Category Archives: Cryptocurrency Issues

Tokenized Private Funds (Hedge Funds & VC Funds)

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Overview of the Legal Process to Tokenize a Hedge Fund

By Bart Mallon, with Malhar Oza

As the digital asset industry continues to evolve, we see more use cases for tokenization, including tokenization of private investment funds like hedge, VC and PE funds.  While currently we see more examples of tokenizing various real world assets (RWAs) such as investments in real estate, many groups are now choosing to tokenize private investment funds for a variety of new and innovative reasons.   This blog post is intended to provide information about the legal and operational processes to take into account when tokenizing a private investment fund.

What is being tokenized?

When tokenizing a hedge fund or other private investment fund, we are talking about creating a separate instrument (essentially a digital ledger) on the blockchain in addition to creating all the “real world” formation documents. The total process is more akin to launching an existing private investment fund rather than foregoing the current fund formation and record-keeping process.  In this way we tokenize the RWA of a fund offering – because of this, we first examine the RWA parts of the tokenized fund.

Similarities between Tokenized and Non-Tokenized Funds

While there are many differences between traditional and tokenized funds, from a high level overview, they have essentially equivalent legal/regulatory and operational requirements for the non-tokenized features.  These similarities include: 

Structure – like a traditional fund, a tokenized fund is going to be structured with (1) a management level entity or entities and (2) the fund level entity or entities (including potentially offshore feeder funds).  For any private investment fund, the driving considerations for structure will involve business questions (e.g., where are investors located, where are investments made, etc) and tax (where is the manager physically located, do investors have specific tax needs, etc).  Like traditional funds, managers are going to need to think about how regulatory requirements may affect structure generally (see below for more information here).  For tokenized private investments funds there may also be a token issuing entity as well (discussed below) that will interact with this traditional structure.

Offering Documents – as with a traditional private fund, a tokenized fund needs to have fund offering documents.  Specifically, a tokenized fund will have a PPM, limited partnership (or operating) agreement and subscription documents that will be substantially similar in structure and content to traditional non-tokenized funds.  These documents describe the standard items for any private fund, and also make reference to many of the token-specific characteristics of the investment.

Investment program – while many will assume that a tokenized fund will be a crypto fund, these vehicles can be established to invest in any asset class (traditional securities (publicly or privately traded), real estate, art, commodities, etc.).  The requirement to accurately describe the major aspects of the investment program in the fund offering documents are the same for both tokenized and traditional funds alike. 

Service providers – the main service providers will be the same – this means that the manager will need to engage an administrator, an auditor, a broker/prime broker (if investing in securities on a securities exchange), a digital asset exchange (if trading in digital assets), a custodian, lawyer, etc.  It is important for the manager to work with service providers who are comfortable with the tokenized aspects of the fund.  Sometimes some fund managers will have two sets of attorneys for the fund launch – one set devoted to the standard fund aspects and one set devoted to the tokenized aspects. Where managers engage two sets of counsel, it is paramount each group of attorneys is in sync with the other to ensure proper compliance with securities laws.

Regulation – managers of tokenized funds will need to consider all of the same regulatory items that apply to normal funds.  These items include:

  • RIA or CPO/CTA registration – there may be a requirement for the manager to obtain certain licenses based on the fund’s underlying investments or economic activity; for example, RIA registration is required if the manager invests in securities and CPO/CTA registration is required if the fund transacts in futures or commodities.  
  • Regulation D – the manager will need to determine whether to utilize Section 506(b) or Section 506(c).  Section 506(c) allows for general solicitation and many tokenized fund managers choose this safe harbor despite there being additional investor qualification requirements.  [Note: some funds may try to tokenize via the Regulation A process, but we don’t think this is optimal.]
  • Form D and blue sky filings – as with a normal fund, after fund interests have been sold, the manager will also need to make sure to make Form D and blue sky filings.
  • Investment Company Act – the manager will need to choose whether to have the fund use the 3c1 or 3c7 exemptions. 
  • Investor qualifications – based potentially on whether the fund will be 3c1 or 3c7, the investors may need to have accredited investor status, qualified client status, or qualified purchaser status.
  • Other items to be aware about – AML/KYC (standard in subscription documents, though there should be heightened AML/KYC practices when launching a tokenized product), adequate description of conflicts of interest, whether the fund will be subject to ERISA, making sure marketing materials are accurate, etc.

Token Specific Aspects of a Tokenized Fund

While the many similarities between the two types of funds are clear, there are specific technical items to consider with respect to the tokenized fund.

What blockchain? – perhaps this is going to be the most important technical question for the manager and will influence the characteristics and usefulness of the fund token.  Normally this part is determined by the manager after discussion with their tech team (internal or external) and then relayed to the attorney.  It will be very important for the manager to detail all technical aspects of the generation and potential movement of the fund token to the attorney for appropriate legal analysis. 

