A token issuer that spent eighteen months building a digital-asset fund structure discovered, at the point of investor close, that its chosen offshore vehicle blocked institutional allocators governed by ERISA and triggered withholding tax that erased the projected net return. The cost was not a legal fee. It was the deal itself.
Tokenised fund structuring sits at the intersection of fund law, securities regulation, tax treaty networks and on-chain architecture. Getting the investment vehicle right means matching domicile, asset mix, investor base and redemption mechanics before a line of code is written or a capital call is issued. This analysis works through the principal decisions boards face, the contrasting approaches taken in the leading fund domicile jurisdictions, and the structural lessons that separate transactions that close from those that do not.
The analysis proceeds in eight sections: the regulated perimeter; the domicile decision; the token-mechanics layer; regulatory exposure for the fund manager; the tax and banking interaction; a decision matrix by fund profile; common structural mistakes; and a self-assessment for boards approaching first close.
What Is the Regulated Perimeter for a Tokenised Fund?
A tokenised fund is a collective investment scheme in which investor interests – or underlying portfolio assets – are represented on a distributed ledger. Regulatory characterisation turns on substance, not on the label "token." Most major regimes ask the same two questions: does the structure pool capital from multiple investors, and is that capital managed for a collective return? If both answers are yes, the entity almost certainly falls within the regulated perimeter for collective investment schemes, regardless of whether interests are ERC-20 tokens or paper units.
Under MiCA (the EU Markets in Crypto-Assets Regulation administered by ESMA and national competent authorities), fund tokens that confer rights over a managed pool are unlikely to be treated as simple crypto-assets. They are more likely to engage the existing fund-law perimeter – the AIFMD or UCITS regimes – and the MiCA whitepaper and CASP authorisation obligations that sit around the token distribution itself. The interaction between MiCA and fund law is a live regulatory question across EU member states; boards must not assume that satisfying one framework satisfies the other.
Outside the EU, the analysis is jurisdiction-specific. In ADGM, the FSRA's virtual-asset regime and its regulated-activities framework for collective investment funds are legally separate; a structure that falls under both requires dual authorisation or a carefully designed exemption. In Singapore, the MAS Payment Services Act applies to the token distribution mechanic, but the collective investment scheme rules in the Securities and Futures Act govern the fund itself. Offshore fund vehicles – Cayman, BVI – carry their own regulatory positions that interact with the onshore regime of every jurisdiction where investors are accepted and where the manager operates.
The practical lesson for boards: map the regulatory perimeter separately in the vehicle's domicile, in each manager's location, and in each investor's home jurisdiction. Those three maps rarely overlap perfectly, and the gaps are where structural risk lives.
The process above describes the standard analysis path. Your facts – the entity structure, the investor base, the asset mix – change the analysis materially. For a scoped regulatory mapping of your fund structure, contact OBOLUS at info@oboluslaw.com.
How Should a Board Select a Fund Domicile?
Domicile selection for a tokenised fund is a decision that locks in tax treatment, investor eligibility, redemption mechanics and regulatory overhead for the life of the vehicle – and it is not easily reversed. The leading choices each carry a different profile of advantage and constraint.
The Cayman Islands, administered by CIMA under the Virtual Asset (Service Providers) Act, remains the dominant vehicle for institutional managers targeting US and Asian allocators. The Cayman exempted limited partnership and the Cayman unit trust are well understood by institutional legal and compliance teams. The VASP Act adds a registration and, for some activities, a licensing layer on top of the existing fund regime. The structure is familiar; the digital-asset overlay is relatively new and still being interpreted in practice.
The British Virgin Islands, regulated by the BVI FSC under the VASP Act 2022, offers a lighter-touch fund registration framework alongside the VASP registration. BVI has historically suited smaller managers and structures where cost efficiency matters. Its investor-base optics differ from Cayman for large institutional allocators, and boards should test that perception with their specific LP list before committing.
Switzerland, under FINMA, offers a distinctive position. FINMA's token taxonomy – payment, utility and asset tokens – provides a relatively clear classification framework. The collective investment scheme regime is mature. For managers targeting European family offices or sovereign-adjacent allocators who prefer a regulated-onshore environment over an offshore vehicle, a Swiss limited partnership or investment company can be compelling. The cost and time to authorisation are higher than Cayman, but the reputational signal is different.
Within the EU, Luxembourg and Ireland remain the dominant AIFMD-authorised fund domiciles. MiCA adds a layer of complexity for token distribution but does not displace the fund regime itself. A Luxembourg SCSp or SICAV-RAIF with a MiCA-compliant token distribution wrapper is structurally feasible; the legal engineering is non-trivial and requires allied counsel on the ground in the relevant member state.
