Protocol Governance Vehicles
In this note we discuss why decentralised crypto projects should look to Gibraltar to set up their off-chain legal structures. Gibraltar has positioned itself as a prime crypto jurisdiction by providing legal and regulatory certainty to crypto companies operating in or from Gibraltar. In a joint effort by the Gibraltar Government, the Gibraltar Financial Services Commission and the local industry, Gibraltar introduced a bespoke framework on 1 January 2018 with the Distributed Ledger Technology Providers Regulations.
With this backdrop, we can look at how Gibraltar Foundations and Purpose Trusts can be used as governance vehicles for decentralised crypto protocols which we will term “Protocol Governance Vehicles” or “PGVs”. PGVs are an important component to any crypto project to try to ensure that the protocol does not become centralised through the control of a small number of big players holding the majority of the voting rights. PGVs are also critical in coordinating the efforts to build, support, grow and improve the protocol. The PGV can be funded in various ways including by way of transaction fees from the protocol or via donations from stakeholders. Foundations and Trusts can distribute funds and make grants with much more flexibility compared to a regular company as that is the whole purpose of the PGV compared to a company which operates for the benefit of its shareholders. Furthermore, a PGV may create a subsidiary operating company if this helps it to further its objects. From a tax perspective, a Gibraltar PGV will likely not have any income that will be assessable for tax as Gibraltar uses a territorial basis for taxation and only taxes income that is derived or accrued from Gibraltar. In addition, there is no VAT or capital gains tax in Gibraltar.
The Private Foundations Act 2017 allows for the establishment of foundations in Gibraltar. A foundation is an entity with separate legal personality which is able to hold and deal with property in its own name as absolute legal and beneficial owner, for the specific purposes that are detailed in the Foundation Charter. The purposes can be very wide, need not be charitable, and indeed can be “anything capable of fulfilment” as long as they are not illegal, immoral or contrary to public policy.
Advantages of a Foundation
- Unlike a trust, a foundation has legal personality and can hold assets as legal and beneficial owner. The concept of the trust is often met with confusion or difficulty in civil law-based jurisdictions, which may not recognise it. Conversely, the use of foundations is common in civil law jurisdictions, and this understanding can often facilitate transactions and planning.
- Having a Professional Trustee firm as a requirement can give comfort to the stakeholders of the foundation.
Purpose Trusts are governed by the Purpose Trusts Act 2015. Trustees may hold property on trust to carry out specific purposes which are not of a charitable nature. The trust would be established by executing a trust document declaring that the Act applies and stating the objects and purposes of the trust. A Purpose Trust must have purposes which are capable of being carried out, not contrary to public policy, not unlawful and capable of consuming the property it shall hold. The Purpose Trust should not benefit its trustees beyond the payment of fees, set out in the trust document, for so acting.
Advantages of a Purpose Trust
- Purpose Trusts are easier and cheaper to set up than foundations.
- Purpose Trusts do not require a Professional Trustee and therefore the running costs of the vehicle may be less.
Suggested purposes of a PGV:
The purposes of a PGV can cover:
- Promote and develop the protocol;
- Contract advisors and employees, and create incentive plans to develop the protocol;
- Support and finance appropriate research and development in the field of decentralised ledger technology and blockchains;
- Promote and educate the public on decentralised ledger technology and blockchains;
- Engage with various businesses, partners, banks, regulators, authorities and other third parties as to the benefit of the protocol;
- Receive and distribute contributions and participate strategically in other entities or projects with a view to benefitting the protocol directly or indirectly;
- Acquire, hold or grant trademarks and other intellectual property rights or licences;
- Organise conferences and other events that support and promote the protocol;
- Promote and support all applications using the protocol’s platform; and
- Build an active community for the protocol’s platform.
Feel free to contact me to learn more: firstname.lastname@example.org
"Ultimately, it is a decision for the principals of the relevant protocol to decide which vehicle works best. Our view is generally that the Private Foundation provides a more robust structure to support the protocol moving forward. The fact that foundations are easier understood than trusts in civil law jurisdictions, is also a key advantage if the protocol’s community is international."