Compliance Points for Participating in the Web3 Secondary Market

With the changes in investment paths in Web3, the Secondary Market has once again become the focus of investors. However, participating in the Secondary Market requires facing new legal responsibilities and regulatory challenges. This article will explore the legal boundaries and risk reminders of participating in the Secondary Market from a Compliance perspective, providing references for investors.

Participant Identity

Different participation methods determine different regulatory requirements. Taking Hong Kong and the United States as examples:

The United States has strict regulations for both individual and institutional investors. Limited partners participating in crypto asset management products must be "qualified investors," and general partners typically need to be registered as investment advisers or obtain an exemption.

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

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

• Individual investors are encouraged to prioritize the use of locally licensed platforms and avoid using overseas wallets or agents with unclear entities.
• Family offices/small funds can establish special purpose companies or fund structures to facilitate identity isolation and compliance operations.
• Investors participating in structured fund investments should confirm whether the manager holds the relevant licenses.

Investment Platform Selection

Choosing the right trading platform is crucial. Centralized exchanges are usually operated by physical companies that have applied for regulatory licenses in certain regions, with a relatively high level of compliance. However, investors should also pay attention to whether the platform has obtained a license in its location.

Although decentralized exchanges do not have a registered entity technically, the legal risks of using DEX may be higher in many jurisdictions, especially when engaging in derivatives, leverage, or high-frequency trading.

Investors need to at least:

1. Understand the platform's compliance background and confirm whether it has obtained a formal license in your location.
2. Avoid using illegal means to circumvent regulatory rules, such as using anonymous wallets for transfers or cross-chain bridges to bypass deposit and withdrawal controls.

Secure Deposit and Withdrawal

Legal and safe deposit and withdrawal are key to long-term participation in Web3 investment. In recent years, many regions have imposed strict controls on the flow of funds related to cryptocurrencies.

For investors in mainland China, buying and selling USDT through OTC dealers has become high risk. Banks' scrutiny of large USDT currency exchanges has also noticeably tightened.

In markets such as Hong Kong, Singapore, and the United States, there are some compliant deposit and withdrawal pathways, but the prerequisite is that investors need to clarify their identity and operational processes. It is recommended to operate using a legal and segregated identity structure, common methods include:

• Cayman Special Purpose Company
• Hong Kong Family Office Structure
• Singapore Exempt Fund Structure

These structures can be used in conjunction with licensed institutions for currency exchange and settlement, making it easier to explain the source and destination of funds to banks and tax authorities.

Tax Declaration

In many countries and regions, the income related to crypto assets has been incorporated into the tax system. The various forms of income obtained by investors through trading, including arbitrage, airdrops, staking rewards, and profits from NFT transactions, theoretically need to be declared for tax purposes.

Taking the United States as an example, the IRS requires taxpayers to declare whether they are involved in virtual currency transactions. Although Singapore has a relatively low overall tax burden, the tax authority has clearly stated that commercial gains from crypto assets are subject to taxation.

For high net worth investors, it is recommended:

• Prepare complete trading records
• Hire a professional tax advisor to organize the income structure
• If participating in investments through special purpose companies or family offices, consideration should be given to corporate law and tax treaty arrangements.

Conclusion

With the shift in investment paths in Web3, the Secondary Market has become an important source of liquidity. However, participants need to actively identify their legal identity, choose Compliance platforms, and clarify their tax obligations and capital inflow and outflow paths. Compliance operations are the foundation for ensuring long-term stable participation in Web3 investments.