Web3 Finance & Tax and Blockchain Security Compliance Awareness: Perspectives from Private Crypto Funds

As more and more traditional financial institutions — and even non-financial institutions — begin entering the private crypto fund business and making crypto-related asset allocations, operating private crypto funds in a compliant manner has become critically important. This paper summarizes the types and characteristics of crypto funds with varying strategic attributes, trading methods, and capital sources, as well as the macro regulatory landscape for private crypto funds. Drawing on compliant fund operation case studies, this paper will outline the operational workflows of private crypto fund businesses and the key factors for compliant operation of private crypto funds.

(This research report is jointly published by WolfDAO & TaxDAO! Thank you for the support of all our readers. The following is the main body of this report!)

I. Definition and Classification of Private Crypto Funds

What Is a Private Crypto Fund? 1.1 Definition and Characteristics of Private Crypto Funds

In the broad sense, a fund is a pool of capital established for a specific purpose. It primarily includes trust investment funds, reserve funds, insurance funds, pension funds, various charitable funds, and so on. Their common feature is that they are managed by professional asset managers to achieve higher investment returns. These funds may be invested in the primary market (venture capital, private equity) as well as the secondary market.

A private crypto fund is a type of investment fund that is not publicly offered. It primarily targets institutional investors and high-net-worth individuals with a certain level of wealth and risk tolerance. It focuses on investing in crypto assets and related projects. The portfolio may include crypto assets, crypto options futures contracts, crypto company stocks, RWA assets, and more. Combining the characteristics of private equity funds with the unique nature of crypto assets, it differs from other private equity funds in the following ways:

Specific investment scope: Private crypto funds focus on the crypto asset market, including cryptocurrencies, blockchain projects, decentralized finance (DeFi) applications, and more. High volatility: The value of crypto assets fluctuates far more than traditional financial assets. The valuation of unbacked crypto assets (such as most cryptocurrencies) is primarily driven by speculative demand, resulting in extreme price swings. This high volatility presents investors with the potential for substantial returns while simultaneously increasing investment risk. Significant divergence in regulatory attitudes across jurisdictions: Different countries hold vastly different regulatory views on crypto assets. For example, the United States has maintained a relatively ambiguous and shifting regulatory stance on cryptocurrencies, while Japan legalized Bitcoin and incorporated it into its regulatory framework at an early stage. Private crypto fund managers must closely monitor regulatory policy changes across jurisdictions to adjust their investment strategies and mitigate compliance risk. Lack of transparency: Private equity funds are inherently opaque, and the pseudonymous and decentralized nature of the crypto asset market compounds this opacity. As a result, private crypto funds need to establish robust information disclosure systems and investor protection mechanisms.

1.2 Differences Between Private Crypto Funds and Traditional Private Equity Funds

Private crypto funds and conventional private equity funds share many similarities, but there are several key differences driven by their distinct investment targets and market environments.

(1) Investment Targets

Private crypto funds: Focus on cryptocurrencies, blockchain technology, and related digital assets. They may invest directly in cryptocurrencies (such as Bitcoin and Ethereum), or invest in blockchain startups, tokenized assets, and other projects related to the blockchain ecosystem.
Conventional private equity funds: Typically invest in assets in traditional financial markets, such as equities, bonds, real estate, private company equity, or other traditional asset classes. Conventional private equity funds have a more diversified range of investment targets, but all are rooted in the traditional economic system.

(2) Risk and Volatility

Private crypto funds: The crypto market is extremely volatile and faces higher risks, including market volatility, technical risks (such as hacking attacks), legal risks (different countries hold different regulatory attitudes and policies can change continuously), and liquidity risks (some tokens or crypto assets may be difficult to liquidate quickly).
Conventional private equity funds: While still subject to market fluctuations, shifts in the economic environment, and sector-specific risks, these risks are generally more manageable and supported by more extensive historical data. The investment targets of conventional private equity funds typically have a longer market history and clearer legal frameworks.

(3) Regulatory Environment

Private crypto funds: Constrained by the regulatory environment of the crypto market, they may face greater uncertainty. Different countries have different regulatory policies on cryptocurrencies and related assets, which can affect the fund's operations and investment strategies.
Conventional private equity funds: Generally subject to strict financial regulations and laws with clear compliance requirements. Investment targets are typically in more mature and regulated markets.

