the director to ensure you're doing what's best for the protocol, and I think that's what's really important.

[00:31:52] Umar: Fantastic. Thanks for clarifying, Petri. Now, you mentioned crypto funds, earlier. It's the fourth category of directorship I wanted to go through.

[00:32:01] Umar: Now, the directorship role, it changes when you move from a DAO foundation into a fund structure. Now you're not really accountable to a community of token holders, but you're accountable to LPs, CIMA directly the regulator. You are signing off all these NAV calculations overseeing the fund administrator, right?

[00:32:20] Umar: And sitting between the regulator and the investment manager. So at Hash Directors, how would you approach, this directorship role in a fund context? And what would you say are the risks or what's different with, uh, fund directorship for crypto companies? 

[00:32:38] Petri: So I think in the fund industry it's definitely much more regulated.

[00:32:42] Petri: You've got very specific filing deadlines that you have to meet. You've got an audit that you have to meet as well. But you also have more support in your auditors, your fund administrators, everything else. As a fund director. I mean there's a lot of, let's call it the normal corporate governance things that any fund director needs to do.

[00:32:59] Petri: CIMA has very specific requirements there. We make sure we meet all those requirements. The crypto specific side, I'd say firstly is custody. Who your custodians are, how everything's configured, you know, how approvals, et cetera work. Then if you're doing subscriptions in kind, we have funds that are doing that.

[00:33:17] Petri: How are you doing your KYC/AML checks, you know, wallet screenings, et cetera, on those.

[00:33:23] Petri: For VC funds. We see, I mean, there's a lot of value we can add there because we work with foundations as well. So with the VC funds, it's very much looking at, you know, what are the projects, how are they launching, what are the things that you should consider?

[00:33:36] Petri: Because I mean, if I'm a VC investor and my, you know, project decides to just launch the token without a legal structure or anything like that. That's bad for my investment as well. So that's where we, you know, advise and help a lot of our VC funds as well. And then it's the normal, you know, investor relations, making sure we don't do anything that's against the fund's documents, making sure subscription redemptions are going well, and then just managing all of the vendors.

[00:34:02] Petri: So fund admin relationship, auditor relationship, all those kinds of things. So I think it's. It's a much more regulated area, and it's a much more specific playbook, but it is still does have very crypto specific things. And when you have that sort of experience and you see what's going on in the industry, you can also advise your clients.

[00:34:21] Petri: If there's issues with a specific bank, issues with specific custodian, whatever, you can at least tell your client, listen, this is what we're seeing in the industry. You know, we should consider having a backup if anything goes wrong, et cetera. 

[00:34:34] Umar: Like in the Cayman Islands right now, what you say is the composition between, directors for funds or for foundations.

[00:34:42] Umar: I mean, the majority of directorship right now are probably for foundations, right? Because there's so many foundations in the Cayman Islands as compared to funds, which is like the bigger category?

[00:34:53] Petri: Yeah, I mean, I'd say if you're looking at Cayman as a whole, the fund industry is much, much larger.

[00:34:59] Umar: Okay. 

[00:34:59] Petri: Um, so you've definitely got a lot more directors working on funds. The digital asset industry is growing. But I think the fund industry is a multiple of what we are at the moment. 

[00:35:09] Umar: I understand. So now at the Hash Directors, you are also providing non-executive directorship services for these funds.

[00:35:17] Umar: So as a non-executive director on a crypto fund, what does your oversight actually consist of? 

[00:35:24] Petri: I think for a non-executive director, it is really, this is for investors. So if I'm an investor investing into a hedge fund, you want a non-executive director because they are not part of the management team and they're providing that oversight role.

[00:35:38] Petri: And we are sort of responsible for the investors. So we're looking after number one, the incorporation documents and the fund documents, making sure that we stay within the specific rules and what we set out that we're going to do there. But then the second part is, looking at the investment manager.

[00:35:57] Petri: I mean, we always, in our board meetings, we'll have the investment manager report. We'll find out what's going on, fund performance, if there are any investors that are redeeming new subscriptions, et cetera. So we're really, we're that independent oversight because yes, you are trusting an investment manager and you've got a full fund structure here.

[00:36:18] Petri: But we're the ones that are checking in, asking all the difficult questions sometimes. We sometimes have to have those really difficult conversations with people. But then also making sure we are meeting audit requirements, CIMA filing requirements, everything else. So I'd say for anyone investing into a crypto fund, if you see there's an independent director that is a, a check and a nod because you know, there is someone that is sort of, you know, making sure you do everything and everything is made that needs to be in the fund.

[00:36:45] Umar: We probably have around 10 minutes left. And, um, this topic is probably gonna be my last question. I wanted to go through different substance requirements and founders risk from a tax perspective. What I understand is that foundation companies are specifically excluded from the Economic Substance Act.

