Token-based fund structures are reshaping how capital is raised, pooled and distributed in the digital-asset industry. For a fund manager building a vehicle that issues investor interests as on-chain tokens, the legal question is not simply "which offshore jurisdiction is cheapest?" It is whether the token represents a regulated security, how the fund manager's activities are classified across every market where capital is solicited, and whether the chosen domicile actually holds up under the tax and banking scrutiny that follows. This analysis sets out where those legal lines are drawn – the classification questions, the domicile decision, the regulatory perimeter for managers, and the cross-border interactions that determine whether a structure works in practice. Read it as a map before you commit to an architecture.
What is a tokenised fund and why does classification come first?
A tokenised fund is one where investor participation rights – typically units, shares or limited-partnership interests – are represented as digital tokens on a distributed ledger. The token does not change what the underlying interest is; it changes how that interest is recorded, transferred and settled. That distinction is foundational. Regulators in every leading jurisdiction start with the substance of what the investor acquires, not the form in which it is recorded. A token representing an economic share in a pooled vehicle that invests in assets on behalf of others is, in almost every regime, a security (or a regulated collective investment scheme interest) on day one.
This means the classification analysis must happen before the structure is designed, not after. In the European Union, MiCA (the Markets in Crypto-Assets Regulation) explicitly carves out financial instruments covered by MiFID II – including transferable securities – from its own scope. A tokenised fund interest that qualifies as a transferable security falls under the existing securities regime, not under MiCA. The ESMA guidance that flows from MiCA reinforces this: crypto-asset tokens must be assessed against the full spectrum of existing financial regulation before the MiCA pathway is even considered.
In Singapore, the Monetary Authority of Singapore (MAS) applies the same substance-first logic under the Securities and Futures Act. In Hong Kong, the SFC has been explicit that tokenised investment products do not escape the regulatory perimeter because they use distributed-ledger technology. Across all three hubs, the classification question is the gateway. Get it wrong, and every subsequent structural decision is built on a defective foundation.
In our practice, we have seen managers spend months selecting a domicile and negotiating a fund constitution before running the token-classification analysis. That sequence inverts the risk. The correct order is: classify the token, map the regulatory consequences, then design the vehicle.
For a scoped classification review before you commit to a structure, contact OBOLUS at info@oboluslaw.com. The analysis above describes the standard path. Your facts – the asset mix, the investor base, the redemption mechanics – change the classification outcome and, with it, every downstream decision.
How does the regulatory perimeter apply to tokenised fund interests?
Once a tokenised fund interest is classified as a security or collective investment scheme unit, the full securities-regulation perimeter applies: the fund itself must be authorised or registered in every jurisdiction where it is offered, the manager must hold the appropriate authorisation, and disclosure documents must meet applicable prospectus or offering-memorandum standards. The on-chain form of the token does not create a carve-out; it creates an additional layer of operational obligation.
Under MiCA, funds that issue tokens classified as asset-referenced tokens (ARTs) or e-money tokens (EMTs) face the full issuer-authorisation regime, with reserve composition and redemption obligations sitting alongside the fund's existing securities-law requirements. A closed-ended vehicle issuing a fixed-allocation token may avoid the ART/EMT pathway – but only if the token genuinely does not reference a basket of assets or purport to maintain a stable value. That line is narrower than many managers assume.
In the United Arab Emirates, VARA (the Virtual Assets Regulatory Authority) has constructed an activity-based regime covering management and investment activity in virtual assets. A fund manager operating in mainland Dubai who manages a portfolio containing virtual assets must map its activities against VARA's rulebooks. The FSRA within the Abu Dhabi Global Market (ADGM) applies a parallel analysis: a fund managing digital assets is engaging in a regulated activity, and the manager must hold the corresponding FSRA authorisation. Neither free zone is a regulatory-free zone.
The Cayman Islands and the BVI remain dominant offshore domiciles for digital-asset funds. Both the Cayman Islands Monetary Authority (CIMA) and the BVI Financial Services Commission regulate investment funds and VASPs under distinct frameworks that may apply simultaneously to a tokenised vehicle. A Cayman-domiciled fund issuing tokenised interests to investors via a digital-asset platform may engage both CIMA's fund-registration regime and the Virtual Asset (Service Providers) Act obligations. Managers sometimes treat these as alternatives. They are not.
Which domicile fits which fund profile?
Domicile selection for a tokenised fund is not a single-variable optimisation. It turns on the investor base (retail versus professional, EU versus US versus Asia-Pacific), the asset mix (pure digital assets, a hybrid of tokens and traditional securities, or stablecoins), the redemption profile (open-ended daily liquidity versus closed-ended multi-year lock-up), and the manager's own regulatory position. The following matrix describes the dominant structural choices.
