A token issuer expanding a tokenised fund (an investment vehicle whose interests are represented by blockchain-based tokens) into cross-border markets quickly discovers that the structural choices made at formation become the battleground in every subsequent dispute. Domicile, custody arrangements, redemption mechanics and the legal character of the token itself all determine which court has jurisdiction, which law governs investor claims, and whether a manager can actually enforce its own fund documents. Getting that architecture wrong does not simply create regulatory friction – it generates litigation exposure that is often discovered only after a dispute has already begun.
The disputes angle on tokenised fund structuring is distinct from the compliance angle. A structure that clears a regulator's licensing checklist can still fail catastrophically in adversarial proceedings if the underlying documentation did not anticipate on-chain mechanics, cross-border enforcement, or the treatment of tokens as property across different legal systems. In our practice, we regularly advise fund managers who discover these vulnerabilities mid-dispute rather than at the drafting stage. This analysis works through the key structural decision points and explains the litigation risk each one carries.
What makes a tokenised fund different from a conventional fund – and why it matters in disputes?
A tokenised fund differs from a conventional fund because the investor's economic interest, and often their governance rights, are recorded and transferred on a distributed ledger rather than in a central register. That distinction is not merely technical. In adversarial proceedings, it determines who has standing to bring a claim, which court can issue an injunction over the investor's asset, and whether the manager can freeze or reverse a transfer without a court order. The legal character of the token – is it a security, a unit in a collective investment scheme, an e-money token, or an asset-referenced token under a regime such as MiCA – conditions every one of those questions.
When a dispute arises between a fund manager and an investor, the first question a court asks is not "what does the white paper say?" It asks which jurisdiction's law governs the relationship, what instrument the investor actually holds, and where that instrument can be located for the purposes of attachment or injunctive relief. Courts in England and Wales, the DIFC, Singapore and Hong Kong have each addressed aspects of this question in recent years. Their answers are not uniform. A structure that relies on the manager's preferred governing law without considering where its investors are domiciled, where custody is held, or where the token is treated as legal property may find that the chosen law is not the law a court will actually apply.
In our cross-border practice, the single most common structural deficiency we identify in tokenised fund documents is an assumption that the blockchain record is self-evidently authoritative. It is not. Courts treat the blockchain record as evidence, not as a substitute for legal title analysis. The documents behind the token – the subscription agreement, the fund constitution, the custody arrangement – carry the legal weight.
How does domicile selection affect dispute outcomes for a tokenised fund?
Domicile selection for a tokenised fund directly shapes which court has supervisory jurisdiction, which insolvency regime applies if the vehicle fails, and which law governs the rights of token holders. These are not abstract questions. They determine whether an investor who bought tokens on a secondary market can trace their claim back to the fund's assets, whether a redemption obligation is enforceable, and whether a receiver or liquidator appointed by a court in one jurisdiction will be recognised in the jurisdiction where the assets are held.
The leading fund domiciles for digital-asset vehicles – Cayman Islands, British Virgin Islands, Luxembourg, Delaware and increasingly the ADGM in Abu Dhabi and the AIFC in Kazakhstan – each present a different risk profile from a disputes perspective. Cayman and BVI structures benefit from well-developed common-law courts with significant experience in investment fund insolvency and asset tracing. Luxembourg's regulated fund structures benefit from the EU passporting regime under MiCA and the collective protection of the EU legal framework, but disputes are resolved in civil-law courts that may not have the same depth of crypto-asset case law. ADGM's DIFC-adjacent jurisdiction offers the DIFC Courts as an optional seat, which brings common-law procedure and an increasingly developed body of digital-asset case law.
The cross-border reality for most tokenised funds is that the fund vehicle, its manager, its investors and its assets sit in four different jurisdictions. A Cayman fund managed from Dubai, holding assets in custody with a Swiss custodian and distributing to European investors, faces recognition questions in every jurisdiction if a dispute arises. Choosing Cayman for the vehicle without considering where enforcement will actually be sought creates a gap that opposing counsel will exploit at the earliest opportunity.
The AUDIENCE_PAIN here is concrete: the wrong domicile locks in tax leakage and limits which investors you can accept – but from a disputes perspective, the wrong domicile also limits which courts will assist you and which courts your investors can use against you. Both sides of that equation matter.
A frequent structural error in early-stage tokenised fund formation is selecting a domicile based on cost or formation speed, without mapping the investor base against the fund's likely dispute forums. We match domicile to investor base, asset mix and redemption profile precisely because those three factors determine the litigation terrain.
