Once upon a time, cryptocurrency companies thrived in the United States. In that charming past, they frequently held funding events referred to as “initial coin offerings” and utilized the capital raised to attempt various projects in both the physical and blockchain realms.
Today, however, most of these activities take place “offshore” through foreign entities while deliberately avoiding the U.S. market.
This shift has had a significant impact: nearly all major U.S.-founded cryptocurrency issuers now operate with some form of offshore foundation. These organizations create substantial domestic complications. They are costly to manage, present operational challenges, and leave many important governance and regulatory issues inadequately addressed.
Many in the industry aspire to “re-shore,” but until recently, a pathway to do so did not exist. Now, however, changes may be on the horizon. New regulatory frameworks for cryptocurrency are being developed, some members of the Trump family have suggested removing capital gains taxes on crypto investments, and numerous federal agencies have eased enforcement against crypto businesses.
For the first time in four years, government signals indicate a willingness to engage with the cryptocurrency sector. A return to U.S. operations may soon be feasible.
### Efforts to Comply with U.S. Regulations
The trend of offshoring U.S. cryptocurrency operations can be traced back to 2017. At that time, the SEC had largely adopted a hands-off approach to regulating this emerging market. This all shifted with the release of a pivotal document known as “The DAO Report.”
For the first time, the SEC claimed that homemade cryptocurrency tokens, which had begun surfacing since the Bitcoin white paper in 2009, should be classified as securities. This determination wasn’t absolute; around the same time, the SEC’s Corporate Finance Director publicly stated his belief that Bitcoin (BTC) and Ether (ETH) did not fall under the securities category.
To clarify this classification, the SEC issued a framework for digital assets in 2019, identifying factors to assess whether a token qualifies as a security and noting that more robust consumer utility reduces the likelihood of meeting the Howey test. Many speculated that if tokens had tangible “consumptive” uses, projects would be less susceptible to securities concerns.
Meanwhile, complex tax ramifications were crystallizing. Tax professionals reached a consensus that unlike traditional financing instruments, sales of tokens were categorized as fully taxable events in the U.S. Even simple agreements for future tokens faced poor tax treatment, deferring tax liabilities only until the tokens were issued. This meant that a token sale launched by a U.S. entity would incur substantial tax liabilities.
Many projects earnestly attempted to abide by these regulations. Legal experts utilized principles from the SEC’s framework to guide their clients. Some made the difficult decision to pay taxes instead of circumventing U.S. regulations by establishing foreign entities.
### The Impact of SEC v. LBRY
For a few years, things proceeded with relative stability. The SEC pursued notable enforcement actions against companies like Ripple and Telegram, shutting down projects such as Diem. Still, many founders believed they could operate lawfully in the U.S. if they adhered to the established guidelines.
However, that equilibrium was disrupted. The arrival of SEC Chair Gary Gensler in 2021, the collapse of FTX led by Sam Bankman-Fried in 2022, and an unexpected ruling from Judge Paul Barbadoro in the case SEC v. LBRY altered the landscape significantly.
The LBRY case, though involving what appeared to be a minor crypto project, produced legal interpretations that profoundly influenced cryptocurrency law and the options available to founders.
Judge Barbadoro acknowledged that the token had consumptive uses but ruled that “nothing in the case law suggests that a token with both consumptive and speculative uses cannot be sold as an investment contract.” His assertion implied that it didn’t matter if some individuals had purchased tokens for consumptive reasons; the economic realities suggested that the expectation of profit prevailed.
This ruling was damaging. The LBRY decision effectively indicated that the SEC’s framework factors were largely irrelevant in securities disputes. The finding suggested that if there was evidence the token was marketed with a profit expectation, it could be treated as a security.
### Regulation and Optimism Drive Companies Offshore
This development had a chilling effect. The precedent from the LBRY case and subsequent rulings destabilized many cryptocurrency projects. Rather than providing a framework to operate within, the only remaining option seemed to be moving offshore and decentralizing.
Even the SEC acknowledged that Bitcoin and Ether were not classified as securities due to their decentralized nature. Without a single promoter accountable for their sale, these assets were viewed as products of distributed networks. Consequently, projects in 2022 and 2023 found themselves compelled to pursue decentralization.
Inevitably, most operations began in the U.S. Initially, some developers would work on projects from a small apartment. As their success grew, they needed funding, and in the crypto world, funds were typically tied to tokens. However, selling tokens legally in the U.S. was a violation.
Consequently, their attorney or venture capitalist often advised them to set up a foundation in a more accommodating jurisdiction, like the Cayman Islands, Zug in Switzerland, or Panama. This foundation could be structured to “wrap” a decentralized autonomous organization (DAO) with governance mechanisms linked to tokens.
By leveraging this entity, they could either sell tokens under exemptions from U.S. securities regulations or distribute them freely through airdrops.
This approach aimed to develop active markets and significant market capitalization, eventually achieving the level of decentralization needed to operate legally within the U.S. again.
These offshore arrangements not only ensured compliance but also provided tax benefits. Since foundations lack owners, they evade “controlled foreign corporation” rules, under which foreign firms are indirectly taxed in the U.S. via their American shareholders.
Well-structured foundations also took care to avoid engaging in U.S. business activities, maintaining their offshore status.
The outcome: they became highly efficient tax vehicles, free from direct U.S. taxation due to their offshore operations and shielded from indirect U.S. taxation because of their ownerless structure. Additionally, this arrangement cast a layer of legitimacy over them, making it challenging for regulators to identify a single point of control.
Once established, the U.S. arm of the company often transformed into a small “labs” or “development” unit, generating income by licensing their software and intellectual property to these offshore entities, all while waiting for the regulatory landscape to shift, anxious about potential enforcement actions.
Thus, it wasn’t solely regulation that pushed crypto companies offshore; hope played a vital role. Countless projects sought pathways to legally operate within the U.S., and the route to offshore decentralization appeared as the only viable option.
### A Gradual Shift
This situation may now be changing. With one of the Trumps at the helm, movement at federal agencies in Washington may be warming. SEC Commissioner Hester Peirce has assumed leadership of the agency’s Crypto Task Force.
Recently, Peirce has shown interest in providing both prospective and retroactive relief for token issuers, advocating for a regulatory “third way” wherein token launches could be regarded as “non-securities” under the SEC’s exemptive authority.
Simultaneously, legal advances are beginning to pave the way for onshore operations. Innovators like David Kerr and Miles Jennings have developed a novel legal structure known as the decentralized unincorporated nonprofit association (DUNA), which could permit autonomous organizations to register as legal entities in U.S. states such as Wyoming.
Additionally, propositions for favorable tax treatments for cryptocurrency tokens have emerged, which, while perhaps ambitious, could serve as a significant incentive to draw assets back to the U.S. Without waiting for formal regulatory changes, tax attorneys have devised more effective fundraising methods, such as token warrants, to aid projects in maneuvering through existing laws.
As recently highlighted by a16z in discussions with Commissioner Peirce’s Crypto Task Force, if the SEC were to clarify its stance on token distributions, it could reverse the trend of tokens primarily being issued to non-U.S. entities — a situation that effectively offshores ownership of the blockchain technologies that originated in the U.S.
Perhaps this time, they will heed the call.