Crypto Trading 101: Corporate Structuring for Digital Asset Traders

Digital asset investment among proprietary trading firms, family offices, and asset managers peaked in the fall of 2021, dipped a bit in the summer of 2022, and now it’s on the rise again — even with the turbulence in the market as a result of the FTX bankruptcy.

Setting up a crypto trading shop requires getting the fundamentals right — and it starts with corporate structuring. But following the model used by traders of traditional financial products can lead to serious problems for those trading in digital assets. Why is that?

To effectively engage in the crypto markets, you’ll want to be able to access exchanges anywhere in the world — and that will require specific approaches to your corporate structure.

First, all the usual best practices apply

Our corporate team helps trading firms and asset managers on strategic corporate structuring issues all the time. Whether you focus on digital assets or traditional financial products, a lot of the same legal needs apply, including:

• Follow the principles of good organization
• Strive for tax efficiency
• Lock in your partnerships

Plan for cross-border and offshore activities

As a digital asset trader or investor, you’ll need to plan for cross-border and offshore activities. From a regulatory standpoint, this can get complicated, so you’ll want to bake it into your structure.

Understand the requirements for digital asset exchanges

Regulations for digital asset trading are evolving and, in some cases, not specifically articulated in the law. Often, the driving force behind the requirements are the trading venues themselves. Some negotiation is possible, but given the changing environment, it’s wise to take a conservative approach and plan for the most restrictive requirements.

The “non-US person” requirement

In general, offshore digital asset exchanges want to onboard only non-US persons and will require firms to make certain attestations to that.

The “non-US capital” requirement

In addition to being a non-US person, certain offshore exchanges have required our clients to be trading or investing entirely or mostly with non-US capital.

The regulatory requirements also vary based on the type of financial product you’re trading in — the CFTC has taken an overly restrictive approach to its definition of “non-US person” — and it’s a definition that continues to evolve quickly.

If you plan to trade digital assets, seek skilled counsel

Experienced counsel is a must at this stage of the game. Attorneys who understand the venues and understand the requirements can often negotiate attestation agreements that make sense both for the venues and for your new firm.

Lance Zinman, partner and global chair, Financial Markets and Funds Department; Gary DeWaal, special counsel, Financial Markets and Funds; Timothy Kertland, partner, Financial Markets and Funds; Jill Darrow, partner, Transactional Tax Planning; Neil Robson, partner, Financial Markets and Funds; and Mitchel Pahl, partner, Employee Benefits and Executive Compensation; provided a more detailed overview during an “Investing and Trading in Digital Assets – Corporate and Tax Structuring for Principal Traders and Asset Managers” session of Katten’s inaugural “Crypto With Katten Symposium.”