For a scoped structural assessment of your fund vehicle and dispute risk profile, contact OBOLUS at info@oboluslaw.com. The process above describes the standard path. Your facts – the entity, the investor base, the banking and custody arrangements – change the analysis materially. Map your options before a dispute surfaces.
What are the key litigation risks in tokenised fund documents?
The key litigation risks in tokenised fund documents cluster around five structural points: the definition and legal characterisation of the token, the redemption and liquidity mechanics, the governance and voting procedures recorded on-chain, the custody arrangement and its segregation obligations, and the manager's discretion to halt or reverse transfers. Each of these points becomes a claim or a defence in adversarial proceedings.
Token characterisation is often treated as a regulatory compliance question. From a disputes perspective, it is primarily a contract law question. If the token is described as a membership interest in a limited partnership, a court will apply partnership law to the relationship between token holders. If the fund documents describe the token as a receipt for a contribution to a collective investment scheme, the investor's rights – and the manager's obligations – are different. Ambiguity in this characterisation is not a minor drafting issue. It is the point at which an investor's counsel will begin.
Redemption mechanics in a tokenised fund introduce a new category of risk that does not exist in a conventional fund. In a conventional fund, a redemption notice is processed by a registrar; the mechanics are administrative. In a tokenised fund, the redemption may be triggered by an on-chain action – the investor returning the token to a smart contract or a designated address. If the smart contract executes the redemption at a time or price that the manager disputes, the question of which governs – the smart contract outcome or the fund's constitutional documents – is a live litigation issue. Courts have not resolved this question uniformly. Fund documents that are silent on the relationship between smart-contract execution and the underlying legal obligations create precisely this ambiguity.
Governance rights recorded on a blockchain present a similar tension. Token-weighted voting, snapshot governance and on-chain proposal execution can all produce outcomes that a minority investor argues were procedurally invalid under the fund's constitution. If the fund's constitution and the smart contract diverge – even slightly – an adversarial proceeding will force a court to decide which controls. That decision will be made on general principles of contract law and company or partnership law, not on any principle unique to blockchain governance.
The manager's discretion to halt or reverse transfers – a power that may be technically achievable through a token contract's pause function or blacklist mechanism – raises its own set of risks. Exercising that discretion without documented legal authority and process creates a claim for wrongful interference with property or breach of contract. We have seen managers in our practice exercise on-chain control over token transfers during a dispute, only to find that the exercise of that control was itself the basis of the investor's damages claim.
How does custody structure affect dispute outcomes in a tokenised fund?
Custody structure is the single most consequential element of a tokenised fund's design from a disputes perspective, because it determines who controls the private keys, under what legal obligation, and in which jurisdiction that custodian can be sued or compelled to act. A custody arrangement that is legally adequate for regulatory purposes may be entirely inadequate for recovery purposes if the custodian becomes insolvent, the manager defaults, or a court needs to freeze assets.
The principle that custody is a regulated activity in most flagship regimes – established under MiCA for EU-facing vehicles, under the FSRA in ADGM, under the MAS Payment Services Act regime in Singapore and under the SFC's VATP framework in Hong Kong – means that a properly structured tokenised fund will engage a licensed custodian. But licensing is a floor, not a ceiling. The questions that matter in disputes are: does the custody agreement create a true bailment obligation, with the fund's assets segregated from the custodian's own assets and protected in the custodian's insolvency? Does the agreement specify which court has jurisdiction to compel delivery or transfer of the private keys? Is the custodian subject to jurisdiction in a forum that the fund manager can actually use?
The cross-border custody reality for most tokenised funds is that the regulatory-grade custodian is in one jurisdiction, the fund vehicle is in a second, and the investors seeking recovery are in a third. An English freezing order, a DIFC disclosure order, or a Cayman appointment of a receiver each require a route to the custodian. If the custody agreement does not address enforcement jurisdiction, the fund will spend significant time and cost establishing that route during a live dispute – often while the clock on asset recovery is already running.
In a recent matter in our practice, a fund manager engaged a custodian in a mid-tier jurisdiction without specifying the enforcement forum in the custody agreement. When a dispute arose with a significant investor and a court order was needed to freeze the underlying digital assets, the absence of a clear enforcement clause added weeks to the process and required parallel proceedings in two jurisdictions. The structural fix – a single clause specifying jurisdiction and submission to service – would have cost a fraction of the litigation delay.