(4) Investor Type

Private crypto funds: Typically attract investors with a deep interest in cryptocurrencies and blockchain technology, who may be willing to embrace high volatility and the opportunities brought by innovative technology.
Conventional private equity funds: Draw from a broader investor base, typically including high-net-worth individuals seeking relatively stable returns, institutional investors, as well as pension funds, endowments, and so on.

(5) Technology Dependency

Private crypto funds: Highly technology-dependent, requiring the management team to possess knowledge and practical command of advanced technologies such as blockchain technology, smart contracts, decentralized finance (DeFi), and more.
Conventional private equity funds: Rely more heavily on traditional financial analysis, market research, and portfolio management skills, with relatively low technology dependency.

(6) Liquidity

Private crypto funds: Liquidity in the crypto market can be very high, but it can also give rise to liquidity risk due to insufficient market depth or the nature of specific assets — particularly during periods of significant market volatility, when this liquidity risk can increase substantially.
Conventional private equity funds: Investment targets generally have fairly predictable liquidity arrangements, although they can still face liquidity constraints, especially when invested in long-duration assets such as private companies or real estate.

These differences illustrate that while the two share structural similarities as fund vehicles, there are significant divergences in investment targets, risk tolerance, regulatory environment, and technology requirements.

Classification of Private Crypto Funds

As investment funds focused on the crypto asset market, private crypto funds can be divided into various categories based on different classification criteria. The following are some common approaches to classifying private crypto funds by investment target, operating method, and other factors.

(1) Classification by Investment Target

Direct investment funds: These funds primarily invest directly in cryptocurrencies, blockchain projects, or NFTs (non-fungible tokens). They purchase and hold these assets with the expectation of generating returns as asset values appreciate.
Indirect investment funds: Indirect investment funds may gain indirect exposure to the crypto asset market by investing in the equity of crypto asset-related companies, fund shares, or derivative securities. Examples include investing in the equity of crypto exchanges, blockchain technology companies, or crypto mining companies.

(2) Classification by Operating Method

Closed-end funds: Closed-end funds fix the size of the fund at inception and do not accept new investments during a defined period. These funds typically have a fixed lifecycle and are liquidated or converted at maturity. In the context of private crypto funds, closed-end funds can ensure that fund managers have a stable fund size over a given period, which is conducive to long-term investment planning.
Open-end funds: Open-end funds allow investors to subscribe for or redeem fund shares at any time during the fund's lifecycle. These funds generally offer greater flexibility and can be adjusted based on market conditions and investor preferences. However, given the high volatility of the crypto asset market, open-end funds may face greater pressure on fund liquidity.

(3) Classification by Investment Strategy

Based on different investment strategies, private crypto funds include active, passive, market-neutral, fixed income, and more.

Passive strategy: Returns from a passive strategy are generated by price appreciation of coins. In the crypto asset space, this primarily reflects the overall performance of tracking a basket of liquid coins (such as Bitcoin, Ethereum, etc.), earning passive returns from price appreciation.
Market-neutral strategy: Through long-short hedging, this approach uses derivatives and other instruments to hedge out market directional exposure (Delta) and keep overall net long risk near zero, pursuing absolute returns regardless of coin price movements. Common strategies such as arbitrage and market-making fall under the market-neutral category.
Active strategy: An active strategy refers to the fund manager applying a specific analytical or predictive model to establish a target price, then trading around that target. If the current price is below the target price, the fund buys. If the current price is above the target price, it sells short, adjusting positions based on the gap between the current and target prices. Returns come from both market direction (Beta) and the excess returns (Alpha) generated by subjective judgment.
Fixed income funds: These primarily generate returns through "bonds." While there are no standardized bonds in the crypto asset space, there is a large volume of OTC lending or non-standardized debt instruments. These funds can earn interest through lending or capture interest rate spreads in lending to generate returns. Similar to traditional fixed income funds, returns are relatively stable, but in practice they require strong risk management capabilities (such as collateral management). DeFi is a financial activity based on smart contracts on blockchain and carries certain fixed income characteristics.

(4) Other Classification Methods

In addition, private crypto funds can also be classified based on other factors such as capital source and investment stage. For example, by capital source they can be divided into private equity funds and private securities funds; by investment stage, they can be divided into angel funds, venture capital funds, and so on.

II. Global Development Landscape of Private Crypto Funds

Crypto Fund Scale

In recent years, the total market capitalization of cryptocurrencies has shown a volatile growth pattern. As of the time of writing, it has surpassed $2.3 trillion. Data from Crypto Fund Research indicates that while crypto funds account for a small share of total fund assets under management, nearly 900 crypto funds had been established worldwide by the end of 2023. These funds span multiple categories including hedge funds, venture capital funds, and index funds. Additionally, according to a Galaxy report, crypto asset funds were highly active in 2023, reaching $33 billion in assets under management, with Bitcoin dominating the market and becoming the most popular investment target among funds.

