How to Shut Down a Crypto Startup

Shutting down a crypto startup is a multifaceted process that demands detailed planning and execution. This guide provides a step-by-step approach focusing on the unique challenges and regulatory requirements of the crypto industry, to ensure a smooth and compliant closure of your business.

First Things First: Compliance With Regulatory Bodies

The cryptocurrency industry, contrary to popular belief, faces a significant amount of regulation. This makes understanding and adhering to the rules of the game absolutely essential for anyone involved. 

Understanding which regulatory bodies oversee your specific crypto business is the first step. Look at the following table to learn more about the key players and their areas of focus:

The table shows the primary regulatory bodies influencing crypto startups within a specific jurisdiction. However, the cryptocurrency industry's global nature adds further layers of complexity. 

Crypto businesses operating in multiple countries could face regulatory oversight from various international bodies, such as the Financial Action Task Force (FATF), and regional regulatory organizations, like the Financial Conduct Authority (FCA) in the UK, the European Securities and Markets Authority (ESMA) in the EU, and the Monetary Authority of Singapore (MAS). 

By familiarizing yourself with these regulatory requirements, you can take the first step toward a compliant and orderly shutdown.

The Notification Process

The decision to shut down must be communicated with investors and the board of directors first.

Once a board meeting is held and a majority decision to shut down the startup is made (the details of which must be recorded in the meeting minutes), the dissolution process can begin. 

Next, it’s time to inform relevant regulatory authorities. Each regulatory body has its own unique notification requirements but the general steps soon-to-dissolve crypto startups should follow are:

• Identify which agencies have jurisdiction over your startup's activities.

• Explain in detail the reasons for closure, timelines, plans for asset disposition, and customer communication strategies.

• Comply with the notification procedures, e.g., the SEC in the US has specific guidelines for reporting business closures.

• Maintain detailed records of all communications and interactions with each regulatory body.

Terminate Your Licenses 

Next, surrender or terminate licenses issued by state-level and national regulators. The general guidelines include:

• Review all the licenses and permits your startup holds.

• Learn about the specific requirements and timelines for surrendering each license or permit. For example, the New York Department of Financial Services has specific requirements for crypto startups who want to shut down and terminate their BitLicense.

• Get written confirmation of license termination from the relevant authorities to tie loose ends.

• Maintain detailed records of all license-related documentation for potential future reference.

Prepare Article of Dissolution

In addition to the regulatory and licensing steps, you must also prepare and file the Article of Dissolution, i.e., a formal document stating the decision to dissolve the company. This document typically includes information such as the company name, date of dissolution, and reasons for dissolution. 

The process varies according to state, so ensure that you’re following state-specific instructions on how to submit these documents. For example, a crypto startup incorporated in Delaware must file the Certificate of Dissolution with the Delaware Division of Corporations. 

Breaking the News: Build a Solid Communication Strategy 

Internal Communication

Effectively communicate the shutdown to mitigate anxiety, maintain morale, and ensure a smooth transition for employees. Other stakeholders that you should inform include:

• Advisors

• Contractors

• HR and legal teams

• Public relations team

• IT and security personnel

Make sure to:

• Openly communicate the reasons for the shutdown.

• Provide clear timelines for the shutdown process.

• Detail severance packages (if any) and benefits offered to employees.

• Address concerns about job placement and outplacement services.

• Explain how employee data will be handled and protected.

• Create opportunities for employees to ask questions and express concerns.

External Communication

In your customer communication message, clearly articulate the reasons for the closure without leaving any room for speculation.

Next, clarify the process for withdrawing funds or transferring assets. To accommodate customer preferences, offer multiple withdrawal options, such as bank transfers or cryptocurrency wallets. 

Also, provide timelines and information about the security measures in place to protect customer funds and data. If possible, offer incentives or compensation to compensate for any inconveniences caused by the shutdown.

Managing Your Finances: A Roadmap to Financial Closure

Handling Customer Funds

Safeguarding customer assets is essential for maintaining trust and avoiding legal backlash. Conduct a thorough audit of customer balances across all platforms, including exchanges and wallets. 

Implement secure methods for transferring digital assets back to customers. Use security measures such as multi-signature wallets and hardware security modules (HSMs) to safeguard funds. Prioritize customer withdrawals and provide clear communication throughout the process. To prevent situations where assets are inaccessible, ensure multiple individuals have control over private keys.

Then, provide customers with detailed instructions on how they can withdraw their funds and prepare your customer support team to assist with any issues during the transfer process. You must also establish clear deadlines for fund withdrawals and follow up with customers who have not yet taken action.

Settling Debts

Settle debts and manage financial obligations by:

• Creating a creditor list: Identify parties you must repay, including suppliers and lenders. For example, if your startup used multiple cloud service providers, consultants, or marketing agencies, each one should be listed with detailed financial obligations.

