Compliance Guidelines for Web3 Secondary Market Investments

Recently, the Web3 investment landscape is undergoing a shift, from the "retreat" of the primary market to the "reconstruction" of the Secondary Market. As traditional VC models lose their appeal due to difficulties in exits and sluggish fundraising, investors are beginning to seek more flexible and market-responsive ways to participate. However, these new investment paths also bring corresponding legal responsibilities and regulatory challenges.

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

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:

In the United States, whether individual or institutional investors, as long as they invest in tokens, options, contracts, and other products, they must comply with the relevant regulations of the SEC or CFTC. LPs participating in crypto asset management products must be "qualified investors," and managers typically need to register as RIA or exempt fund managers.

Currently, Hong Kong does not explicitly prohibit individual investors from participating, but it requires platforms to hold a virtual asset trading license issued by the SFC and prohibits promoting high-risk products to retail investors.

Investors are advised to choose a compliance path according to their own identity:

• Individual investors should prioritize using locally licensed trading platforms, register with real names, and avoid using foreign wallets or agents with unclear entities.
• Family offices or small funds can establish SPVs or fund structures in regions such as Hong Kong and the Cayman Islands, which is beneficial for identity isolation, tax declaration, and Compliance.
• Structured fund participants should confirm whether the manager holds the relevant legal licenses, such as CIMA, RIA, MAS exemptions, etc.

Investment Platform Selection

Choosing the right trading platform is crucial. Centralized exchanges (CEX) are usually operated by physical companies that have applied for regulatory licenses in certain regions, supporting operations such as user real-name registration, fiat deposits, and tax declarations, with a relatively high level of Compliance. However, investors still need to pay attention to the licensing situation of the platform in their location.

Decentralized exchanges (DEX) technically do not have a registered entity, but using DEX in many jurisdictions may involve higher legal risks, especially when engaging in derivatives trading, leveraged trading, or high-frequency arbitrage.

Investors need to achieve at least two points:

1. Understand the platform's Compliance background and confirm whether it holds a legitimate license in its location.
2. Avoid using "black technology" to bypass rules, such as jumping through anonymous wallets or using cross-chain bridges to circumvent capital control. These actions may be deemed as money laundering or illegal fund transfer.

Secure Deposit and Withdrawal

For investors, safe and compliant deposits and withdrawals are crucial. Especially for investors from mainland China, the previously common OTC trading method for USDT has become high-risk. Banks have tightened their scrutiny on large USDT currency exchanges, and using personal bank cards to connect with OTC practices can easily trigger risks.

In markets such as Hong Kong, Singapore, and the United States, there are various compliance deposit and withdrawal paths, but the premise is to clarify "identity" and "path". It is recommended to avoid having personal accounts bear all transactions, especially during frequent trading or when the amount of funds is large, and to use legitimate, isolated identity structures.

Common compliance structures include:

• Cayman SPV: Suitable for crypto funds, flexible capital inflow and outflow, transparent regulation.
• Hong Kong family office structure: suitable for investors with Hong Kong capital background or overseas income.
• Singapore Exempt Fund Structure: Suitable for portfolio investment, facilitating declaration and subsequent transformation.

These structures can be combined with licensed institutions for currency exchange and clearing, making it easier to explain the source and flow of funds to banks and tax authorities.

Tax Declaration

The profits obtained in the cryptocurrency market, including arbitrage, airdrops, Staking rewards, and profits from NFT transactions, theoretically need to be declared for tax purposes. Several countries have included cryptocurrency assets in their tax systems.

Taking the United States as an example, the IRS has included virtual currency transactions as a mandatory item on the 1040 tax form. Although Singapore has a relatively low overall tax burden, the IRAS clearly states that commercial gains from crypto assets are subject to taxation according to the relevant income types.

For high-net-worth investors, it is recommended:

• Prepare complete transaction records.
• Hire a professional tax consultant/accountant to organize the income structure.
• If participating in investment through an SPV or family office, it is necessary to arrange in accordance with company law and tax treaties to confirm income attribution and jurisdictional responsibilities.

Conclusion

Since the beginning of 2024, the role of Web3 investors is undergoing a profound transformation. The Secondary Market has become the main battlefield for liquidity, with incubation and structured products providing more ways for capital to participate. However, the diversification of participation methods has also brought more complex responsibilities.

Whether it is individual investors, family offices, or those participating indirectly through funds, all need to proactively identify their legal identity, choose a compliant platform, and clarify their tax obligations and deposit/withdrawal paths. This is the basic principle to ensure that they do not cross legal red lines in the future.

It is worth emphasizing that the diversification and rapid development of the Web3 world cannot be separated from the boundaries of law. Investors should participate in Web3 under the premise of legality and compliance, and carefully assess risks.