When and how are tokens created? – mechanically the fund tokens will need to be generated pursuant to some sort of token creation protocol.  This will depend on other qualities of the fund token including how whitelisting (discussed below) will be done, what blockchain is being utilized, and whether the fund token will interact with certain smart contracts.  

Smart contracts? – depending on the native blockchain and functionality of the fund tokens, managers may choose to allow the fund tokens to interact with certain smart contracts.  The ability for investors to use fund tokens to interact with smart contracts is one of the potential emerging use cases of the fund tokenization process.  Managers should understand what the smart contracts will be doing, and care must be taken such that at all points in the smart contract process all applicable laws and regulations are followed.  The use of whitelisting, among other safeguarding techniques, is a common tool to comply with securities laws among other purposes.  Obviously allowing smartcontract functionality with the fund tokens will increase various technical and legal risks with respect to the fund tokens. 

Transfers and Whitelists – one of the reasons to tokenize private investment fund interests is to allow for easier transfer between token holders through a faster speed of settlement as well as the potential creation of a more robust secondary market.  As these fund tokens represent private fund interests (or only certain features of private fund interests in some cases), any transfers require compliance with all applicable securities regulations and laws.  This means that like in the traditional fund context, the tokenized fund manager will need to continually understand the fund’s investor base (for example: accredited investor, qualified client, qualified purchaser status, number of purchasers/holders, etc,) and may need to be aware of other items as well (holding periods, AML/KYC, etc.) in order to conform to applicable securities laws and regulations.  

Like with traditional funds, the manager ultimately still approves transfers of fund tokens (representing fund interests), even when the transfer is done on the blockchain.  To aid with this, most tokenized funds will need to have some kind of a whitelist of wallet addresses (where the manager knows the identity of the person and/or entity that controls the whitelisted wallet address). This knowledge allows the manager to make sure that any fund token transfers are between parties whom the manager knows and/or are investors in the fund.  Any transfer of the fund tokens needs to abide by securities laws and regulations and the utilization of a whitelist helps the manager ensure compliance.

Offshore lawyers/ jurisdiction – there are two ways that offshore lawyers are important to the tokenized fund launch process.  The first is with respect to normal offshore structuring in the event the fund will have non-US investors.  The second way deals with the jurisdiction of the token itself.  Many times there will be a foundation or other offshore entity that issues the token.  The foundation may or may not be the token issuing entity.  In many cases, the token issuing entity is likely to be an offshore company and offshore counsel is needed in the creation of this entity.

No NY investors in a tokenized fund – it is likely that tokenized funds run afoul of the New York bitlicense requirement.  Unless a manager goes through the process to obtain a bitlicense in New York, the manager will need to make sure that there are no New York resident investors in the fund. Given the potential of each state to implement similar regulations, your choice of counsel should remain up-to-date about all such regulatory regimes.

Tax – on the fund side, these vehicles are taxed like normal private fund vehicles and generally are structured to act as passthroughs for US taxable investors and as “blockers” for non-US investors.  On the investor side, care needs to be taken with respect to any transfers of the fund tokens.  Investors should also talk with tax counsel before using the fund tokens in smart-contracts or other programs because there may be certain tax consequences.  The IRS has been slow to issue guidance, and the asset class is novel and kinetic, so we urge managers to connect with tax counsel throughout the structuring process.

Limitations

Some of the limitations of tokenized fund products stems from uncertain regulatory regimes like the New York Bit License requirement and other states’ similar regulatory regimes. Additionally, the cost and expense of developing the fund token on the blockchain, retaining a tech team, engaging and potentially educating service providers, and the constant regulatory scrutiny of digital assets in general may make fund tokenization unattractive for certain groups. While any private investment fund in any asset class has the potential to become tokenized, groups should internally assess whether tokenization makes sense for the product seeking to be launched.

Specific risks of tokenized funds 

The tokenized fund has both standard risks associated with a private fund, as well risks related solely to the tokenized aspect.  Standard risks include operation of the fund structure, general risks with respect to trading/investment program (including normal liquidity), standard legal and regulatory risks, etc.  In addition to those risks, the following will be applicable to tokenized funds:

  • Unclear regulations – investment adviser, IRS, etc
  • Risk related to the technology (blockchain generally, DeFi, smart contracts, hacks, private keys, malicious actors, network outages and bugs)
  • Token units may have a different “value” than the underlying NAV related to the fund interest, depending on how the manager operates the private fund

Cost and Timing 

Tokenized funds are inherently more resource-intensive to launch given the various structuring components and specialization of the service providers.  Timing for a launch will also be longer than a traditional fund launch to allow for coordination between the lawyers, manager, operations, and technical fund token deployment teams.  A good rule of thumb is that a tokenized fund will probably cost about twice as much in both cost and time than would apply for a non-tokenized fund product.