What is the cross-border enforcement problem for tokenised fund managers?
The cross-border enforcement problem for tokenised fund managers is that the assets exist on a global network, the counterparties are typically spread across multiple jurisdictions, and the legal tools available to manage a dispute – injunctions, disclosure orders, receiverships – are creatures of national law, each requiring their own procedural steps in their own courts. A manager who needs to freeze an investor's tokens pending a dispute, or an investor who needs to freeze the fund's assets pending a claim against the manager, must identify a court with both jurisdiction and willingness to act quickly.
Courts in England and Wales have developed the most extensive body of applicable law, including the worldwide freezing order (an injunction freezing a defendant's assets globally) and the Norwich Pharmacal order (a disclosure order requiring a third party to identify wrongdoers or provide information), with the foundational case of AA v Persons Unknown [2019] establishing that crypto assets are capable of being the subject of a proprietary injunction. The DIFC Courts have followed that trajectory, with recent authority addressing worldwide freezing orders in support of foreign proceedings. Singapore and Hong Kong courts have each confirmed that crypto assets are property capable of being the subject of injunctive relief.
For a tokenised fund, the practical implication is that the fund's governing documents should anticipate the litigation forum and the enforcement path from the outset. A fund constituted in Cayman, managed from Dubai, with a European investor base and a Swiss custodian should have a dispute resolution clause that selects a forum capable of reaching all of those jurisdictions. The choice of that forum is not neutral. English courts have established tools; DIFC Courts have growing authority; Cayman courts have deep fund-specific experience. Each carries different costs, timelines and asset-reach.
The CFAAR (Crypto Fraud and Asset Recovery) network, launched in London in September 2021, provides a framework within which digital-asset recovery professionals and legal practitioners coordinate cross-border recovery actions. A tokenised fund structure that aligns its documentation with the procedural requirements of leading recovery forums is materially better positioned if a dispute requires cross-border enforcement.
If a structural review of your fund's dispute resolution clause is overdue, reach out to OBOLUS at info@oboluslaw.com. If a prior structure stalled or a dispute has already surfaced, a second-read analysis can identify the route forward. Map your options with our disputes and funds teams.
Which fund profile faces which dispute risk – a decision matrix
Different fund profiles carry materially different dispute risk profiles, and the structural choices that minimise risk for one profile can amplify it for another. The following prose matrix maps four common profiles against their primary dispute exposure, the most suitable structural response, and the indicative timeline complexity if a dispute arises without that structure in place.
Profile A – Retail-facing tokenised fund with secondary-market trading. A fund that issues tokens tradeable on a secondary market faces the broadest investor base and the widest range of potential claimants. Investors who purchased on a secondary exchange may have no direct contractual relationship with the manager. Their claims will be framed in property law and unjust enrichment rather than contract. The structural response is a clear token-holder rights document, a published redemption mechanism that secondary holders can access, and a chosen forum that can handle class-type proceedings. Without this, a dispute involving multiple secondary holders requires separate proceedings or an unwieldy multi-party action. Timeline complexity: high.
Profile B – Closed-end institutional fund with long lock-up. An institutional fund with a small number of sophisticated investors and a defined investment period faces lower frequency but higher value disputes. The primary risk is manager discretion – the deployment of capital, the valuation of illiquid positions, the decision to gate or suspend redemptions. The structural response is a rigorous valuation policy, a documented gate procedure referenced in the fund constitution, and an independent valuation agent with a clear contractual role. Without this, a gating decision during a market dislocation generates a claim that the gate was improperly triggered. Timeline complexity: medium, but case value is typically high.
Profile C – Open-ended crypto fund with daily liquidity claims. A fund that offers daily or near-daily liquidity in digital assets faces the most acute tension between its redemption obligations and the liquidity of the underlying assets. During market stress, the on-chain redemption mechanism may execute at prices or at a speed that the fund's NAV calculation cannot match. The structural response is an explicit liquidity risk management policy, a circuit-breaker provision that suspends on-chain redemptions when conditions are met, and a reconciliation mechanism between the smart-contract execution and the fund's accounting records. Without this, a redemption dispute will turn on whether the investor was entitled to the on-chain result or the NAV-adjusted result. Timeline complexity: high, with potential for injunctive proceedings on short notice.
