The development and growing adoption of blockchain technology mean that Web3 projects are increasingly moving rapidly from the conceptual stage to actual business operations. At this point, one of the key decisions becomes the choice of the legal environment in which the project will be developed and, at a later stage, commercialised.
When selecting a legal framework for a blockchain project, many founders consider offshore jurisdictions. The main reason is the greater openness of such jurisdictions to innovative business models and new technologies. These jurisdictions often offer a more flexible and pragmatic regulatory approach, simplified corporate structures, and tax solutions tailored to the international nature of Web3 projects.
In addition, the generally favorable attitude of local institutions toward technology projects often translates in practice into an easier launch of operations, better access to banking services, and more efficient licensing or registration processes.
Among the most commonly chosen locations are the British Virgin Islands (BVI), the Cayman Islands, and Estonia. Each of these jurisdictions offers different benefits, but also comes with specific obligations.
At the same time, choosing such jurisdictions may involve higher compliance requirements, more detailed due diligence by banks and investors, and the need to demonstrate real operational presence (so-called “substance”).
British Virgin Islands (BVI) – a frequently chosen jurisdiction for international Web3 structures
The BVI is one of the most popular jurisdictions for blockchain projects. Companies incorporated in the BVI can benefit from solutions typical for internationally oriented entities, including rules on taxation of income earned outside the territory of the BVI and flexible corporate arrangements. However, issues of tax residency (including the place of effective management) as well as reporting obligations in the country of operation and on the part of shareholders and beneficial owners must always be carefully analyzed.
Features commonly considered when establishing companies in the BVI (depending on the specific structure and business model) include:
- no corporate income tax on foreign-source income,
- as a rule, the possibility of keeping beneficial owners not publicly disclosed,
- fast and relatively inexpensive incorporation,
- flexible shareholding structures and no requirement for local directors.
Recently the BVI has implemented a number of reforms increasing transparency, including the obligation to maintain a register of beneficial owners (UBO) and to provide data to the regulator. Companies are also required to keep accounting records and to demonstrate “substance,” i.e. economic presence in the BVI, if they conduct operational activities that fall within the defined “relevant activities” under the BVI economic substance regime.
Cayman Islands – a jurisdiction often used for funds, holding structures, and selected Web3 models (including DAOs)
The Cayman Islands have long been recognized as a leading jurisdiction for investment funds and holding structures. In the Web3 space, they are often chosen for specific business models (in particular those related to tokenization, exchanges, and organizational structures for DAOs), depending on the regulatory profile of the activity.
The jurisdiction is perceived as pro-innovation and “tax-neutral” – as a rule, there is no corporate income tax or capital gains tax, and no VAT system (although other fees and indirect charges, such as customs duties, do apply).
At the same time, the Cayman Islands, like other leading offshore jurisdictions, are gradually tightening regulatory compliance standards. The local financial regulator expects entities operating in the virtual assets space to meet specific anti-money laundering and counter-terrorist financing (AML/CFT) requirements. Depending on the nature of the activity, such entities may be required to register or obtain a license as a VASP, as well as to report transactions and apply the so-called “Travel Rule”.
Key points to consider when establishing companies in the Cayman Islands:
- not every crypto-related activity remains outside the regulatory regime – depending on the business model, an obligation to register or obtain a licence may arise,
- DAO structures, including foundations, should have a clearly defined purpose, operating principles, and governance framework; where regulated or strictly commercial activities are carried out, additional formal requirements may apply,
- relationships with banks, particularly those located outside the Cayman Islands, may be more demanding – financial institutions often expect extensive compliance documentation and a detailed explanation of the project’s business model.
Estonia – an EU jurisdiction as an alternative to classic “offshore,” but more demanding than in the past
Estonia was one of the first jurisdictions in Europe to regulate the activities of entities providing crypto-asset-related services – as early as 2017 it was possible to obtain licenses for services such as exchange operations and wallet services.