Issues and Conclusion

Tokenized funds are new vehicles and with any new structure (and unclear regulatory guidance), there are going to be issues that pop up during the launch process.  As discussed above, most issues are likely to be with respect to the mechanical or technical aspects of tokenizing the fund (as opposed to the drafting of the fund offering documents and legal agreements).  We recommend taking more time on the front end to make sure all of the service providers truly understand how the fund token will work during all stages of the token lifecycle – it is vital for the technical functionality of the token is understood and appropriately disclosed in applicable documents.

By some accounts, tokenized funds will become a big part of the future financial world.  If it comes to pass that there is and continues to be a compelling use case for tokenizing a private fund, then we believe that this process will become more and more streamlined.  But, tokenized funds are still novel and relatively untested and complete functionality with respect to a token’s potential will be limited by applicable laws/regulations.  These structures will continue to develop both in standardization in terms of process, cost and timing as more groups seek to tokenized private fund products, and in functionality as more people come to the digital asset space and try to do new and novel things. 

We are very early in this space and are excited for the future.  If you have any questions on how to tokenized a private fund, please contact us or call Bart Mallon directly at 415-868-5345.

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Bart Mallon, co-founder of Cole-Frieman & Mallon LLP, has established himself as a leader in the private fund space for digital assets and has helped to launch some of the first tokenized private funds.  For more information on his practice please see his bio or reach out to him directly at 415-868-5345.

Malhar Oza works as Counsel at Cole-Frieman & Mallon LLP and assists clients on various operational, transactional and regulatory matters related to digital assets, including fund formation (domestic and offshore). Malhar also counsels crypto managers, investment advisers, digital asset fund managers, and other members of the digital asset investment management industry on complex compliance matters related to state and federal securities laws. He also specializes in launching tokenized fund products, including closed-end and evergreen private investment funds.  To contact Malhar, please email him at [email protected] or give him a call at 415-762-2879.

Crypto Fund Offering Documents Post FTX Collapse

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Items to Consider for Fund Terms / Structures

We are moving into the next phase of operations after the FTX collapse – for those crypto funds that did not face issues with assets on FTX (and even for those who did and who are remaining in business), we are now examining how this disruption changes the way managers operate their business and/or how do investors look at crypto fund terms and operational structures. 

As managers deal with questions from investors, or how they will proceed with their operations post-FTX bankruptcy, they may want to be thinking about the following items:

  1. Side Pockets – some managers may have seen their investment in FTX turn from individual crypto assets into a single asset (a bankruptcy claim) that has much different liquidity parameters.  The single asset bankruptcy claim may need to be sidepocketed and if so managers should review their fund documentation to see how that works and also discuss the mechanics with their fund administrator.  Of course, when sidepocketing any asset, managers should be careful with accounting and valuation. There are a number of other issues applicable to side pockets that managers may want to think about, including maximum percentage allocable to side pockets and when assets can be so designated.
  2. Lock-ups – in general liquid crypto funds have been able to institute longer initial and ongoing lock-up periods than traditional managers.  How these periods interact with the withdrawal provisions will determine required liquidity for any withdrawal periods. 
  3. Suspension of withdrawals – most offering documents (both in the traditional and digital asset spaces) have pretty standard suspension of withdrawals discussions.  Normally to suspend withdrawals there needs to be a major disruption in the industry.  My normal talking point is that it would be a 9-11 type event.  Here, for managers who had assets on FTX, this may be a suspension type event depending on the various circumstances of the particular fund (including total liquidity and normal withdrawal provisions, which may include a gate provision).  Managers may want to take another look at this language given the recent market events.
  4. Custody – this is always one of the most important disclosures for managers.  Custody in the digital assets space, while much improved from 2017-2018, is still all over the place.  Some managers will self-custody as much assets as possible while keeping certain assets with actual qualified custodians, and some managers will keep some or most assets on-exchange.  Whatever the technical expertise the manager has, and the mix of cold/hot storages and off/on-exchange, should be reviewed to make sure that a manager’s current practice mirrors the disclosure in the offering documents.
  5. Conflicts of interests (COI) – COI is always a vitally important section in any offering documents and managers should always try to over-disclose here.  For most groups with streamlined structures (GP-Fund entities only), there are standard COIs.  For groups with multiple management level entities and different agreements between them, or for groups with multiple fund structures and outside entities (like staking, mining, other service businesses) there will need to be more robust disclosure of the activities.
  6. Discussion of investment program – the purpose of the investment program disclosure is to provide investors with some kind of an overview of how the assets will be invested.  Some managers have multiple pages of disclosures and some will have a couple of paragraphs.  Some will include a discussion of everything they could potentially do and percentages etc, and some will be purposefully vague (and then augment the discussion with more detail in a pitchbook or other marketing materials).  Managers sould review the program and make sure it accurately describes their current state of affairs as well as how the program may change in the future.
  7. Risk factors – perhaps the most important part of the documents for a crypto fund manager is the risk factor section. There are some limitations in what ultimately is disclosed because at any particular time because the industry is constantly evolving, and quickly.  For managers in the traditional investment management space, most risks for any particular investment strategy has been developed over a long period of time.  In the digital asset space, risk factors are constantly being added and also modified over time.  For our manager clients, the risks related to exchanges and counterparties, both domestic and offshore, were robust and accurately depicted the issues that the FTX bankruptcy brought to the forefront.  Many times we work hand in hand with managers to understand the risks of a particular part of the industry and we develop them together.  Our specific risk factors have been informed by our interactions with regulators.  