Profile A – EU-facing, professional investor base, MiCA-compliant intent. The natural domicile is an EU member state with a developed funds regime and an NCA willing to process CASP and AIFMD authorisations concurrently. The fund benefits from the EU passporting mechanism once authorised. The trade-off is timeline and compliance overhead: the MiCA whitepaper obligation, the CASP authorisation process and the AIFMD depositary requirement layer onto one another. Managers we advise in this profile consistently underestimate the interaction between MiCA and the existing AIFMD depositary and custody rules – both apply, and they do not always point in the same direction.
Profile B – Global professional investor base, hybrid asset mix, offshore efficiency. The Cayman Islands remain the most frequently used domicile for this profile. A Cayman exempted limited partnership or an exempted company with CIMA registration offers a well-understood legal vehicle, broad banking correspondent relationships and a developed secondary market in fund interests. The risk for a tokenised vehicle is that the on-chain token mechanism may trigger VASP obligations under the Cayman VASP Act in addition to fund registration, and that some institutional investors in the EU and UK require additional structuring to receive interests from an unregistered offshore vehicle.
Profile C – MENA-facing, with Gulf investor capital and regional banking. Dubai (VARA) or Abu Dhabi (ADGM/FSRA) are the dominant choices. Both offer common-law-based fund structures and regulatory regimes that increasingly attract regional family-office and institutional capital. The VARA regime is still maturing for funds specifically, and the interaction between the VARA management licence and the fund-registration obligation is an area where the rules are being interpreted in real time. Managers we advise in this profile benefit from early engagement with the regulator rather than reliance solely on published guidance.
Profile D – Asia-Pacific focus, with Singapore or Hong Kong as the management hub. The MAS Payment Services Act governs the manager's digital-asset activities; the fund itself may still be domiciled offshore. Singapore has developed clear guidance on what a licensed digital-asset fund manager must do to maintain its DPT service licence, and the SFC in Hong Kong has published detailed requirements for tokenised funds offered to retail investors. A Hong Kong-based manager running a Cayman fund that issues tokenised interests to Hong Kong professional investors must satisfy both the SFC's platform-authorisation requirements and the offshore fund's own regulatory posture vis-à-vis Hong Kong law.
What are the cross-border tax interactions a tokenised fund cannot ignore?
The wrong domicile generates tax leakage that compounds across every distribution cycle. For a tokenised fund, the tax analysis covers three independent layers: the fund-level tax position, the manager's carried-interest and management-fee treatment, and the investor-level withholding and reporting obligations that attach to the token as a securities instrument.
Fund-level tax: most offshore fund domiciles (Cayman, BVI) are tax-neutral at the vehicle level, but that neutrality does not automatically pass through to the manager or the investors. A manager resident in a high-tax jurisdiction managing a Cayman fund may face CFC (controlled foreign corporation) rules or substance-over-form challenges that pull the fund's income back into the manager's home jurisdiction. Switzerland, under FINMA's guidance and the Swiss tax framework, offers a well-trodden path for asset managers who wish to co-locate management and tax substance in a single jurisdiction. In our structuring work, we see managers who place the fund offshore but leave all investment management activity in a jurisdiction that then asserts taxing rights over the offshore vehicle's gains.
Token transfers as taxable events are the specific problem that tokenised funds introduce that traditional funds do not. In a conventional fund, an investor sells their interest through a redemption mechanism administered by the fund. In a tokenised fund, the token may be transferred peer-to-peer on a secondary market. Many jurisdictions treat a token transfer as a disposal for capital-gains purposes regardless of whether the investor intended to exit the fund. The fund documents must address this explicitly, and the manager must build reporting infrastructure that captures secondary transfers – a requirement that the standard fund administrator workflow does not automatically cover.
Carried interest treatment for the manager varies sharply by domicile and by the characterisation of the fund's returns. A manager receiving carry denominated in tokens rather than in cash faces the question of when the gain accrues for tax purposes: at receipt, at vesting or at ultimate disposal. No jurisdiction has issued comprehensive guidance on token-denominated carry. Managers we advise in this position generally adopt a conservative accrual position and take local tax advice in the manager's home jurisdiction before fixing the carry mechanics in the LPA.
VAT and GST on management fees: in EU jurisdictions, management fees on certain collective investment schemes are VAT-exempt. Whether that exemption applies to a tokenised fund depends on whether the vehicle qualifies under the applicable domestic implementation of the EU exemption – a question that turns on the fund's legal form, its regulatory status and whether the tokens constitute units in a collective investment undertaking. This analysis must be run by the manager's tax counsel in the management-entity jurisdiction, not assumed from the offshore domicile's tax treatment.