The wrong domicile does not just create legal friction. It creates tax leakage – withholding on distributions, PFIC exposure for US investors in certain offshore vehicles, VAT on management fees – and it limits which investors can participate. A US pension fund cannot invest in a vehicle that fails ERISA's "plan assets" analysis. A European insurance company may be constrained by Solvency II look-through requirements that disfavour certain offshore structures. Boards that select domicile on cost grounds alone consistently find themselves restructuring before second close.
What Does the Token Mechanics Layer Add to Fund Legal Risk?
The on-chain representation of fund interests creates a distinct set of legal risks that sit on top of, not instead of, traditional fund law. These risks are in the smart contract, the transfer restrictions, the oracle dependencies and the cross-chain bridges.
Transfer restrictions are the first point of failure. A tokenised fund interest that is freely transferable on a public chain is, in most jurisdictions, a publicly distributed security or fund unit without the benefit of any placement exemption. The smart contract must enforce transfer restrictions – whitelisted addresses only, AML/KYC verification before transfer, lock-up periods where required – at the protocol level, not merely as a contractual term in the subscription agreement. A contractual restriction that cannot be enforced on-chain is functionally no restriction at all if a token holder transfers directly through a DEX.
Oracle dependencies present valuation risk. A tokenised fund that marks NAV on-chain must obtain reliable price feeds for its underlying assets. Stale or manipulated oracle data creates NAV errors that affect redemptions, performance fee calculations and LP economics. Boards should ask whether the oracle source is auditable, what the fallback is if the feed fails, and who bears liability for a NAV error caused by a bad feed. These are not abstract questions; they are the kind of issues that create LP disputes at the point of a redemption event.
Cross-chain bridges introduce counterparty and smart-contract risk. A fund that holds assets across multiple chains and uses bridging protocols to move liquidity creates exposure to bridge exploits. The legal question is whether that risk is adequately disclosed in the fund documents and whether the bridge's failure mode – a loss of bridged assets – constitutes a fund-level liability or a segregated-sleeve loss. Most current offering documents do not address this with sufficient specificity.
Custody of the underlying digital assets is a separate question addressed in a later section, but it interacts with the token mechanics layer directly: the relationship between the on-chain token representing the fund interest and the on-chain or off-chain location of the underlying portfolio assets must be legally coherent and practically auditable by the fund's administrator and auditor.
Does a Digital-Asset Fund Manager Need a Licence?
In almost every jurisdiction where a fund manager operates, the answer is yes – though the form of that licence varies significantly by activity, asset type and jurisdiction. A manager that simply runs an internal treasury does not have the same regulatory footprint as a manager offering a pooled vehicle to external LPs. The threshold that triggers licensing is lower than many founders expect.
Under MiCA, the CASP authorisation covers certain services relating to crypto-assets, but the fund manager's regulated activities are primarily captured by AIFMD (for alternative funds) or the relevant MiFID framework (for discretionary portfolio management). MiCA and AIFMD do not have a clean dividing line for tokenised funds; the practical position in most EU jurisdictions is that a manager of a tokenised AIF must comply with both frameworks simultaneously, or obtain a formal position from the relevant NCA.
In the UAE, a manager operating under VARA in mainland Dubai must hold the relevant VARA licence for the activity conducted. Advisory, management and exchange activities each carry their own licence category under the VARA rulebooks. A manager in ADGM operates under the FSRA's framework, which is legally separate from VARA. Boards of managers who operate across both zones – as many do – must hold authorisations in each.
In Singapore, MAS requires a Capital Markets Services licence for fund management. The DPT (Digital Payment Token) service licensing under the Payment Services Act is a separate obligation that applies if the manager also provides payment-related crypto services. The two regimes coexist; satisfying one does not discharge the other.
A common structural approach for smaller managers is the "exempt manager" route – available in Cayman, BVI and certain US states below a regulatory threshold. That route has limits. It does not apply in all jurisdictions where LPs are located. It does not cover all activities. And it does not provide the credibility signal that institutional allocators increasingly require. In our practice, we see managers outgrowing the exempt route faster than they anticipated, particularly when they receive inbound interest from US RIAs or European pension funds.
If a prior application stalled or a regulatory query went unanswered, the structural reason is usually identifiable. For a second-read analysis of your licensing position, write to OBOLUS at info@oboluslaw.com.