[00:37:04] Umar: So a DAO Foundation, they don't need to demonstrate physical presence or hold board meetings in Cayman. But correct me if I'm wrong.

[00:37:12] Umar: Now, even if the foundation is exempt from the Economic Substance Act, the management and control test for tax residency is a completely separate question.

[00:37:22] Umar: So let's say the founder is making decisions from, anywhere else from Dubai, from Zurich, does this exemption actually protect the foundation or is there still a tax residency risk in the founder's home that the structure doesn't address? 

[00:37:39] Petri: I think this almost gets back to sort of what we're talking right in the beginning, that these foundations are director-led in the end.

[00:37:45] Petri: So the director is in the end, responsible for anything that is happening. And those decisions have to come to the director and you have to show that those decisions are being made by the director. And this is something that we work with a lot with our teams and founders. So communication, approvals, all those kinds of things is very important.

[00:38:04] Petri: And a lot of the time we'll have, you know, email approvals. We'll have conversations on Signal and Telegram with people with new deals, whatever might be happening, but that will always flow back to the director and we'll make sure we actually put those in resolutions. You have email approvals.

[00:38:20] Petri: Anything else around that? Because I mean, on the one side, if a founder is making decisions independently for a foundation, those aren't really valid decisions. You have to have the foundation actually approve that, and that's why you have your directors in Cayman. So the decision making is in Cayman.

[00:38:37] Petri: Everything is happening here. And this is also that evolution that I sort of talked about of this industry is now you are seeing teams like Lemma, where they are physically in Cayman as well. So the, you know, finance team at Labs may send us an invoice for payment. But the team over here that's completely independent, they're actually going through it, checking everything, lining up the payment, executing it.

[00:39:00] Petri: So that segregation is very important. And it's important for everyone. I mean, it's important for the community because in the end we're looking after the community. So if we don't perform these, procedures, and a tax authority takes the view that these assets are actually in the control of the founder, I mean, that's bad for the entire community as well.

[00:39:20] Petri: So it's something that we really focus on and make sure that we, you know, get those approvals and document everything and have it in place. 

[00:39:27] Umar: Have you seen any precedents, in this space where maybe there was a specific jurisdiction that creates a bit more friction there for certain founders?

[00:39:38] Petri: I wouldn't call out any jurisdiction. I think all the different tax jurisdictions are definitely aware of the crypto industry. They're looking at it. I'd say one of the interesting ones we saw early on was a developer that was based in a European jurisdiction. He was one of the signers on a multisig, and when he filled in his tax return, he was a good individual.

[00:40:00] Petri: They said, do you control any other accounts? And he said, yes, I'm on this multisig. And that tax authority then turned around and said, well then you potentially control these assets. So one of the things we always do, because in that event, I mean this is not that individual's assets, they're providing a service.

[00:40:15] Petri: So you are just helping us secure. It's like being on a bank account and just being one of the approvers. So we always make sure we've got a service agreement in place for those people that specify, you know, this is a service that you're providing, but then also you're accountable to the company. So if they do anything, we have recourse against them as well.

[00:40:33] Petri: But to answer your question specifically, I'd say that's the one that we've seen. But in the end, I mean, that was resolved. We put up a service agreement. We explained that these assets are not controlled. It's in the control of the entity. The individual is just providing a service to us. 

[00:40:47] Umar: Very clear.

[00:40:49] Umar: Now I want to end with, it's probably gonna be the last topic we can go through is, um. To speak about the conference that you recently organized in the Cayman Islands called Cayman Crypto Week. I mentioned in the intro that you are also the Chairman at BACI. BACI stands for Blockchain Association of the Cayman Islands.

[00:41:11] Umar: Maybe if you can share with the listeners a little bit more about what BACI does and maybe even share a little bit more about the next conference that you'll be organizing. 

[00:41:21] Petri: Definitely. So, I mean, we set up the Blockchain Association back in 2018 and it is really there to promote Cayman, but then also help with the development of the industry.

[00:41:30] Petri: So in Cayman, when there's new legislation, you have to be an industry body. To give consultation feedback to CIMA as well as the Ministry of Financial Services. So that's where this really initiated is when we were working on the VASP legislation, we realized that only the bankers and the funds were going to comment on this new legislation.

[00:41:48] Petri: So we set up the Blockchain Association to represent the industry. And over time, that's really evolved. These days we've got a very large steering committee. We've got regulation education committee, women in blockchain, events committee. Now we have a VASP chair as well. And we are really educating and representing the industry.