For each of the sections above, there are many different ways for managers to think about the issues presented. We believe that it is important to discuss and think about these items on the front end, and we also believe that investors will be giving greater weight to these items in the future (especially with respect to side pockets and liquidity) so crypto fund managers should give these items extra thought during the fund formation process. While the above items were written with the crypto space in mind, the concepts apply equally to those groups in the traditional investment management space.

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Bart Mallon is a founding partner of Cole-Frieman & Mallon LLP.  Cole-Frieman & Mallon has been instrumental in structuring the launches of some of the first cryptocurrency focused hedge funds. For more information on this topic, please contact Mr. Mallon directly at 415-868-5345.

Crypto Funds Selling FTX Bankruptcy Claims

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Contracting for the Sale of a FTX Bankruptcy Claim

There are a number of digital asset focused funds that have their assets on FTX frozen pending the bankruptcy process.  These managers now have a claim against FTX and it is unclear when such claims will ultimately be settled and for how much.  For a variety of reasons then many of these groups are looking to sell their claims and move on with their operations (either to continue their investment program or to close down). 

In the event a crypto manager does decide to sell a claim, we believe the sale should be memorialized in a contact of some kind, as would be normal operating procedure. However there are not really any standardized contracts for these types of claims.  What we are seeing though is that parties are modifying existing OTC trade document to fit the particulars of this situation.  In these documents we are seeing the following as the main sections:

  1. Discussion of the parties – this is pretty clear here, but the main selling party is the fund that holds the claim.  That fund may be a standalone or may be the master fund in a master-feeder structure.
  2. Discussion of the claim – the claim will normally be identified by the name of the selling party, but there may be additional information included as well including account numbers, account activity, outstanding amount, etc.
  3. Price – obviously this is the most important part for the selling party.  We are seeing/hearing anywhere from 3 cents to 8 cents on the dollar depending on a number of factors.  Managers should speak to at least two counterparties to see what the prevailing price and other terms are for these claims. 
  4. Buyer due diligence – the contract may have a discussion about continued buyer due diligence on the claim. [Note: this seems a bit odd and kind of turns the “contract” into more of a kind of “binding term sheet”…]
  5. Reps and warranties – manager sellers should be careful of any contract here that requires reps and warranties on the managers behalf.  This is especially true if the manager will be shutting the fund down after the sale of the claim.  It is unclear how the process will play out and the manager does not want to be creating a headache for themselves in later years based on a rep made in haste while trying to sell the asset. We would recommend negotiating this section pretty aggressively. Notwithstanding the above, normal reps regarding AML/KYC, ability to contract, etc are likely to not pose any issues to manager sellers.
  6. Miscellaneous items – there are standard miscellaneous items in these contracts around jurisdiction, which is turning into an interesting issue in this bankruptcy case.

If the manager ultimately does decide to sell a bankruptcy claim, they should talk with their various service providers to make sure that all important items are addressed (legal, tax, accounting, audit). 

With respect to the auditor, the most important item is to make sure that title over the claim has fully passed to the third-party so the auditor can determine that the transfer of the asset/claim to the buyer is complete and therefore off the books of the fund. Please note again there may be jurisdictional issues (needing Bahamian counsel) or issues with respect to the bankruptcy process (which may require bankruptcy counsel). We expect that these sales will pick up as managers try to get these claims off of their books by the end of the year.

We are also recommending to clients that they draft some kind of compliance memo to file that discusses all aspects of the decision to sell and the factors around the ultimate sale price.

Please feel free to reach out if you have questions on this process and we will try to keep this post updated as we deal with more of these sales over time.

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Bart Mallon is a founding partner of Cole-Frieman & Mallon LLP.  Cole-Frieman & Mallon has been instrumental in structuring the launches of some of the first cryptocurrency focused hedge funds. For more information on this topic, please contact Mr. Mallon directly at 415-868-5345.