How Do Tax and Banking Considerations Shape the Structure?
Tax and banking are the two structural constraints that most often force a restructuring after initial formation, yet they are the least likely to receive serious attention at the term-sheet stage. Both are jurisdiction-specific; both are capable of making an otherwise sound legal structure economically unviable.
On tax, the critical questions are: where does the fund pay tax on portfolio gains; where do management fees attract VAT or GST; what withholding applies to distributions to LPs in each target investor jurisdiction; and what is the carried-interest treatment in the manager's home jurisdiction? Tokenised funds do not benefit from special tax treatment simply because interests are represented on-chain. The underlying economic substance determines tax characterisation. A Cayman fund holds its tax-exempt status because of its legal form and the absence of Cayman corporate tax, not because of its digital format. A BVI fund is similarly positioned. But the manager entity – typically onshore – carries a tax liability on its fees and carry that must be managed separately.
For US investors, the PFIC (Passive Foreign Investment Company) rules are an acute concern. A foreign fund that primarily holds passive assets – as most crypto funds do – and that fails the PFIC mitigation tests creates adverse US tax treatment for its US LP investors. Boards that do not address this at the structuring stage face a choice between restructuring (costly), offering a US-specific feeder vehicle (complex and expensive), or losing US investor eligibility entirely.
Banking is the other structural bottleneck. Digital-asset fund managers consistently report difficulty opening and maintaining institutional bank accounts in the jurisdictions where they operate and where their fund vehicle is domiciled. The practical consequence is that subscription proceeds, redemption payments and management fee flows may need to pass through a stablecoin or on-chain settlement layer, which itself creates regulatory questions under MiCA's EMT provisions or under the local payment-services regime.
In our cross-border practice, we consistently see that managers who build the tax and banking stack into the initial structure – rather than retrofitting it – reach first close faster and retain institutional LPs at second close. The banking question, in particular, benefits from being addressed before entity formation, not after.
Which Structure Fits Which Fund Profile?
The optimal structure for a tokenised fund is a function of four variables: the manager's regulatory home, the target investor base, the underlying asset mix and the expected redemption profile. No single domicile or vehicle is optimal for all four simultaneously.
Profile A – Institutional manager, US and European LP base, liquid crypto portfolio. The indicated structure is a Cayman exempted limited partnership with a separately regulated management entity (onshore, in the manager's home jurisdiction) and a MiCA-compliant token distribution wrapper for EU investors. The Cayman vehicle is familiar to US institutional counsel; the EU wrapper satisfies MiCA's CASP and whitepaper requirements for the distribution of token interests to EU allocators. Timeline to first close is typically a matter of months once regulatory authorisations are in place – the regulatory element is the critical path. Key risk: the EU token distribution layer is legally complex, and the regulatory position is still evolving as NCAs issue guidance under MiCA.
Profile B – Emerging manager, family office and HNWI LP base, illiquid DeFi and venture portfolio. A BVI fund – either a private investment fund or a limited partnership – with a VASP Act registration offers a cost-efficient vehicle with a lighter regulatory overhead. The manager may qualify for an exempt-manager position in BVI below a threshold, but should obtain formal advice before assuming that exemption applies in the LP's home jurisdictions. Key risk: institutional LPs may require an upgrade to a Cayman vehicle before participating; build the upgrade pathway into the constitutional documents from day one.
Profile C – Manager targeting European and Middle Eastern institutional allocators, mixed portfolio including regulated tokenised securities. A Switzerland-domiciled collective investment scheme, with FINMA authorisation, offers the credibility signal and regulatory clarity that this LP base demands. The FINMA token taxonomy provides a relatively clear classification of the underlying assets. The management overhead is higher than Cayman or BVI. Allied counsel in Switzerland is required. Key risk: timeline to FINMA authorisation is longer and the capital and operational requirements are more demanding; early engagement is essential.
Profile D – Manager in the UAE targeting GCC and Asian institutional allocators. ADGM or DIFC-registered fund, with VARA or FSRA authorisation as applicable, is the natural structure. The DIFC and ADGM common-law frameworks are familiar to regional institutional investors. VARA's activity-based licence covers the token distribution mechanics. Tax efficiency is strong – no corporate tax on most fund structures within the financial free zones. Key risk: the regulatory interaction between the DIFC/ADGM fund regime and the VARA regime on the mainland requires careful mapping; a manager operating across both zones needs authorisations in each.
What Are the Most Common Structural Mistakes in Tokenised Funds?