Profile D – Multi-asset tokenised fund with DeFi protocol exposure. A fund that holds positions in DeFi (decentralised finance) protocols faces a category of risk that has no direct analogue in conventional fund law. A loss arising from a smart-contract exploit, a protocol governance vote, or a liquidity event in a protocol is not straightforwardly a manager's breach of duty. But investors will frame it as one. The structural response is a clearly documented investment policy that identifies the specific protocols in scope, the risk limits applicable to each, and the process for responding to a protocol incident. Without this, a DeFi-related loss generates a claim that the manager exceeded its mandate or failed to manage risk. Timeline complexity: medium to high, with novel evidentiary questions about the operation of the protocol.
A common assumption that creates structural risk in tokenised fund formation
A common assumption among fund managers considering a tokenised structure is that any established offshore vehicle – Cayman exempted limited partnership, BVI segregated portfolio company, a Luxembourg RAIF – works equally well for a digital-asset fund, and that the choice between them is primarily a tax or cost question. This assumption is incorrect in ways that become visible only in disputes.
The relevant differences between vehicles are not just tax efficiency or investor familiarity. They are the vehicle's ability to hold digital assets as assets of the fund (not all vehicle types provide the same clarity here under their governing law), the mechanism for recording token-holder interests in a way that a court will recognise as creating legal title, the treatment of the custodian relationship in the vehicle's insolvency, and the availability of in-jurisdiction courts to supervise the vehicle if it gets into difficulty.
A BVI segregated portfolio company, for example, provides statutory segregation between cells – but that segregation has been tested primarily in conventional asset contexts. Whether it applies cleanly to digital assets held by a custodian under a novel custody agreement is a question that BVI courts have had limited occasion to address. A Cayman exempted limited partnership governed by recent statutory amendments may offer cleaner answers in some of these areas, but with different tax implications for certain investor profiles. Luxembourg vehicles offer EU passporting and MiCA compatibility, but in a civil-law insolvency context that may be less familiar to the manager's counsel.
The structural point is not that any of these vehicles is wrong. It is that selecting among them requires a disputes analysis alongside the regulatory and tax analysis. We structure licensing, banking and tax as one mandate rather than three disconnected workstreams – and that integration is precisely where the disputes angle enters fund formation practice.
Related at OBOLUS
Related at OBOLUS
- Funds and Investment Vehicles for Digital-Asset Businesses – Our full practice scope for digital-asset fund formation, structuring and compliance.
- Fund Domicile Selection – The Compliance Burden in Practice – A detailed analysis of compliance obligations across the leading fund domiciles for digital-asset vehicles.
- PSP and Acquiring Agreements in Turkey – Payment service provider arrangements and acquiring structures for businesses with Turkish market exposure.
FAQ
Where should a crypto fund be domiciled?
The right domicile depends on the investor base, the asset mix and the fund's likely dispute forum. Cayman and BVI offer well-developed common-law courts with fund insolvency experience. Luxembourg and other EU structures offer MiCA compatibility and passporting. ADGM provides access to the DIFC Courts for common-law enforcement. The wrong domicile creates tax leakage, limits investor access and constrains which courts will supervise the fund in a dispute. There is no single correct answer; the analysis is fact-specific.
Does a digital-asset fund manager need a licence?
In most cases, yes. A fund manager operating across borders will typically require authorisation or registration under the applicable regime in the jurisdiction where it operates and, in some cases, in the jurisdictions where its investors are located. Under MiCA, managers of funds holding crypto assets may require CASP authorisation for certain activities. In Singapore, the MAS Payment Services Act regime and the Securities and Futures Act may both be relevant. In the UAE, VARA and the FSRA each have distinct perimeters. The precise requirement turns on the manager's activities and the fund's investor profile.
How is custody arranged for a crypto fund?
Custody for a digital-asset fund should be provided by a licensed custodian under a documented custody agreement that creates a true segregation obligation protecting fund assets in the custodian's insolvency. The custody agreement must specify the enforcement jurisdiction, submission to service, and the process for transferring or delivering assets on the fund's instruction or under a court order. Regulatory requirements for custody vary by regime – MiCA, the FSRA, MAS and the SFC each impose distinct obligations. The custody structure is also the primary operational point in any dispute or recovery action involving the fund's assets.
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 or a live dispute, contact info@oboluslaw.com or message us at t.me/oboluslaw.
By Roman Levitt, Technology & DeFi Counsel – specialising in the legal architecture of tokenised investment vehicles and on-chain fund mechanics across cross-border structures.
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.