set up a company in labuan
This article is relevant to:
australia residency citizenship company banking Australia japan set up a company residency citizenship banking Japan malaysia residency citizenship bank account set up a company Malaysia philippines residency citizenship set up a company banking Philippines singapore set up a company open a bank account residency citizenship Singapore thailand citizenship residency set up a company banking Thailand uae offshore company offshore bank account residency UAE
Reading Mode

Where to set up a Crypto Exchange – Part 2: Start an Exchange in Asia-Pacific

Flag Theory Weekly Letter – Wednesday, August 22nd, 2018

In the first chapter of “Where to set up a cryptocurrency exchange”, we talked about some of the most important factors to consider when analyzing, comparing and finally choosing the most suitable jurisdiction in which to establish your crypto exchange. If you did not have the chance to read it you can do it here.

In today’s chapter, we will get to the point and discuss the key factors of some Asia-Pacific jurisdictions. The following is not an exhaustive list but for this series, we have only considered those jurisdictions that offer certain regulatory certainty.

Start a Crypto Exchange in Japan

Japan has been a pioneer in the adoption of Bitcoin and, in general, cryptocurrencies and was the first country to regulate the sector.

In April 2017, the Payment Services Act was reviewed to accommodate this new business model. Japan’s regulations are perhaps, the most complete and demanding worldwide.

Exchanges are subject to registration and need to obtain a Virtual Currency Exchange License with the Financial Services Authority (FSA).

The regulations apply not only to any entity that establishes an exchange in Japan but also to any exchange that accepts customers who are Japanese residents.

The minimum capital required is JPY 10 million (approximately 93,000 USD), although in practice what the regulator cares most about is that the operating capital is adequate for the size of the exchange and the expected cash flow.

To be eligible, the exchange must have reserves of at least JPY 50 million (approximately USD 500,000).

There must be strict compliance policies and sound KYC/AML systems, the appropriate compliance staff and the appointment of an external auditor.

The security systems and protocols will be carefully analyzed by the regulator to ensure the highest cybersecurity standards.

If the company is formed by foreigners they should hire Japanese personnel, especially representatives who will be in charge of communicating with the regulators.

The preparation process for the license application usually takes from six months to 1 year and the JFSA will approve or reject it within a period of 2 months.

Japan may be the best option for those who are looking to establish an exchange in the most developed cryptocurrency market in the world, have sufficient resources and qualifications to do so and do not mind facing a high tax burden (Japan’s effective corporate tax rate is up to 34.60%).

Set up in Labuan

Unknown to many, the Labuan International Business and Financial Center is a reputable free trade area located in the Federal Territory of Labuan which is off the coast of the state of Sabah in East Malaysia.

Labuan is one of the major financial hubs of Asia due to its pro-business policies, low taxes and compliance with international standards on due diligence and transparency.

Labuan companies may elect to pay a 3% tax or a RM 20,000 fee on their trading income. Although the flat tax scheme may be abolished in 2020 (tax law amendments have been tabled at the Parliament but have not been passed yet) – Labuan remains an attractive jurisdiction from a tax standpoint. Investment profits are not subject to taxes.

In a circular sent on June 28, 2018, the Labuan Financial Services Authority (LFSA) expressed its interest in attracting “Innovative Financial Services” to the region including businesses involved in distributed ledger technology and cryptocurrencies.

To begin with, the exchange must have the appropriate measures to manage the risk related to money laundering and the countering of terrorism financing and it will be subject to the requirements and regulations issued by the Bank Negara Malaysia and the Labuan FSA.

A crypto exchange business must be approved by the Labuan FSA and must apply and obtain a Money Broker License.

In addition to the AML measures, the applicant must demonstrate that it has the adequate capital to carry out the business, the appropriate internal policies, and controls, including the protocols and systems for cybersecurity risk management, and governance expertise.

The LFSA will conduct a fit and proper test for all the promoters of the business and management team members.

The minimum capitalization is RM 500,000 (approximately USD 120,000) and the business should have some type of commercial substance in Labuan. This can be achieved by establishing an office there.

The entire licensing process can take 4 to 6 months.

Labuan is an interesting option for those who wish to set up a regulated exchange that accepts fiat currencies in an advantageous fiscal environment. In addition, although banks are quite selective, it is possible to open bank accounts for exchanges in both Malaysia and Labuan for entities incorporated and regulated in the free zone.