[00:42:06] Petri: So to your point, we do monthly events in Cayman. We host Cayman Crypto Week, which is once a year. But then we also do international events. So if your listeners are at any of the large conferences, we'll often do side events that are Blockchain Association specific. And it is so that people can, you know, meet people from the industry, learn more about Cayman.

[00:42:28] Petri: Understand what we're doing. And that's really the goal with Cayman Crypto Week as well. So Cayman Crypto Week was to bring people to the Island, firstly, to see Cayman, experience it, but also meet the service providers, understand, you know, how it works, what's going on in Cayman, et cetera. And I can confirm that we will have Cayman Crypto Week next year.

[00:42:47] Petri: The date will likely be the first or second week of February. Uh, so if anyone is interested in coming to Cayman, that's a great time to come down. We have a lot of international people coming down as well, so it's a great event. Definitely a much smaller, more intimate event compared to Consensus or anything else.

[00:43:05] Umar: Yeah, and I can confirm it was a fantastic event. I was there and even if it's small, you really have like quality people. You'll meet a lot of service providers and a lot of people working in the web3 industry. And yeah, congrats again for pulling off a fantastic event. I'll surely be back next year.

[00:43:22] Petri: Appreciate it. 

[00:43:22] Umar: Now. 

[00:43:23] Petri: Glad you enjoyed. 

[00:43:25] Umar: Now the title of the episode today was web3 directorship services. To end this podcast, or maybe to summarize it, has there been anything that maybe we didn't touch on that you'd like to share with the listeners, or how would you summarize the episode for today? 

[00:43:40] Petri: I think the big thing is be careful in how the providers that you choose and the partners that you choose. Most of these foundations are entities that are set up to last for a very long time. I mean, they're for the benefit of a protocol, I look at them as a foundation in the traditional sense. Like this thing is designed to last an extremely long period to support this protocol. But in doing that, you need to be careful with the partners you pick.

[00:44:04] Petri: So you need to pick partners who are experienced, are passionate about the space, have your best interests at heart. So that's the main thing I'd say to people is make sure you talk to multiple service providers. Make sure you talk to multiple legal counsels, et cetera, because this is a relationship game and you're gonna be working with these people over a long period of time.

[00:44:24] Petri: I mean, you are not stuck. You can replace a director, you can potentially appoint someone else. But it's a very important thing, when you are setting things up, is to, you know, pick your service providers very carefully. 

[00:44:36] Umar: And lastly to join BACI, what are the requirements to be a member? Because, I do understand that everything that you do is actually funded from, members or other partners, like in the Cayman Islands, but how does one become a member? 

[00:44:50] Petri: Yep. So BACI is a non-for-profit. Yes. We only have corporate memberships. So the corporate memberships, that's where we fund everything. Our members have benefits. They get, first access to all of our events. They get discounts on all the events as well as Cayman Crypto Week.

[00:45:05] Petri: And then we'll co-host events with them, promote their activities, et cetera. If you're an individual and you're interested in BACI, we have the newsletter. So you can sign up to the newsletter, on our website, and then you'll be notified of all of the events. You'll be first to know about Cayman Crypto Week and everything else as well.

[00:45:23] Petri: So I'd say as an individual, that's the main thing. But as an organization, I mean, we've got a big drive this year to onboard more VASPs and foundations. But we also have international members, so we've got Blockchain.com, a lot of other international companies that are also members of the Blockchain Association.

[00:45:40] Umar: Sounds good. I'll be sharing all those links. Now, I like to end the episode usually, Petri is like a tradition on this podcast by asking you about, do you have any favorite quote or like a maxim that you live by or maybe you repeat to yourself. 

[00:45:57] Petri: Yeah. Um, I mean, it's an interesting one. I'd say the one that came up immediately was: How you do anything, is how you do everything.

[00:46:04] Petri: I think that's a good principle in life is, the way you conduct yourself in certain things that pulls through in other areas of your life. So, it's a good standard to set for yourself, when your, you know, personal fitness, health, working with clients, everything else. 

[00:46:21] Umar: Yeah. I like it and I agree.

[00:46:23] Umar: Petri, thanks a lot for joining in today. If people want to reach out to you, for the services at Hash Directors, where should they go on the website or on socials? 

[00:46:34] Petri: Yep. So our website is hashdirectors.com you can find us on LinkedIn as well. If you want to contact me, it's just petri@hashdirectors.com or you can just shoot me a DM on LinkedIn.

[00:46:45] Petri: I mean, fairly active and responsive on both of those. And Umar, thank you very much for the podcast. Really enjoyed it. 

[00:46:51] Umar: Thanks a lot for coming today, Petri, and we'll be in touch and I'll probably see you next year for the conference. 

[00:46:56] Petri: Look forward to it.