In our practice, the structural mistakes that boards most frequently make fall into a consistent pattern. Identifying them before execution is the difference between a structure that works and one that requires expensive remediation.
The first and most common mistake is treating domicile selection as a cost decision rather than a strategic one. The cheapest vehicle to form is not the cheapest vehicle to operate or to close with institutional capital. As noted earlier, the wrong domicile creates tax leakage, investor-eligibility constraints and regulatory friction that compound over the life of the fund.
The second mistake is separating the legal and technical work streams. Boards frequently retain fund counsel and a blockchain developer in parallel, with minimal coordination between the two. The smart contract architecture – transfer restrictions, whitelist logic, NAV oracle integration, redemption mechanics – must be specified by counsel and then implemented by the developer, not the reverse. A smart contract built without legal specification is a liability. We regularly advise on structures where the on-chain mechanics are technically functional but legally inconsistent with the offering documents.
The third mistake is insufficient investor-side diligence. A tokenised fund that cannot produce a coherent answer to an institutional LP's legal due-diligence questionnaire – on custody, on jurisdiction risk, on regulatory status, on token transferability and on administrator independence – will not close the institutional allocation. Building the LP-diligence package in parallel with the structure is not optional for managers targeting serious capital.
A fourth pattern: failing to specify the insolvency mechanics in the fund documents. What happens to the token interests and the underlying assets if the manager becomes insolvent, or if the custodian fails? The answer to this question in most current tokenised fund documents is ambiguous, and ambiguity in insolvency is expensive.
In a recent structuring matter, a fund manager had formed a BVI vehicle, issued tokens representing LP interests, and approached institutional allocators – only to discover that the transfer-restriction mechanism was not enforceable on-chain and that the custody arrangement did not meet the allocators' prime-brokerage standards. We restructured the vehicle to a Cayman limited partnership, rebuilt the smart-contract specification, and implemented a qualified custodian arrangement with a separately regulated entity. The process added several months to the timeline but preserved the institutional LP commitments.
How Is Custody Arranged for a Tokenised Digital-Asset Fund?
Custody of digital assets held by a fund is a regulated activity in most flagship jurisdictions, and the standards applied by institutional investors typically exceed the regulatory minimum. Both dimensions must be satisfied simultaneously.
Under MiCA, the custody and administration of crypto-assets on behalf of clients is a CASP-regulated service. A fund that appoints a custodian for its on-chain assets must appoint an entity that is either MiCA-authorised or operating under a transitional exemption in the relevant member state. The equivalent obligation applies under VARA in Dubai, under the FSRA in ADGM, and under the MAS regime in Singapore – each with jurisdiction-specific variations. The rule that matters across all of them is asset segregation: the fund's digital assets must be held separately from the custodian's own assets and from the assets of other clients.
For institutional investors, the custody question is more demanding than the regulatory minimum. US institutional allocators often require a "qualified custodian" within the meaning of the US Investment Advisers Act, or an equivalent standard. A custodian that is a Cayman-registered entity with no external regulatory authorisation will not satisfy this standard, regardless of its contractual segregation commitments. The practical solution is to appoint a custodian that is regulated in a recognized jurisdiction – a FINMA-supervised Swiss bank, a MiCA-authorised EU custodian, or a regulated entity in a common-law jurisdiction with a well-developed custody framework.
Self-custody – the manager holding the fund's private keys – is almost never appropriate for a fund accepting external capital. Beyond the regulatory issues, it is a structural red flag that institutional LPs will identify immediately in due diligence. A multi-signature arrangement operated by the manager is not equivalent to third-party custody; it is still self-custody, and it carries the same diligence risk.
The interaction between the custody arrangement and the fund's NAV calculation process also deserves board attention. If the fund's administrator cannot independently verify the on-chain balance of the fund's assets – because the custody structure does not provide for independent access to wallet balances or blockchain confirmation – the NAV is not independently calculated. That is a governance failure, not just an operational one.
A Board Self-Assessment Before First Close
Boards that have worked through the analysis above should be able to answer the following questions before committing to a structure and approaching investors.
First: has the regulatory perimeter been mapped separately in the vehicle's domicile, the manager's jurisdiction, and each target investor's home jurisdiction? If not, the legal risk is unquantified.
Second: has the domicile been selected against the specific investor base – not against cost alone? If the first institutional LP's legal team would require a restructuring, the savings from the cheaper vehicle are illusory.
Third: has fund counsel specified the smart-contract architecture – transfer restrictions, whitelist logic, NAV oracle integration, redemption mechanics – before the developer began writing code? If the developer specified the architecture, review it now.
