cayman islands offshore company banking residency
Reading Mode

Why many ICO’s struggles to get banking… and some don’t get it

Flag Theory Weekly Letter  – Thursday, May 10th, 2018

cryptocurrency bankingOne of the main headaches for organizations that launch an ICO is to obtain a bank account.

It is very complicated, if not impossible, for any organization to operate entirely in cryptocurrencies.

You have to pay employees, suppliers, office space, utilities and a whole series of business expenses that require fiat currency.

Furthermore, blockchain projects may want to cover some of the crypto volatility risks.

Without a bank account, you simply cannot operate your day-to-day business efficiently and it’s clear that obtaining banking is essential.

The main problem is that banks are very resistant when it comes to accepting new crypto-centric clients and those that do it are very selective and have an extensive due diligence process. They want to see a pristine legal structure, a solid business plan and most importantly – proper KYC.

Some ICO companies try to avoid being upfront with the bank about the nature of their business. One might attempt this by opening the bank account before the ICO, specifying another purpose than the real one. This is not a good idea.

As soon as ICO proceeds begin to flow after converting the cryptocurrency into fiat, the bank will ask about the source of the funds and the documents supporting these transactions. It is very likely that your account will end up being closed.

ICO Legal Setup

There are several crypto-friendly banks out there, but these will want to see a robust legal structure and a total transparency in how you have carried out your ICO before they’ll take you on as a client.

That is why if you are planning an ICO a well-planned legal setup is a must – and perform proper KYC. What the bank cares about most, is the source of funds. This means they will not only be interested in doing KYC on you – but also in knowing the customers’ customers (your ico participants) source of funds.

To begin with, your token sale must have in place the appropriate KYC/AML & CTF systems in accordance with the bank and the jurisdiction where the issuance is made.

Your business plan must be feasible and it goes without saying that your project must be legitimate.

After analyzing your business plan they will look at is if your ICO falls under any legal scheme that requires regulatory approvals such as securities, commodities, crowdfunding or money transmission of any kind, and if so, that it is properly licensed in the jurisdictions where the sale was made and purchasers located. (We’ve spoken about the legal caveats you must be aware of if you are running an ICO in this article).

Much attention must be paid to the token economy, not only from a business perspective but also from a legal perspective. Having the appropriate legal advice when designing it is essential. In addition, it is well advised to get a legal opinion from a reputable law firm about your token.

The terms and conditions of your sale must define risks, uses, warranties, liability, and other core and fundamental legal issues. Purchasers must be aware of the rights, obligations, and attributes of the tokens. The terms and conditions of the sale are the most important document in an ICO since it governs the sale of all tokens.

If you do not conduct the appropriate compliance efforts with the qualified and competent personnel you will face significant difficulties in obtaining banking.

ICO Corporate Structure

You also need to set up a powerful corporate structure.

Normally, although it is no-size-fits-all, we recommend our clients to establish a company exclusively for the token issuance and sale.

A token sale involves certain risks so the company set up for the sole and only purpose of conducting the sale is a way of separating the liability that this event entails. You can combine it with a Trust to add a layer of security and protection.

Once you have completed your ICO, you must have an entity to manage its proceeds. For certain token ecosystem models, we find a Foundation an ideal entity to manage ICO proceeds and own intellectual property, due to the fact, among others, that they do not have members or shareholders, they may exist for a purpose and not for the benefit of natural persons or corporate bodies and are eligible for a not-for-profit status.

However, a Foundation is not ideal to engage in regular commercial transactions, so you should set up an operating company for the day to day business.

The Foundation will provide the operating company with funding and will oversee the project development. Banks may want to see adequate legal, operating and transfer pricing agreements in place between the entities involved to justify their transactions.

The jurisdictions you choose to establish your corporate structure can make a difference. It is important to choose those that allow for an advantageous tax structure, which is open to cryptocurrencies and have a certain reputation which will make it easier to find banks that are more willing to work with them. In previous letters, we’ve talked about it.

As a conclusion, a proper legal structure is absolutely essential for any ICO to be able to run optimally. Without all the legal work and proper planning, in addition to being subject to several legal issues, you can face serious setbacks to operate your business and develop your project, especially not being able to find banking.

At Flag Theory, we assemble teams for ICOs to have a robust legal, tax and compliance structure and easily get banking. If you are planning to launch an ICO, we can help you.

Would you like to receive the Flag Theory Weekly Letter in your email?

Subscribe to the Flag Theory Weekly Letter