Major Registration Locations for Crypto Funds

Regarding the distribution of registration locations, while it is not possible to obtain the specific registration locations of private crypto funds, we can still use charts to get a general overview of the overall distribution of crypto fund registration locations based on data from Crypto Fund Research.

By country, the United States is the most popular registration location for crypto funds, attracting nearly half of all funds. It is also worth noting that despite the Chinese government — particularly the mainland government — having adopted a more cautious stance toward crypto assets, a significant number of crypto funds are still registered in China, supported by the country's massive economic scale and investment demand.

Figure 1: Global Distribution of Major Crypto Fund Registration Locations

Notable Private Crypto Funds and Their Overview

3.1 Pantera Capital

Pantera Capital is a private equity fund founded in 2003 and headquartered in California, USA. Pantera Capital was the world's first investment fund focused on blockchain technology and cryptocurrencies. Its assets under management span multiple funds and portfolios focused on Bitcoin, ICOs (Initial Coin Offerings), and decentralized finance (DeFi). According to its official website, Pantera Capital manages $4.8 billion in blockchain-related assets.

3.2 a16z Crypto

a16z Crypto is headquartered in California, USA. It is a venture capital fund under the well-known venture capital firm Andreessen Horowitz, focused on Crypto and Web3 startups. The a16z Crypto portfolio is broad, spanning blockchain infrastructure, decentralized applications (dApps), payment systems, and more. According to its official website, a16z Crypto manages over $7.6 billion in assets across four funds and holds wide influence in the industry.

3.3 Galaxy Digital

Founded in 2018 and headquartered in New York, USA, Galaxy Digital is a digital asset and blockchain technology-focused investment management company founded by Mike Novogratz, a former hedge fund manager. Galaxy Digital offers a range of crypto-related investment products, including hedge funds, venture capital funds, and asset management services. According to its official website, Galaxy Digital currently manages approximately $2.1 billion in assets and holds a prominent position in the crypto industry, regularly appearing in industry news.

3.4 AnB Investment

AnBInvestment is a Segregated Portfolio Company (SPC) registered in the Cayman Islands. It operates two funds — a quantitative multi-strategy fund and a market-neutral strategy fund — primarily investing in crypto assets and DeFi, generating Alpha returns from market volatility. The total AUM of the funds is $50 million, with a minimum investment of $100,000 per investor. Both funds are open for monthly subscriptions and redemptions. The fund's revenue sources are management fees and performance-based fees. According to AnBInvestment's marketing materials, the management fee is 2.4% and the performance fee is 20% based on a high watermark methodology. The primary operating costs of the funds relate to strategy, trading, auditing, operations, risk management, legal and compliance systems, and personnel expenses.

3.5 HashKey Digital Investment Fund

This fund officially began accepting investor subscriptions on September 1, 2023. It is licensed by the Hong Kong Securities and Futures Commission and managed by HashKey Capital Limited. 100% of the managed portfolio consists of virtual assets. It is a compliant secondary liquidity fund launched by HashKey Capital. The fund allocates less than 50% of its investments to the two largest cryptocurrencies, Bitcoin and Ethereum, while diversifying its investments to include other coins.

III. Overview of Key International Regulations Governing Private Crypto Funds

A number of international organizations and jurisdictions have introduced relevant regulations governing private crypto funds. The following is a partial overview:

Figure 2: Crypto Regulatory Timelines of Major Global Regulators

U.S. Securities and Exchange Commission (SEC) — Application of Securities Laws

In 2017, the U.S. Securities and Exchange Commission (SEC) published the landmark "Report of Investigation on The DAO." The report stated that certain cryptocurrencies and Initial Coin Offerings (ICOs) may meet the definition of "securities" under the Securities Act of 1933 and the Securities Exchange Act of 1934. Accordingly, these crypto assets must comply with the corresponding securities regulations, including registration, disclosure, anti-fraud protections, and more. This regulation specifically targets crypto projects and token issuances that raise funds and promise future returns or yields. For example, if a token raises funds through an ICO and grants holders corresponding rights, dividends, or other economic benefits, it may be classified as a security. For such assets, issuers must register with the SEC or obtain an exemption, and must also periodically disclose financial and other material information to ensure that investors are adequately protected.

