For years, launching a crypto project in the United States has felt like navigating a maze of uncertainty. The legal ambiguities and a challenging regulatory environment have consistently pushed founders to seek more favorable conditions abroad, turning nations such as Switzerland and the Cayman Islands into blossoming hubs for blockchain innovation.
Initially, there was hope that change would occur with the election of Donald Trump, as his administration signaled a potential shift towards a more crypto-friendly stance. However, despite the optimistic rhetoric, tangible regulatory changes have been alarmingly absent.
The State of Crypto Regulation
Currently, launching a crypto project in the U.S. remains fraught with difficulties. Regulatory agencies continue to adopt a strategy of vague threats and litigation, effectively creating a landscape of fear for founders. While America verbally proclaims its desire to lead in the crypto space, the lack of substantive action underlines an alarming disconnect.
Central to the challenges faced by new projects is the inherent tension between necessary decentralization and unavoidable centralization during early development. For most crypto ventures, avoiding regulatory scrutiny while simultaneously preparing for a token launch has become a daunting endeavor.
The SEC and the Howey Test
The SEC’s application of the outdated Howey test complicates matters further by classifying many legitimate crypto projects as securities. This creates a paradox: while decentralization is essential, the act of launching a token—a requirement for decentralization—immediately draws the SEC’s scrutiny.
This reality has dire implications. Liquidity providers are understandably hesitant to engage with U.S.-based projects, fearing regulatory backlash. Centralized exchanges typically avoid listing tokens from U.S. entities due to similar concerns. Even decentralized exchanges often face pressure to refrain from facilitating liquidity for American initiatives. Consequently, U.S. founders find themselves ostracized from the global crypto economy before even getting their projects off the ground.
Offshore Jurisdictions: A Growing Appeal
This regulatory void has given rise to a flourishing industry of offshore legal firms that specialize in helping crypto projects establish themselves outside of the U.S. Switzerland, with its FINMA no-action letter system, has emerged as a leader for crypto projects due to its structured legal framework. The Cayman Islands and the British Virgin Islands have also positioned themselves as friendly environments for crypto startups, providing flexible corporate structures with reduced regulatory risks.
Despite the bulk of innovation, development, and talent still residing within the U.S., token issuance frequently gets redirected offshore. Founders in America are compelled to divert funds into exorbitant legal fees and unnecessary overseas operations merely to circumvent the relentless scrutiny of U.S. regulators. This trend is detrimental not just to the crypto industry, but to the United States as a whole; if left unchecked, such practices will only lead to further talent exodus and diminished investment opportunities.
Pressing for Change
The U.S. has stumbled in its approach to crypto regulation for far too long, failing to deliver meaningful reforms even under a purportedly pro-crypto administration. Mere promises of capital gains tax exemptions do little to mitigate the oppressive regulatory environment that U.S.-based projects must navigate. For America to reclaim its leadership position in the crypto sphere, it must establish a clear and coherent regulatory framework.
This requires acknowledgment that existing regulations designed for traditional financial markets do not seamlessly translate to the crypto landscape. The current iteration of the Howey test fails to accommodate the unique characteristics of crypto tokens. A revised legal framework is necessary—one that provides a grace period for tokens to achieve decentralization while instituting safeguards to prevent misuse by insiders.
Beyond revising the regulatory approach, there is an urgent need to abandon the ‘regulation by enforcement’ strategy currently employed, which stifles innovation and activity within the U.S. market. Clear, predictable guidelines will empower market makers to assess whether U.S. tokens qualify as commodities or securities, ultimately ending the indiscriminate bans on these assets.
Time is of the essence. With every passing day, as the regulatory landscape remains unresolved, crypto founders are increasingly opting for offshore incorporation. The goal is not for the U.S. to ’embrace’ crypto but rather to refrain from actively pushing it away.
If this administration is genuinely committed to establishing the U.S. as a leading force in the crypto industry, it must move beyond superficial promises and swiftly address the foundational issues that have driven innovation outside its borders. The time to act is now.
This article is for general information purposes and is not intended to be taken as legal or investment advice. The views expressed herein are solely those of the author and do not necessarily reflect the views of any affiliated organizations.