AML and the Travel Rule: the obligations tokenised funds cannot delegate away
A tokenised fund is not exempt from AML/CFT obligations simply because its investors are professional or its interests are lightly traded. The FATF Recommendations – specifically Recommendation 15 covering virtual assets – apply to the fund manager and to any platform that facilitates the transfer of tokenised interests. The Travel Rule (the obligation to pass originator and beneficiary data alongside a transfer of virtual assets) applies to transfers of tokenised fund interests where those interests qualify as virtual assets in the applicable jurisdiction.
This creates a structural problem. A traditional fund maintains a register of investors through a fund administrator, and transfers are effected by register update. A tokenised fund may permit peer-to-peer token transfers on-chain. Each such transfer may be a Travel Rule event requiring the transferor's platform or custodian to transmit identity data to the transferee's platform or custodian. Building the Travel Rule compliance infrastructure into the token's smart contract or into the fund's transfer-agent protocol is a technical and legal decision that must be made at the architecture stage, not retrofitted after launch.
In the EU, the Travel Rule threshold and the applicable VASP provisions under the Transfer of Funds Regulation interact with MiCA's CASP authorisation requirements. A platform facilitating secondary transfers of tokenised fund interests is likely engaged in a regulated activity. Managers who rely on a secondary market for their token's liquidity must ensure that market is itself compliant – or face the position that their fund's token is effectively untradeable in the largest regulated markets.
In a recent matter, a fund manager approaching final close on a tokenised vehicle discovered that its proposed secondary-transfer mechanism would require each transferee platform to hold a CASP authorisation under the applicable EU regime. The platforms the manager had identified did not yet hold that authorisation. We worked through the structural alternatives – including a transfer-restriction mechanism that limited secondary transfers to authorised venues – and the fund launched on a compliant architecture. The issue was identified at the legal-review stage, not after investor commitments had been received.
How is custody structured for a tokenised fund and why does it affect the domicile choice?
Custody of tokenised fund assets is a regulated activity in every leading jurisdiction, and the depositary or custodian requirement for a regulated fund applies regardless of whether the assets are held on-chain or off-chain. This is one of the most frequently misunderstood points in tokenised fund structuring: the on-chain nature of the assets does not eliminate the need for a regulated custodian; it complicates the search for one.
Under AIFMD (and its MiCA-era interaction), an EU-authorised Alternative Investment Fund must appoint a depositary. The depositary must be able to hold the fund's assets in custody and carry out the oversight functions the directive requires. For digital assets, finding a depositary that is both regulated and operationally capable of holding private keys or interacting with smart contracts is a live constraint in the market. Managers we advise who target EU investors from an offshore fund frequently find that the absence of a compliant custodian in the fund's domicile limits which institutional investors will subscribe.
The SFC in Hong Kong and the MAS in Singapore have both issued guidance on custody standards for tokenised assets, including requirements around key-management, segregation and insurance coverage. Those standards apply at the platform level and at the fund level. A fund manager relying on a self-custodied wallet structure – even a multi-signature one – is unlikely to satisfy the regulated-custody requirement in either jurisdiction.
The practical implication for domicile selection is that the fund's domicile must be one where regulated digital-asset custody is available from a provider the manager's prime broker or depositary will accept. Cayman and BVI funds increasingly use regulated custodians incorporated in the US, Singapore or the EU. That cross-border custody arrangement introduces its own regulatory interaction: the custodian in the US may be subject to SEC or NYDFS requirements; the custodian in Singapore must hold the appropriate MAS licence. The fund's constitutional documents and the custody agreement must address the governing law of each relationship explicitly.
To map the custody, domicile and regulatory stack for your fund architecture, write to info@oboluslaw.com. If a structure has already been proposed by another adviser and you want a second read before you commit capital to the build, that is precisely the kind of pressure-test we run.
What are the structural mistakes that generate the most downstream cost?
Three structural errors appear with enough regularity in tokenised fund work that they warrant explicit treatment. None of them is exotic. All of them are avoidable.
First: selecting the domicile before running the investor-base analysis. The fund's domicile determines which investors can subscribe without additional regulatory friction. A Cayman fund issuing tokenised interests to EU retail investors triggers a different regulatory response than the same fund issuing to EU professional investors. A vehicle domiciled in a non-equivalent jurisdiction offering into the UK may trigger the FCA's financial-promotion rules even where the manager believes it is operating offshore. Managers who choose Cayman or BVI for cost and then discover their target investors require a passportable EU vehicle have effectively built twice.
Second: treating the token mechanics as a technology question rather than a legal one. The choice between a permissioned and a permissionless ledger, between a bearer-instrument token and a registered-security token, and between on-chain transfer logic and off-chain transfer restrictions are each legal choices with regulatory consequences. A token that is freely transferable on a public chain is a different instrument, in regulatory terms, from one that enforces KYC-gated transfer restrictions at the smart-contract level. The technology build must follow the legal architecture, not precede it.