Since then, the SEC has stepped up its oversight of crypto funds, and crypto funds have been required to comply with existing securities laws. For example, crypto funds must undergo the necessary registration or obtain an exemption when dealing in security tokens or similar products. Additionally, fund managers must ensure that fund operations comply with "qualified investor" rules and meet anti-money laundering, anti-fraud, and other compliance requirements.

The SEC's increasing regulatory efforts toward crypto assets reflect the agency's emphasis on investor protection and market stability. In 2020, the SEC published its "Framework for 'Investment Contract' Analysis of Digital Assets," further clarifying the criteria for determining which crypto assets qualify as securities. This framework focuses on evaluating factors such as whether token purchasers expect to profit from the efforts of others, whether the project team plays a central role in developing and marketing the asset, and whether the project has decentralized features. Of course, if the "Financial Innovation and Technology for the 21st Century Act" (FIT21 Act) is ultimately passed, the relevant SEC criteria may need to be adjusted accordingly.

EU Market Abuse Directive (MAD) and Market Abuse Regulation (MAR)

The Market Abuse Directive (MAD) and Market Abuse Regulation (MAR) took effect in 2018. They are a comprehensive framework developed by the EU to prevent market manipulation, insider trading, and unlawful disclosure of inside information. These regulations aim to prevent market manipulation, insider trading, and related misconduct. Starting in 2018, MAR began explicitly applying to financial instruments in the crypto asset market. For example, if a crypto asset is classified as a "financial instrument" (such as a security token), it must comply with MAR provisions, including prohibitions on insider trading, market manipulation, and unfair information disclosure. Furthermore, traders participating in crypto assets — particularly those trading on regulated markets or whose actions could influence market prices — must adhere to market abuse regulations. This measure aims to ensure that investors receive fair information and prevent the market from being distorted by unlawful activity.

Financial Action Task Force (FATF) — Anti-Money Laundering and Counter-Terrorism Financing (AML/CFT) Requirements

FATF is an international body that sets global standards for combating money laundering and terrorism financing. In 2019, FATF issued guidance on virtual assets and virtual asset service providers (VASPs), for the first time explicitly outlining AML/CFT requirements in the crypto asset space. This guidance imposes strict AML/CFT requirements on VASPs, with specific rules including: requiring VASPs to conduct customer due diligence (CDD), including collecting and verifying customer identification information; requiring VASPs to report suspicious activities to relevant authorities for transactions exceeding a certain threshold; and monitoring cross-border transactions. When institutions are directly involved in activities such as managing, administering, transferring, or trading virtual assets, they are classified as VASPs and must comply with FATF's AML and CFT requirements. Currently, countries around the world are gradually incorporating FATF guidance into their domestic laws, requiring crypto funds to adhere to these AML/CFT standards.

EU Alternative Investment Fund Managers Directive (AIFMD)

AIFMD was originally passed in 2011 to strengthen the regulation of alternative investment funds in Europe. With the rise of crypto funds, the scope of AIFMD was expanded to include crypto asset funds starting in 2020, requiring fund managers to ensure appropriate disclosure and risk management to protect investor interests. Specific rules include: fund managers must periodically disclose to investors information regarding the fund's investment strategy, asset allocation, and risks; they must have appropriate compliance measures in place to avoid conflicts of interest and ensure that investors are informed and have given their consent. This has resulted in strict regulation of crypto funds across Europe, ensuring that investor rights are protected.

EU Regulation "On Markets in Crypto-Assets" (MiCA)

To establish a unified legal framework for the crypto asset market, the EU enacted Regulation 2023/1114 — the "Markets in Crypto-Assets Regulation" (MiCA) — in 2023. It was formally approved at the European Parliament session on April 20, 2023, and officially entered into force on June 30 of that year, with the transition period ending on June 30, 2026. MiCA, as part of the EU's Digital Finance Strategy package, covers registration requirements, operational requirements, and investor protection for crypto funds. It clarifies the scope of the law, the classification of crypto assets, the relevant regulatory authorities, corresponding information reporting systems, business restriction systems, and conduct supervision systems. It is the most comprehensive legal framework for digital assets to date, with its scope of influence covering all 27 EU member states and 3 additional countries in the European Economic Area (EEA) (Norway, Iceland, and Liechtenstein). It will provide a clear legal framework for crypto assets and achieve regulatory consistency across the EU.

