Cryptocurrency companies once flourished in the United States, frequently raising funds through initial coin offerings (ICOs) to support innovative projects in both real and blockchain environments. However, recent years have seen a dramatic shift, pushing these companies to operate primarily offshore while imposing geofencing restrictions around the U.S.
The consequences of this trend are significant. Most established cryptocurrency issuers have established offshore foundations, creating a myriad of challenges in the domestic market. These offshore entities are often expensive and complicated to manage, leaving many questions about governance and regulation only partially addressed.
Despite these hurdles, there remains a strong desire within the industry to “re-shore” operations. The regulatory landscape appears to be changing, as new rulemaking initiatives are anticipated from regulatory bodies, including discussions from the Trump family regarding the elimination of capital gains tax on cryptocurrency. Additionally, various U.S. federal agencies have reduced enforcement actions against crypto firms, signaling a possible opening for firms to return to domestic operations.
Crypto Companies’ Struggles with Compliance
The tendency for U.S. cryptocurrency firms to offshore operations can be traced back to 2017, following the SEC’s release of the “DAO Report.” This document was pivotal as it redefined homegrown cryptocurrency tokens as securities, sparking a wave of regulatory scrutiny that had previously been absent.
As the SEC mentioned in the DAO Report, some established cryptocurrencies like Bitcoin and Ether were not classified as securities. This distinction led many projects to believe that functional uses of tokens might shield them from securities classifications. However, as tax implications became clearer, the burden of taxation on token sales made compliance more arduous for U.S. companies, leading numerous projects to establish foundations in more favorable jurisdictions as a workaround.
SEC v. LBRY: A Turning Point
In 2021, with the arrival of SEC Chair Gary Gensler and the fallout from FTX’s collapse, the regulatory environment turned hostile. The case of SEC v. LBRY became particularly influential, as it suggested that even tokens with consumptive uses could potentially be deemed securities if they were marketed for profit. This legal interpretation inadvertently tightened the noose around U.S.-based projects, forcing many to pursue an offshore structure to remain compliant.
This has resulted in a precarious reality where to be compliant, projects must decentralize and often relocate operations abroad, away from U.S. jurisdiction, contributing to a growing perception that innovation in cryptocurrency is being stifled domestically.
Hope for Regulatory Change
Recent developments suggest a potential thaw in the regulatory landscape, with SEC Commissioner Hester Peirce leading an initiative to explore more favorable treatment for token issuers. Peirce’s discussions around exemptive measures and new corporate structures, such as decentralized unincorporated nonprofit associations (DUNA), hint at a future where onshore operations may once again thrive.
Moreover, ongoing advocacy efforts, such as proposals from Eric Trump for tax incentives related to cryptocurrency, add an additional layer of encouragement. These changes could serve as critical incentive structures for U.S. crypto firms to reengage with the domestic market.
The pressing concern remains whether U.S. regulators will heed the calls of industry stakeholders to provide clear guidance that would foster a healthier environment for domestic innovation. Industry confidence rests on the promise that productive dialogue can translate into actionable regulatory frameworks that support the growth of cryptocurrency technologies in the United States.
As the crypto landscape continues to evolve, the possibility of a return to an accommodating regulatory framework is on the horizon, with many hoping that this time, regulators will not just listen, but respond with meaningful action.