Third: assuming the offshore fund's AML/KYC infrastructure covers the token's secondary lifecycle. A fund can have a fully compliant onboarding process for initial subscribers and still have no mechanism for tracking or gating secondary transfers of the token. If those transfers are Travel Rule events – and in many jurisdictions they are – the fund manager may be operating a non-compliant transfer system without realising it. The solution requires either a contractual transfer-restriction mechanism backed by a compliant transfer agent, or a technical enforcement mechanism in the token's smart contract. Neither is an afterthought; both require legal drafting before deployment.
Does any offshore vehicle work equally well for a digital-asset fund?
A common assumption among managers early in their fund formation process is that a standard Cayman or BVI exempted vehicle – already proven for a conventional hedge fund or private equity fund – will work equally well for a digital-asset fund that issues tokenised interests. That assumption is not correct, and the gap between it and reality is where most structural problems originate.
The difference is threefold. First, VASP obligations may apply to the vehicle itself or to the platform facilitating the token's transfer, independently of the fund's status under investment-fund law. The Cayman VASP Act and the BVI VASP Act both potentially apply to activities that a traditional fund would never engage in. Second, the custodian and depositary infrastructure for digital assets is not identical to that for traditional securities: the regulated-custody requirement is harder to satisfy, and many traditional fund service providers are not yet equipped to hold on-chain assets in a compliant way. Third, the secondary-market and Transfer Rule implications for tokenised interests have no analogue in a traditional fund. A conventional limited-partnership interest is not transferable on a public chain; a tokenised one may be, and that changes the entire AML/compliance architecture.
Operators we advise who have previously run conventional funds frequently underestimate how much of the existing legal infrastructure needs to be rebuilt rather than simply adapted. A competent digital-asset fund counsel will identify the points of departure early and design around them. The cost of that exercise at the outset is a small fraction of the cost of restructuring after regulatory concerns have been raised by an investor's counsel or a regulator.
Related at OBOLUS
- Funds and investment vehicles for digital-asset businesses – Full-scope structuring, domicile selection and regulatory mapping for crypto fund managers.
- Fund domicile selection under EU MiCA – CASP authorisation, passporting and AIFMD interaction for EU-facing digital-asset vehicles.
- Founder relocation and tax in Switzerland – Swiss tax and FINMA considerations for fund managers relocating management substance.
FAQ
Where should a crypto fund be domiciled?
Domicile turns on investor base, asset mix, redemption profile and the manager's own regulatory position. There is no universally optimal answer. Cayman and BVI serve global professional-investor vehicles. EU-facing funds targeting institutional capital increasingly require a member-state domicile with MiCA CASP authorisation and AIFMD depositary compliance. MENA-focused vehicles often use VARA (Dubai) or the ADGM/FSRA (Abu Dhabi). The correct choice is determined after the investor-base and classification analysis, not before it.
Does a digital-asset fund manager need a licence?
In almost every leading jurisdiction, yes. Managing a pooled vehicle that invests in digital assets is a regulated activity under MiCA and AIFMD in the EU, under the Payment Services Act in Singapore, under the VASP licensing regime administered by the SFC in Hong Kong, and under the VARA rulebooks in Dubai. The form of the fund – onshore or offshore, tokenised or conventional – does not determine whether the manager needs a licence. The manager's activities and location do. Allied counsel in the relevant jurisdiction should be engaged at the pre-launch stage.
How is custody arranged for a crypto fund?
Custody of on-chain assets is a regulated activity, and the depositary or custodian requirement for a regulated fund applies regardless of whether assets are held on a distributed ledger. Managers must appoint a custodian that holds the appropriate licence in the relevant jurisdiction – MAS-licensed in Singapore, SFC-approved in Hong Kong, compliant with AIFMD depositary standards in the EU. Self-custody arrangements, including multi-signature wallets, do not satisfy the regulated-custody requirement in any of these regimes. The domicile must be one where a qualifying custodian is operationally available.
About OBOLUS
OBOLUS is an independent digital-asset law boutique acting only for businesses. We advise exchanges, custodians, token issuers and funds on licensing across 70+ jurisdictions, on disputes and on-chain asset recovery across 25+ forums, and on the tax, banking and compliance that sit around them. Digital assets are the whole of our practice. We match domicile to investor base, asset mix and redemption profile – and we structure licensing, banking and tax as one mandate rather than three disconnected workstreams. To discuss your fund structure, contact info@oboluslaw.com or message us via t.me/oboluslaw.
By Lydia Brennan, Tax & Structuring Analyst – specialising in cross-border fund structuring, token classification and the tax interaction between offshore fund vehicles and digital-asset managers.
This publication is general information about the law and does not constitute legal advice. It is not a substitute for advice tailored to your circumstances. OBOLUS accepts no liability for action taken or not taken on the basis of this material. For advice on your situation, contact info@oboluslaw.com.