Fourth: is there a regulated, third-party custodian appointed or identified, with asset segregation obligations in the custody agreement and an independent NAV verification process in place? If not, institutional capital close is at risk.
Fifth: has the tax stack been analyzed for each significant LP jurisdiction – withholding, PFIC, VAT on fees, and carried-interest treatment in the manager's home? If any of these are "to be confirmed," they should be confirmed before first close, not after.
Sixth: do the fund documents address insolvency of the manager and failure of the custodian – and are those provisions consistent with the on-chain mechanics? If the documents are silent, they are inadequate.
A board that can answer yes to each of these questions has addressed the principal structural risks. Most boards, in our experience, find at least two items that require further work. That is not a failure; it is the purpose of the exercise.
Related at OBOLUS
- Funds and investment vehicles for digital-asset businesses – our practice overview for crypto fund formation and structuring across jurisdictions
- Fund domicile selection in Switzerland – FINMA framework, vehicle types and the institutional LP case for a Swiss-domiciled fund
- Cross-chain bridge legal risk in France under the AMF/PSAN regime – the token-mechanics and cross-border bridge risk analysis for EU fund structures
Is Any Offshore Vehicle Sufficient for a Digital-Asset Fund?
A common assumption among founders approaching their first fund close is that any established offshore vehicle – Cayman, BVI, Marshall Islands – works equally well as a digital-asset fund domicile. That assumption is not correct, and the consequences of acting on it are material.
The offshore vehicles that work well for traditional private equity or venture capital have well-understood documentation standards, investor diligence packages and regulatory positions. When a digital-asset layer is added – token interests representing LP units, on-chain custody of portfolio assets, automated redemption mechanics – those standards must be updated. Most offshore vehicle templates do not address the token mechanics, the custody interaction or the MiCA/VARA/MAS distribution requirements that apply when EU, UAE or Singapore investors participate.
The investor-eligibility constraint is equally important. A Cayman fund that does not address the ERISA "plan assets" analysis, or a BVI fund that has not obtained a MiFID distribution analysis for European institutional allocators, is not a suitable vehicle for those investors – regardless of its general offshore respectability. The vehicle's offshore status does not substitute for the investor-specific legal analysis.
Finally, the assumption that offshore vehicles carry equivalent credibility across all investor profiles is empirically incorrect. Some sophisticated LP categories – certain European institutional investors, some sovereign wealth funds – have explicit or informal preferences for onshore or recognisably regulated vehicles. A manager targeting those allocators who forms a BVI vehicle on cost grounds may find the conversation with those LPs shorter than expected.
FAQ
Where should a crypto fund be domiciled?
The optimal domicile depends on four factors: the manager's regulatory home, the target investor base, the underlying asset mix and the redemption profile. Cayman and BVI suit institutional and family-office LP bases respectively; Switzerland and Luxembourg offer credibility for European institutional allocators; ADGM and DIFC serve GCC-focused managers. The wrong domicile creates tax leakage, investor-eligibility constraints and regulatory friction that compound over the fund's life. A domicile decision should be made against the specific LP list, not against formation cost alone.
Does a digital-asset fund manager need a licence?
In almost every jurisdiction where a manager operates and offers interests to external investors, yes. The applicable regime varies: AIFMD and MiCA in the EU, VARA in Dubai, FSRA in ADGM, MAS licensing in Singapore and CIMA registration in Cayman. An exempt-manager route may be available below a threshold in some offshore jurisdictions, but it does not apply universally and does not satisfy the due-diligence requirements of most institutional allocators. Early advice on licensing is essential; the exempt route is frequently outgrown faster than managers anticipate.
How is custody arranged for a crypto fund?
Custody of digital assets is a regulated activity under MiCA, VARA, the FSRA regime and MAS, among others. Institutional investors typically require appointment of a third-party custodian that is regulated in a recognised jurisdiction, with contractual asset segregation and an independent NAV verification process. Self-custody and multi-signature arrangements operated by the manager are not substitutes for third-party custody in an institutional LP context. The custodian's regulatory status, segregation obligations and insolvency protections should be addressed in the fund documents from the outset.
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 – not to cost alone. To discuss your fund structure, contact info@oboluslaw.com or message us via t.me/oboluslaw.
By Roman Levitt, Technology and DeFi Counsel – advising on the intersection of on-chain architecture and fund law, including smart-contract specification, token mechanics and the regulatory overlay for digital-asset investment vehicles across multiple jurisdictions.
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.