From 15 March 2022 (following changes to AML regulations), the Estonian supervisory authority significantly raised the bar for such entities. Higher capital requirements, mandatory audits, and stricter organizational requirements were introduced, including those relating to the place of business, management qualifications, compliance functions, and internal controls.
In addition, with the entry into force of the EU’s MiCA Regulation, crypto-asset activities in Estonia have become subject to uniform rules applicable throughout the European Union, similar to those known from traditional financial markets.
New requirements applicable in Estonia include:
- ensuring real organizational and operational presence in Estonia (including appropriate management and compliance functions),
- the obligation to prepare and implement full AML/KYC documentation,
- demonstrating that operational activities are effectively carried out within the territory of Estonia.
As a result, Estonia is no longer an “easy” option, but it remains a jurisdiction considered by projects that wish to combine blockchain technology with operations conducted in compliance with EU regulations.
Common Challenges and Risks
Regardless of the jurisdiction selected, blockchain companies face a number of similar challenges:
- access to banking services – opening and maintaining bank accounts, particularly outside the company’s jurisdiction of incorporation, often requires extensive compliance documentation and a detailed explanation of the business model’
- increasing AML/CFT requirements – although baseline standards are becoming increasingly harmonised, their practical application differs between jurisdictions and financial institutions, which may affect the time and cost required to launch operations’
- licensing and reporting obligations – the scope of required registrations, licences, and ongoing reporting depends on the nature of the activities and may differ significantly between jurisdictions’
- substance requirements – in a growing number of cases, it is necessary to demonstrate genuine operational activity, appropriate management structures, and compliance functions;
- regulatory volatility – the dynamic development of regulatory frameworks (in particular at the EU level) entails the risk of further tightening of requirements in the future.
Consequently, the choice of jurisdiction for a blockchain project should not be based solely on low taxation, but should involve a comprehensive legal, tax, and operational analysis that takes into account both the project’s current needs and its future development.
Additionally, depending on the project’s profile, there may be factors that often argue against the use of offshore jurisdictions. For some projects, market and partner expectations may be more important than local regulations.
The most common limitations in this respect include
- bank and investor policies regarding acceptable jurisdictions and more intensive due diligence (including source of funds and ownership structures),
- reputational and communication risks (especially for products aimed at retail customers),
- the cost and practical feasibility of substance (team, office, management, compliance),
- dependence on where activities are actually carried out and where customers are located (regulations on the “place of service provision”).
How to Choose a Jurisdiction?
There is no one-size-fits-all answer. Key questions worth asking include:
- Do I need a licence (and if so, what type)?
- Where are my key clients and investors located?
- Am I planning to raise funds (ICO, IDO, STO)?
- Will I need a bank relationship or fiat integration?
- Do I want to operate locally or globally?
Based on these considerations, it is possible to select the jurisdiction that best fits the project’s profile – bearing in mind that a good legal structure is not an end in itself, but a tool enabling growth. It is also worth assessing operational and compliance costs (including the cost of maintaining substance), as well as licensing costs if a license is required.
Summary
For some Web3 projects, offshore jurisdictions are one of the options considered when building an international structure, alongside EU solutions (e.g. Estonia) or domestic arrangements. However, this is neither a “default” nor automatically the best solution.
Jurisdictions such as the BVI or the Cayman Islands offer structural and tax flexibility, but at the same time require careful planning of compliance, banking, and real operational presence. Estonia, in turn, enables operations under the EU regulatory framework, at the cost of significantly higher organizational requirements.
A well-chosen jurisdiction can reduce operational risks (e.g. in banking and licensing), while decisions made “short-cut,” especially without analyzing tax residency, AML/CFT requirements, and the expectations of financial institutions, can effectively block cooperation with institutional partners or access to regulated markets.
Offshore structures should not be treated as a way to avoid regulatory obligations or transparency. When properly designed, they can operate legally and transparently, but they usually require greater compliance discipline, more extensive documentation, and a higher readiness for scrutiny (by banks, investors, and regulators).