CoinAlts Fund Symposium Recap

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Remarks from Digital Asset Private Fund Conference

A couple of weeks ago on November 3rd our law firm sponsored and ran our digital asset fund conference called CoinAlts. While originally an open conference for all in the digital assets space, it has more recently turned into a client event centered around crypto fund managers.  The goal has always been the same though – to come together to discuss topical digital asset items and to figure out ways for our manager clients to operate their business better.  We were lucky that the conference happened just before the FTX debacle unfolded because the panels were engaged with the real day-to-day issues involved in running a crypto investment management business. 

Below I’ve published my opening remarks and my quick closing remarks.  For a list of the speakers and the panel topics, you can visit our CoinAlts website. 

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OPENINING REMARKS

By Bart Mallon

Before we get into everything, I wanted to ask this question – why are we here today?  What are we hoping to accomplish?  

Welcome everyone to CoinAlts 2022.  This is the 5th full installment of the conference series which was started in 2017 dedicated solely to digital asset fund managers and put on by four founding sponsor firms – Cole-Frieman & Mallon, MG Stover, Cohen & Co, and Harneys.  My name is Bart Mallon and I’ll be saying a few items this morning and will be with you throughout the day. 

I often ask myself what am I trying to get out of a conference before I go – many times, it is just that I want to get away and see friends and have a few drinks.  But in general, when I am going to conferences I try to look at what panels will help me with information help me be better in my business or how will it help me look at the world in a different way.    

Over the last few crytpo conferences, I’ve felt there was not much new stuff or one good idea that I could carry through back to day to day life – the narratives that I’ve heard lately at these conferences are generally “well we’re in bear market and new good things are coming because that’s how the cycles work”…

So, I guess, if that’s where we are – that it’s a bear market and we have to wait until the next cycle until there is something interesting or important, then why are we here?  Before I tell you my thoughts on that, let’s take a quick look at where we have been and what has been accomplished over these last five years since coinalts started.  

Let’s start with just the sheer amount of different crypto strategies we’ve seen during this time:

  • Long bitcoin
  • Long bitcoin and other tokens
  • Token trading
  • Long/short tokens
  • High frequency trading
  • Exchange arbitrage 
  • Blended or Multi-Strat offerings
  • Crypto VC
  • Mining focused funds and operations
  • Yield farming
  • Offshore focused exchange trading
  • Staking (and the rise of staking specific service entities)
  • Ecosystem dedicated strategies
  • Lending and DeFi strategies
  • NFTs
  • Web3, and,
  • DAO focused strategies

We all know that each of these are unique strategies, some literally having not existed even a couple of years ago.   From these strategies the founding sponsors have collectively worked with our manager clients (many of you here today) to develop “the firsts” in an industry and I’ll list off a few of these:

  • The first to really force the definition of crypto tokens as securities – we started with the question of what are crypto assets?  I am not sure we know for sure still – we know that bitcoin is not a security (at least for now), but what about ETH and Ripple?  At some point we will gain clarity, but our law firm was adamant from the very beginning that many assets would “likely be deemed to be securities” and therefore are subject to many of the traditional investment management laws.
  • The first firm to specialize in the crypto audit – how do you even audit something that is not physical and may not have a traditional custodian?  There are so many questions here that the team at Cohen had to deal with from the theoretical of “what does it mean to have the ability to control an asset?” to the mundane – “how do we see this asset on a blockchain?”
  • The first to deal with issues around Net Asset Value:
    • Traditional investment managent space markets don’t trade 24/7
    • Concept of first/last business day of a month or quarter versus the last calendar day
    • We collective saw themovement from midnight ET to UTC (which I now understand means Universal Time Coordinated – I had to look that up, perhaps Matt can confirm)
    • The first full crypto NAV process (as opposed to NAV Lite)
    • The first daily NAV crypto hedge fund
  • The first questions around Hard Forks – how do you deal with these from an accounting and tax standpoint?  How do you deal with any legal issues.  Operational items?  What to be careful with?  Same thing with Airdrops.
  • In-Kind Crypto Subscriptions and Redemptions – same thing here – this is a completely different process from the tradfi space and we helped facilitate all aspects of these transactions, from legal to tax to operations. 
  • Custody – for a few years this was one of the bigger legal and compliance issues for our managers.  How do you deal with the various issues around self-custody given the lack of qualified custodians?  It’s been a pretty constant five years of dealing with this front and center issue and there are many knowledgeable people here.
  • SEC registration – similar to the custody issue, how would digital asset managers actually register with the SEC if they were trading digital assets.
  • SEC examination – perhaps even a bigger question than registration was examination.  We didn’t know how the SEC would react to our clients – we helped our clients with both of these and found out that they did ok.
  • Many people here were some of the first people to speak with regulators of all kinds – SEC, state securities regulators, the IRS – about digital assets.  Many people here have been and currently are involved with discussions with legislators for future tax and regulatory bills.
  • Finally, the firsts for really building the basis for the industry – obviously legal and audit and tax were huge in this space, but we literally had the folks at MG Stover building APIs into exchanges.  Helped correct/fix/create APIs for various exchanges and custodians.  Build pricing sources. Standardized OTC trade confirms. Standardized custody reporting.  None of the day-to-day nuts and bolts for reporting would happen without these items…and

They even found $5mm hack of a client through their reconciliation process and the client ended up recouping all the crypto.

