The Compliance Path for Investing in the Web3 Secondary Market

Recently, the Web3 investment landscape is undergoing changes. As the appeal of traditional venture capital models declines, investors are beginning to seek more flexible and market-responsive ways to participate. The Secondary Market has once again become the focus, and incubation-style investments and structured platform products are also receiving increasing attention. However, these new paths also bring new legal responsibilities and regulatory challenges.

This article will explore the legal boundaries and risks of participating in the Secondary Market from a compliance perspective, providing important references for investors.

Compliance Considerations for Participant Identity

In the cryptocurrency secondary market, the method of participation determines the regulatory requirements faced. Taking Hong Kong and the United States as examples:

• United States: Whether individuals or institutions, any investment in tokens, options, contracts, and other products must comply with relevant regulations from the SEC or CFTC. LPs participating in crypto asset management products must be "qualified investors", and managers typically need to register as RIAs or exempt fund managers.

• Hong Kong: Currently, there is no explicit prohibition on individual investors' participation, but platforms are required to hold a virtual asset trading license issued by the SFC and are not allowed to promote high-risk products to retail investors.

Investors are advised to choose a compliance path based on their identity:

1. Individual investors: Preferably use local licensed CEX platforms with real-name registration, and avoid using overseas wallets or agents with unclear entities.

2. Family Offices/Small Funds: SPVs or fund structures can be established in regions such as Hong Kong and the Cayman Islands, which is beneficial for identity isolation, tax declaration, and compliance operations.

3. Structured fund participants: It should be confirmed whether the manager holds a legal license, such as CIMA, RIA, MAS exemption, etc.

It is important to note that some overseas crypto funds accept high net worth users through convertible bonds, income certificates, or Token revenue rights, but may be classified by regulators as "disguised fundraising" or "illegal issuance of securities."

Compliance Considerations for Choosing Investment Platforms

Choosing the right trading platform is crucial. Centralized exchanges (CEX) are usually operated by physical companies that have applied for regulatory licenses in some regions, and their compliance level is relatively high. However, investors still need to be cautious:

1. Does the platform have a license in its location? For example, the Hong Kong SFC has launched a licensing system for virtual asset trading platforms, and currently, only a few platforms have obtained licenses.

2. The U.S. regulations are more stringent, requiring platforms to register as MSB and comply with FinCEN oversight.

Decentralized exchanges (DEX) may not have a registered entity, but the legal risks of using a DEX can be higher in many jurisdictions, especially when engaging in derivatives, leveraged, or high-frequency trading.

Investors should:

1. Understand the platform's compliance background: Confirm whether the platform has obtained a formal license in its location.

2. Avoid using methods to circumvent regulations: such as using anonymous wallet transfers and cross-chain bridges to bypass deposit and withdrawal controls, as these may be considered money laundering or illegal fund transfer activities.

Security Deposit and Withdrawal Strategy

Legal and secure deposits and withdrawals are key to long-term participation in Web3 investments. Especially for investors in certain regions, traditional OTC trading of USDT has become high risk.

It is recommended to adopt the following methods:

• Cayman SPV: Suitable for crypto funds, flexible capital inflow and outflow, and transparent regulation.
• Hong Kong Family Office Structure: Suitable for investors with Hong Kong capital background or overseas income, facilitating foreign exchange and asset allocation.
• Singapore Exempt Fund Structure: Suitable for portfolio investment, facilitates reporting and subsequent transformation.

These structures can be used in conjunction with licensed institutions for currency exchange and settlement, making it easier to provide accounting explanations to banks and tax authorities.

Tax Declaration Considerations

In major jurisdictions, the profits from cryptocurrency asset trading have been incorporated into the tax system. The United States, the United Kingdom, Singapore, and other places require the declaration of various types of income, including arbitrage, airdrops, Staking rewards, and profits from NFT transactions.

Taking the United States as an example, the IRS has made virtual currency trading-related questions a mandatory item on the 1040 tax form. Although Singapore has a relatively low overall tax burden, the IRAS clearly requires taxation on commercial gains from crypto assets.

High net worth investors should:

• Keep complete transaction records.
• Hire a professional tax advisor/accountant to organize income structure.
• If investing through SPV or family office, it is necessary to confirm the attribution of income and jurisdictional responsibilities in conjunction with company law and tax agreements.

Conclusion

In 2024, the role of Web3 investors is transforming. The Secondary Market has become the main battlefield for liquidity, while incubation and structured products offer more ways to participate. Investors need to identify their legal status, choose compliant platforms, clarify tax matters and inflow/outflow paths, and ensure they do not cross regulatory red lines.

The Web3 world, although diverse and rapidly developing, requires investment activities to be conducted within a legal framework. Compliance is not only a responsibility but also an important barrier to protect one's own interests.