Exchanges in Abu Dhabi

The regulator of the Abu Dhabi Global Markets Free Zone, the Financial Services Regulatory Authority (FSRA), published a legal framework for crypto businesses on June 25, 2018.

The framework introduces, as a regulated activity, Operating a Crypto Asset Business (OCAB), which includes cryptocurrency exchanges.

Regulated crypto exchanges must be compliant with KYC/AML & CTF and consumer protection regulations and are subject to technology governance guidelines.

Crypto Asset Exchanges are regulated in a similar manner to “Multilateral Trading Facilities” and are required to have in place the proper market surveillance protocols, settlement processes, transaction recording, transparency & public disclosure mechanisms and investment exchange-like operational systems and controls.

Exchanges must request authorization and will be granted a Financial Services Permission to carry out the regulated activity of OCAB.

An OCAB will be required to hold adequate capital resources, similar to Recognized Investment Exchanges.

The FSRA may decide at its discretion the amount of capital required according to the size, scope, and complexity of the exchange, but at least it must be equal to 6 months of operational expenses plus an additional buffer amount of up to another 6 months’ operational expenses.

The application fee is USD $125,000 and there is also an annual fee of USD $60,000 and a levy on the average daily volume between 0.0006% and 0.0015%.

Exchanges that include cryptos that are considered securities will remain subject to the relevant regulatory requirements and will need to obtain another license as a Recognized Investment Exchange or Recognized Clearing House.

There is no foreign-ownership restrictions, nor corporation tax on companies established in the Abu Dhabi Global Markets Free Zone. The banks established in the Free-zone are considerably open to accept regulated businesses dealing with cryptocurrencies.

Set up a Crypto Exchange in Thailand

Thailand has completed a very comprehensive regulatory framework for businesses involved in digital assets, including the publication of two royal decrees, several regulations of the SEC and announcements from the Bank of Thailand.

Under this regulatory framework, digital asset exchanges operating in Thailand must be incorporated in the jurisdiction and obtain certain licenses which involve both the Securities and Exchange Commission (SEC) and the Bank of Thailand (BOT).

Keep in mind that Limited companies in Thailand must be incorporated by at least three promoters and foreign-ownership is restricted to 49%. Among other restrictions, a Limited company in Thailand must maintain a ratio of 4 Thai employees for each foreign employee.

There is an exception. Companies promoted by the Board of Investment (BOI) can be exempted from the foreign-ownership/foreign employee restrictions and in certain industries, such as technology, can enjoy tax holidays for up to 8 years.

Nonetheless, obtaining the approval of the BOI can be cumbersome and the process can take more than 6 months. Technically, a company developing software such as an exchange may be eligible but there is no precedent in the crypto industry and therefore approval is not guaranteed.

In addition, after approval by the BOI, an exchange should secure the permission of the SEC and the BOT which could add another 5-6 month before you will be able to finally start operations.

Among other requirements, an exchange must capitalize the company with THB 50 million (approximately USD $1.5M) for a centralized exchange and THB 10 million (approximately USD $300,000) for a decentralized exchange.

The initial fee to obtain the license is THB 5 million (USD $150,000) and the annual fees are 0.002% of the total trading volume.

An exchange must withhold 15% of the profits of their users (capital gains tax) and each transaction attracts a 7% VAT. Besides being a considerable economic burden for the user, it is also an operational and accounting burden for the exchange itself.

A properly licensed exchange should not have any problems opening a local a bank account, both to hold customer funds and for day to day business operations.

In short, Thailand can be a valid option for those who want to exclusively target the Thai market and provide trading, deposits, and withdrawals with Thai Baht. However, foreign-ownership restrictions, time and tax burdens may make it less appealing for most.

Exchanges in the Philippines

Exchanges in the Philippines are regulated by the Monetary Board and are considered Non-Banking Financial Institutions (MORNBFI).

Exchanges must obtain a license from the Bangko Sentral as a Remittance and Transfer Company (RTC) and register as a Virtual Currency (VC) Exchange operator.

With this license, an exchange can provide services with both cryptocurrencies and fiat currencies.

Exchanges must also be registered with the Anti-Money Laundering Council and are subject to cybersecurity monitoring which covers storage and transaction security requirements as well as key management practices to guarantee integrity and security of transactions.

Foreign-owned companies in the Philippines must be capitalized with at least USD $200,000 and must be incorporated by at least 5 incorporators, each of them having at least one share in the company and the majority must be Filipino residents (3 of 5). Foreigners can keep most of the shares.