All of these things are the firsts that were developed hand in hand between our clients and our firms through many hours of phone calls, collaborations, research, a lot of “I thinks” and “we’ll see” and “hopefullys”…some “I don’t knows”…these are the things you go through when you are building the infrastructure of an industry…

I’ve already mentioned the four founding sponsors, but this conference also could not be put on without our Partner level sponsors Cowen Digital, Figment, Standard Custody and Trust Company; and out Supporter level sponsor Aspect Advisors, IQEQ, Silvergate, Withum, Copper, and Nova.  We also had our Women in Crypto networking event yesterday which was sponsored by Aspect, Strix Leviatian (a crypto fund manager), and StoneX that had about 75 attendees.  CalAlts, HF Alert, Help for Children were also our partner sponsors and we appreciate all their help.

For the first time our conference auctioned off an NFT 1.07ETH to a private collector in the Bay Area…the proceeds from this transaction will be donated to Help for Children, along with a match from our law firm.  Anyone else who wants to match, please see Sharon Hamilton over there.  I will spend more time thanking Sharon later today, but she is the main person who put this conference on, along with Karen Thornton, so please thank her if you see her today. 

We have six panels that will cover topics ranging from legal to custody to raising assets.  We also have two special keynotes from Mark Yusko and Punk6529, a lunch, breaks and networking reception at the end.  There is no shortage of current topical items that will probably be discussed during these times today:

  • Is crypto simply a risk-on asset that will move in lockstep with tech?
  • When is the crypto spring?
  • How do we not yet have a bitcoin ETF?
  • How will the recent OFAC rulings affect business going forward?
  • What did Terra Luna tell us about systemic risks of the industry?
  • Will the SEC and CFTC begin to regulate through rulemaking or continue with regulation by enforcement?
  • What does the successful ETH merge mean, if anything?
  • How will midterm elections affect the crypto space, if at all? 
  • Will FTX continue buying everything in sight?
  • Apple, Twitter, Google, Starbucks, Reddit…each one of them have real and interesting crypto use cases…which of these are going to emerge as real things that will be integrated into our daily lives?
  • And… funds have raised hundreds of millions of dollars, there are billion dollar funds, and even multi-billion dollar crytpo and crypto VCs fund that have been raised over the last 12 months…what will they be doing with that capital?

So I go back to the original question – why are we here?

I submit we might not know the reason right now but I am hoping we all find ideas, or hints of ideas, during the panels today that will help us in our day to day business and in life going forward.  I also hope that something here will spark another first we can add to our list…

With that as perhaps one reason for us to be here, we’ll move into our first item of the day, our Keynote discussion with Mark Yusko, Managing Partner of Morgan Creek Digital, talking here with Matt Stover of founding sponsor MG Stover.

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CLOSING REMARKS

Thanks to all of the speakers, panelists and moderators today – there were a number of distinct takeaways for me – from not calling NFTs NFTs (instead digital property rights), do not make misrepresentations in your offshore account paperwork, that exchanges and custody will continue to bifurcate, the importance of crypto fund service providers to work together, that defi platforms generally worked, that there is an opportunity with respect to asset prices right now because of the crypto winter, and operational due diligence for crypto funds is in a much different place than it was even a couple of years ago.

Thank you again to all of our sponsors who helped make this event possible and specific thank yous go out to Sharon Hamilton of Cole-Frieman & Mallon and Karen Thornton – I know these two spent an inordinate amount of time working to make sure this symposium would be a success and we obviously could not have done this without them.

At the beginning of the conference I had asked everyone why we were here today…I didn’t realize we would get such a forceful call to action from Punk 6529 but I think that he’s right – we have to look to ourselves to see what we have individually done to help this industry and we have to fight for it.  It is not guaranteed. 

And with that I’d like to invite you all to our cocktail reception.

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Bart Mallon is a founding partner of Cole-Frieman & Mallon LLP.  Cole-Frieman & Mallon has been instrumental in structuring the launches of some of the first cryptocurrency focused hedge funds. For more information on this topic, please contact Mr. Mallon directly at 415-868-5345.

2021 IA/BD Compliance Update

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Aspect Advisors and Cole-Frieman & Mallon are excited to usher in our second annual compliance update, albeit in a virtual format this year.  [For a summary of our event last year, please go here.]