IV. Overview of Global Tax Policy on Private Crypto Funds

Many countries are actively developing or refining their tax policies to ensure that profits and income from crypto fund trading and related activities can be accurately reported and taxed in accordance with the law. This includes tax categories such as capital gains tax, goods and services tax, value-added tax, and so on.

United States

Income tax: In the United States, the organizational forms that private crypto funds may use include Limited Partnerships (LP), Limited Liability Companies (LLC), and Corporations (further divided into C-corps and S-corps). The applicable tax policies differ across these three types. LPs are directly liable for losses and profit sharing and must pay income tax; LLCs have flexibility in choosing their tax structure — they may elect to be taxed as a sole proprietorship, partnership, S-corp, or C-corp; Corporations face double taxation, because profits earned by a Corporation are subject to corporate income tax, and if those profits are then distributed as dividends to shareholders, shareholders must also pay personal income tax. Therefore, given the high profit potential of crypto assets, selecting the corporate form may be disadvantageous for reducing the overall tax burden on private crypto funds and their investors.
Capital gains tax: Capital gains tax in the United States is divided into short-term capital gains tax and long-term capital gains tax. Short-term capital gains refer to profits generated from assets held for no more than one year. Long-term capital gains refer to profits generated from assets held for more than one year. Short-term capital gains tax is equal to the taxpayer's ordinary income tax rate; long-term capital gains tax is generally lower than short-term capital gains tax and is divided into three tiers based on total annual income and filing status: 0%, 15%, and 20%.

The U.S. Internal Revenue Service (IRS) issued Notice 2014-21 on cryptocurrency transactions in 2014, explaining how cryptocurrencies are treated for federal income tax purposes. In that notice, all crypto assets are treated as property rather than currency, and therefore the general tax principles applicable to property transactions apply. This means most crypto asset transactions are subject to capital gains tax. When executing crypto asset transactions subject to capital gains tax, investors must calculate capital gains or losses by subtracting their cost basis from the sale price and pay the corresponding capital gains tax. The holding period of the crypto asset (divided by the unit of 1 year) determines the applicable capital gains tax rate. If a crypto asset is held for more than 1 year, the investor must pay long-term capital gains tax, which is generally lower than the short-term capital gains tax that applies to holdings of under 1 year.

European Union

Value-Added Tax (VAT): EU tax policy on cryptocurrencies varies — some member states impose VAT on crypto asset transactions while others exempt them. For example, countries such as Ireland and Germany do not levy VAT on Bitcoin transactions, while in Italy and Spain such transactions may be subject to VAT.
MiCA (Markets in Crypto-Assets Regulation): The introduction of MiCA aims to provide a legal framework for crypto assets not covered by existing EU financial services law; support innovation by establishing a robust and transparent legal framework to facilitate the development and wider use of crypto assets and distributed ledger technology (DLT); ensure appropriate consumer and investor protection and market integrity; and further strengthen financial stability, noting that certain crypto assets may achieve widespread adoption.

United Kingdom

Given the common law tradition and the flexible nature of crypto assets, the UK government opted not to develop a comprehensive standalone crypto asset tax law; instead, it incorporated crypto assets into the existing tax framework based on their nature and use. They are primarily subject to income tax and capital gains tax. The taxation methods for these two taxes are the same as those applied to other types of income and assets. Taxpayers must calculate their income and gains from crypto assets for each tax year based on their individual circumstances and declare them on the corresponding tax returns. The UK also provides certain tax deductions or reliefs, such as the personal allowance, the Individual Savings Account (ISA) allowance, the Annual Exempt Amount, and so on.

Singapore

Income tax: Singapore does not levy capital gains tax, making it a very favorable jurisdiction for private crypto funds. However, if cryptocurrency transactions are deemed business income, income tax must be paid.
Goods and Services Tax (GST): Singapore originally intended to apply Goods and Services Tax to cryptocurrency transactions, but from January 1, 2020, it ceased levying GST on transactions involving payment-type digital payment tokens (DPTs).

V. OECD Tax Compliance and Regulatory Framework

The OECD (Organisation for Economic Co-operation and Development) is one of the world's most influential international organizations. Its member countries have paid close attention to the regulation and taxation of crypto assets. In recent years, the OECD has expanded the scope of existing regulations and developed new policies, gradually forming several important policies and frameworks on the regulation and tax compliance of crypto assets and their related funds, with the aim of regulating the operations of private crypto funds and ensuring their transparency and tax compliance globally. Accordingly, special attention should be paid to summarizing the OECD's tax compliance and regulatory framework.

Crypto-Asset Reporting Framework (CARF)