Companies in the Philippines are subject to a corporate tax of 30% and a 30% withholding tax in the distribution of dividends to non-residents, in addition to other local taxes.

However, if the crypto exchange is set up in the Cagayan Economic Zone Authority (CEZA), a government-operated economic zone in the northern tip of the Philippines, it may enjoy a more advantageous tax regime subject to a tax rate of 5% of gross income in lieu of all local and national taxes.

CEZA is known as the Fintech hub of the Philippines and is attracting a number of foreign businesses (mainly from Hong Kong). The free zone announced that it is granting a maximum of 25 licenses to virtual currency exchange operators.

The exchange must commit to invest a minimum of USD $1 million over a period of 2 years and have at least one administrative office in the Philippines.

The cost of the license can be up to USD $365,000 and each transaction made in the exchange will be taxed at 0.1% of its value.

Start an Exchange in Australia

Exchanges in Australia need to be registered with the Australian Transaction Reports and Analysis Center (AUSTRAC) and are subject to the anti-money laundering and terrorist financing laws (AML/CTF).

To obtain a permit to operate, a digital currency exchange must demonstrate that it has the proper systems and controls in place to minimize risk and comply with compliance and reporting obligations.

In addition to proceeding with typical KYC procedures, regulated entities must monitor transactional activity and inform the AUSTRAC of transactions that exceed USD $10,000.

Exchanges must be incorporated and have an office in Australia and appoint an external auditor.

The AUSTRAC is considerably demanding when granting licenses. Only those with a solid team formed by the appropriate personnel, enough resources, and expert compliance systems will be eligible.

If the exchange holds customer funds it must obtain a financial services license.

The required capital is USD $50,000 plus a 5% reserve according to the size of the exchange.

Several requirements apply if the exchange holds USD $100 million in assets. It is usually recommended to have at least USD $10 million of reserves before submitting an application.

Set up a Crypto Exchange in Singapore

Singapore is a hot spot for the fintech sector and perhaps one of the most business-friendly jurisdictions worldwide when it comes to innovation and new technologies applied to finance.

As far as cryptocurrencies are concerned, Singapore has attracted a large number of players in the sector, especially after the crypto ban in China.

Cryptocurrency exchanges in Singapore are not regulated per se, although they are obliged to comply with AML/CTF requirements, verifying the identities of their clients and reporting suspicious transactions to the Suspicious Transactions Reporting Office.

In accordance with the Monetary Authority of Singapore (MAS) guidelines, only exchanges that provide trading of tokens that are considered securities are regulated by the Securities and Futures Act (SFA). In this case, they must request the approval, recognition or exemption of the MAS to operate as a Regulated Market Operator (RMO).

Currently, there is no exchange registered as an RMO.

Exchanges incorporated in Singapore that want to support fiat currency and provide fiat wallets could potentially be subject to obtaining a Stored Value Facility License. However, in practice, currently, there is no Singaporean exchange supporting fiat as it is challenging for a crypto business to open a bank account in Singapore.

However, Singapore can be an interesting option for those exchanges that do not want or do not have the resources to obtain a license and do not plan to accept or support SGD. Exchanges in Singapore have been facing difficulties getting and keeping a Singaporean bank account, at the time of publication.

The Bottom Line

If you are planning to launch a crypto exchange, you need to surround yourself with a team with the appropriate qualification and enough experience in cybersecurity, finance, legal matters, among other areas.

You need to have the necessary capital and resources to do so. If you are looking to be regulated, licensing processes are demanding and you will need a sound project and the right plan to achieve it.

Each jurisdiction has its upsides and downsides, and the cost and requirements to be regulated can represent a barrier for many. However, there is a clear trend of increasing and more rigorous regulatory supervision, and being already regulated will not only help you to mitigate legal uncertainty, but also oblige you to meet the highest standards and provide an optimal service.

If you are not ready to go through a licensing process, adhere to the best practices and prepare your business to meet requirements.

Whether you are setting up a regulated or unregulated crypto exchange, or funding it via ICO, at Flag Theory, we can help you set up a sound corporate structure choosing the most suitable jurisdictions and legal entities according to your requirements, priorities, and goals, obtain licensing and bank accounts, as well as assisting in compliance matters. Contact us, it will be our pleasure to assist you.


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

Subscribe to the Weekly Letter