These past twelve months have been especially eventful from both a regulatory and business perspective, with both the traditional investment management space and the digital asset world experiencing a number of noteworthy progressions.  The event will address the following topics:  

  • 2021 compliance calendar (including Form ADV annual update)
  • Major issues from the SEC and courts in 2020
  • The year of Bitcoin and DeFi
  • Fintech regulations and best practices
  • Other hot topics

The event is on January 21, 2021 at 10am PT. You can register here.

Although virtual, we will have an opportunity for real time audience questions to help guide the discussion. We look forward to seeing you all then!

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Bart Mallon is a founding partner of Cole-Frieman & Mallon LLP. Cole-Frieman & Mallon has been instrumental in structuring the launches of some of the first digital currency-focused hedge funds. For more information on this topic, please contact Mr. Mallon directly at 415-868-5345.

Recap of Crypto Discussion Forum

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On September 2nd we held our crypto discussion forum where we discussed legal, tax and compliance issues related to the digital asset space. The below is a quick recap the event from panelist Justin Schleifer of Aspect Advisors. We’ll keep updating everyone through this blog on future events as well.

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Thank you for attending our “Cryptocurrency and Digital Asset Forum: Trends in Legal, Tax, and Compliance” webinar last week. I would also like to extend many thanks to my fellow panelists, Ryan David Williams of Ashbury Legal and Nick Cerasuolo of Blockchain Tax Partners, and to Bart Mallon of Cole-Frieman & Mallon for hosting.

We had a very interesting and lively interactive discussion about putting crypto investments to work through yield and lending, and DeFi implications including market-making, governance and custody issues.

Here are my favorite tidbits from the various speakers:

Each state has their own regulations as well, and everyone is on different parts of the learning curve. People have to address the nuances of each individual state. States may not agree with the idea of a custodian. DeFi is just way out there for them. They’re still on this idea of what is a custodian in the crypto space? Just getting over that hurdle has proven to be very difficult. – Bart

With the advent of crypto/blockchain, we almost went back in time because are used to dealing with USD. It’s obvious when something is taxable. Crypto took us back to the stone age where we’re back to barter model; property for property (BTC for ETH). You have transactions that don’t involve fiat at all. Tax event triggers are traps for the unwary. It’s not always obvious when a transaction is taxable. – Nick

Insider trading is absolutely an issue in this industry, and it’s getting more nuanced. Firms in the venture capital space get involved with companies on working on their protocols and Dapps. You can very well come in contact with all types of MNPI, so both sides must evaluate what is material or public. You have to restrict yourself in certain areas and not commit to certain trading activities. – Justin

There was a fantasy that once you achieve decentralization, laws are gone. This is an ethos that a decentralized exchange doesn’t need KYC/AML. We are now dispelled of that notion (i.e. the SEC went after the founder of a crypto exchange). The CFTC has also said they will go after software developers. This is the concept of causing a violation of securities law. The expectation of profits is based on the efforts of others. The manager is doing all the work, but what do we do when there is no sponsor and the work is done by community participants? We haven’t finalized this yet. ETH is officially decentralized, so it doesn’t make sense to apply traditional securities laws. – Ryan

If you (or your friends or colleagues) would like to review any of the webinar content, please email Amanda Brown for a link to the recording. If you have any questions about any of the above topics, please reach out to any of our panelists.

We hope you enjoyed this event and if you have any feedback, we would love to hear from you. We look forward to seeing you at our next event!

Best regards, Justin Schleifer

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Bart Mallon is a founding partner of Cole-Frieman & Mallon LLP.  Cole-Frieman & Mallon LLP has been instrumental in structuring the launches of some of the first cryptocurrency focused hedge funds. If there are any questions on this post, please contact Mr. Mallon directly at 415-868-5345.

Crypto Discussion Forum Tomorrow!

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Tax, Compliance and Legal for the Digital Asset Space – Ask Your Questions

Tomorrow, September 2nd, at 10am PT we will be hosting an open question and answer discussion forum on issues affecting the digital asset space. We have a number of interesting topics to explore from the legal, tax and compliance side including:

  • Yield and lending trends and consequences
  • DeFi, DeFi, DeFi
  • Market Making
  • Custody
  • Regulatory update and what this means for different groups (managers, stakers, custodians, etc)

Speakers include:

  • Bart Mallon, Cole-Frieman & Mallon
  • Ryan David Williams, Ashbury Legal
  • Justin Schleifer, Aspect Advisors
  • Nick Cerasuolo, Blockchain Tax Partners

To register for forum, please go here.

To submit a question, please go here. 

Look forward to seeing you then!