• Prioritizing payments: Determine a payment plan based on subordination.

• Negotiating with creditors: Explore options for extending payment terms or restructuring debt. For example, explore potential restructuring options like debt-for-equity swaps or asset-based lending.

• Documenting all transactions: Maintain detailed records of all financial obligations and payments. For example, keep digital and physical copies of invoices, payment receipts, and communication with creditors.

Tax Obligations

Accurately reporting and managing taxes is crucial for crypto startups. Here’s a checklist to help you successfully resolve your tax obligations:

• Ensure all crypto transactions are accurately reported, including trades, sales, income from mining, and staking rewards.

• Determine and document the fair market value of all crypto assets at the time of each transaction.

• Maintain detailed records of all transactions, including dates, amounts, and counterparties.

• Review and report any capital gains or losses from the sale or exchange of crypto assets.

• Report any income received in the form of cryptocurrencies, including payments, mining rewards, and staking rewards.

• Ensure compliance with IRS guidelines on cryptocurrency taxation, including any specific reporting requirements.

• Prepare and submit any outstanding tax returns or filings required by local, state, and federal tax authorities.

• Document all interactions with tax professionals and regulatory bodies for future reference.

• Archive all tax-related documents and transaction histories securely for audit purposes.

Protecting Digital Assets: Security First

Shutting Down Operations Securely

Prioritize the protection of sensitive information, digital assets, and intellectual property by

• Destroying private keys: Implement protocols for managing and destroying private keys associated with digital wallets and services. Consider using multi-signature wallets or hardware security modules (HSMs) for added protection.

• Deactivating smart contracts: If applicable, systematically deactivate smart contracts to mitigate risks.

• Implementing cybersecurity measures: Maintain strong cybersecurity practices throughout the shutdown process, including regular security audits, vulnerability assessments, and incident response plans.

Data Management

Develop a comprehensive data management plan to protect privacy and comply with regulations. Here are some tips:

• Data inventory: Conduct a thorough assessment of all data assets, including customer information, financial records, intellectual property, and employee data.

• Data classification: Categorize data based on sensitivity levels to determine appropriate handling and retention periods.

• Data deletion or transfer: Securely delete or transfer customer data in accordance with privacy regulations. Obtain necessary customer consent for data transfers.

• Data retention: Determine the appropriate retention period for company data based on legal and operational requirements.

• Data breach response: Develop a plan for responding to potential data breaches during the shutdown process.

Open Source Projects

For startups with open-source contributions, consider the following:

• Community engagement: Communicate the shutdown plans to the open-source community to minimize disruptions.

• Code transfer: Transfer ownership or maintenance responsibilities to other community members or organizations.

• Archiving code: Create comprehensive code repositories and documentation for future reference or reuse.

• Licensing considerations: Review open-source licenses to ensure compliance during and after the shutdown.

Consider these guidelines to minimize security risks, protect sensitive information, and responsibly manage open-source contributions during the shutdown process.

Maximizing Value: Liquidating and Distributing Assets

An effective liquidating strategy isn’t only about managing the sale of crypto assets but also ensuring that all remaining assets, including intellectual property, are appropriately distributed to stakeholders.

Here’s how to go about liquidating crypto assets:

• Asset Valuation: Accurately valuing crypto assets is crucial for determining their worth. Consider using multiple valuation methods, including market-based, income-based, and cost-based approaches.

• Market Analysis: Conduct thorough market research to identify optimal selling points. Avoid dumping large volumes of assets at once, as this can depress prices.

• Gradual Liquidation: Consider a phased liquidation strategy to minimize market impact.

• Diversification: If holding multiple cryptocurrencies, prioritize liquidation based on market performance and liquidity.

• Exchange Selection: Choose reputable exchanges with high trading volumes and liquidity to facilitate efficient asset sales.

For traditional assets, conduct a detailed inventory of physical assets and determine their market value. Consider selling assets through online marketplaces, auctions, or directly to interested buyers. For intellectual property, assess the value of patents, trademarks, copyrights, and other IP assets. Explore options like licensing, selling, or transferring IP to other parties.

Asset Distribution

After settling all outstanding debts, distribute the remaining assets to shareholders, investors, and other stakeholders. Begin by determining the fair market value of all assets, including cryptocurrencies, traditional assets, and intellectual property.

When deciding on the distribution method, consider options like cash payouts, in-kind transfers, or selling assets and distributing the proceeds. Ensure you follow any shareholder agreements that outline specific distribution procedures.

Conclusion

Having read this far, you now know the basics of shutting down a crypto startup. However, given the different business models, applicable state and international regulations, and the ever-evolving landscape, it’s best to work with a professional.

SimpleClosure has successfully guided many crypto startups through a smooth shutdown, helping them avoid legal and financial pitfalls. Ready to close your startup and move on to the next chapter? 

Let’s talk!