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Bart Mallon is a founding partner of Cole-Frieman & Mallon LLP. Cole-Frieman & Mallon is a boutique law firm focused on providing institutional quality legal services to the investment management industry. For more information on this topic, please contact Mr. Mallon directly at 415-868-5345.

Cryptocurrency / Digital Asset Forum – Ask us your questions!

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Open Forum on September 2nd for Legal, Tax & Compliance Questions

There are a ton of hot topics in the digital asset space right now – the price of Bitcoin, DeFi, staking, lending, venture capital, etc – and we want to answer your questions in a unique format where the experts answer your questions directly.  Our firm is teaming up with Asbury Legal, Aspect Advisors and Blockchain Tax Partners to host a live discussion where we will talk about what you want to talk about.

To register for webinar, please go here.

To submit a question, please go here. 

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September 2, 2020 10:00am Pacific / 1:00pm Eastern

The Host: Bart Mallon, Cole-Frieman & Mallon as Host

The Panel:

Ryan David Williams, Ashbury Legal

Justin Schleifer, Aspect Advisors

Nick Cerasuolo, Blockchain Tax Partners

Join us to get your questions answered by an expert panel during a Live Discussion. Experience a unique collaborative event to explore the latest developments in the Cryptocurrency and Digital Asset sector. Suggested topics for this session include (but are in no way limited to):

•    Putting Crypto Investments to Work:  Unlocking Full Potential Through Yield and Lending

•    DeFi Implications: Market-Making (Liquidity), Governance, and Custody

•    Evolving Landscape: Latest Products/Services, Regulations, and Enforcements

Submit your questions in advance and we’ll have answers prepared.   You’ll also be able to ask questions during the interactive discussion.  We’re excited to talk about anything you want!

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Bart Mallon is a founding partner of Cole-Frieman & Mallon LLP. Cole-Frieman & Mallon is a boutique law firm focused on providing institutional quality legal services to the investment management industry. For more information on this topic, please contact Mr. Mallon directly at 415-868-5345.

CoinAlts Webinar – May 14th at 11am PT

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Cole-Frieman & Mallon Presenting a Digital Asset Legal Update for 2020

We are excited to present our first webinar to update the industry on the various updates applicable to digital asset managers. We will be providing the US legal update during the webinar and will be covering the following topics:

  • Proposed Laws (state and federal)
  • Wyoming Update
  • SEC Digital Asset Priorities
  • The Courts
  • Structuring Trends

Below is our invitation for the event – it is free to join and all are welcome. Look for coming posts providing an overview of the content from the webinar. As always, please contact us if you’d like to be added to any mailing lists.

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With the rescheduling of our 2020 CoinAlts Fund Symposium to Fall of 2021, we are excited to announce our new CoinAlts Webinar Series, beginning on Thursday, May 14th at 11:00am PT.

Hear from industry experts on the investment, legal and operational issues that digital asset managers are facing in today’s climate. 

After the panel, we are excited to host a Q&A session with Matt Perona from Polychain Capital. 

Webinar details: 

·    Title: CoinAlts Fund Symposium Webinar Series 

·    Date: Thursday, May 14th

·    Time: 11:00am – 12:00pm PT

·    Registration: Click here to register

If you would like to submit a question for consideration to one of the founding sponsors or Matt Perona, you will have the opportunity to do so upon registration. For those unable to join, the webinar will be available for replay within 24 hours.

We look forward to having you! 

All the best, 

Cole-Frieman & Mallon LLP

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Bart Mallon is a founding partner of Cole-Frieman & Mallon LLP. Cole-Frieman & Mallon is a boutique law firm focused on providing institutional quality legal services to the investment management industry. For more information on this topic, please contact Mr. Mallon directly at 415-868-5345.

Bitcoin Mining Panel Event in San Francisco

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CFM & Aspect Advisors Sponsor Mining Discussion

As the price of bitcoin (and other digital assets) rises, the economics of mining changes – we plan to have an event to explore the economics of mining and other aspects of the industry including any digital asset compliance matters. Below is the invitation. If you are interested in attending or would like to see the notes on the event, please contact us.

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Please see attached an invitation to attend a discussion on the current environment for bitcoin mining.  This event is presented by Michael Fitzsimmons of Williams Trading and sponsored by Cole-Frieman & Mallon LLP and Aspect Advisors LLC.

This event will feature the following panelists:

  • Mathew D’Souza of Blockware Solutions
  • Thomas Ao of MCredit
  • Yida Gao of Struck Capital

Location is at Cole-Frieman & Mallon LLP offices – 255 California Street, Suite 1350. 

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Bart Mallon is a founding partner of Cole-Frieman & Mallon LLP. Cole-Frieman & Mallon has been instrumental in structuring the launches of some of the first digital currency-focused hedge funds. For more information on this topic, please contact us or you can call Mr. Mallon directly at 415-868-5345.