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A long time ago, cryptocurrency companies operated quite comfortably in the United States. In that ancient era, they often held fundraising activities called "Initial Coin Offerings (ICOs)" and then used the funds raised to try to achieve goals in both the real world and the blockchain world.

Today, most of them conduct these activities "offshore" through foreign entities while geographically blocking the United States.

The effects of this change are significant: almost all major cryptocurrency issuers that started in the United States now include some offshore foundations. These entities pose significant challenges domestically. They have high operating costs, are difficult to manage, and leave many key issues in governance and regulation only partially resolved.

Many industry insiders are eager to "re-onshore," but until this year, there was no path to follow. However, this situation may change. New cryptocurrency regulations are on the horizon, some members of the Trump family have proposed eliminating capital gains tax on cryptocurrencies, and many U.S. federal agencies have halted enforcement actions against cryptocurrency companies.

For the first time in four years, the government has sent a signal of open cooperation to the cryptocurrency industry. A path back to the United States may soon emerge.

The story of U.S. offshore operations dates back to 2017. Cryptocurrency was still young, and the U.S. Securities and Exchange Commission (SEC) took a non-interventionist regulatory approach to these new products. This all changed when the commission released a document titled "The DAO Report."

For the first time, the SEC asserted that homemade cryptocurrency tokens developed since the 2009 Bitcoin white paper are actually regulated instruments known as securities. This ban was not a blanket prohibition—at the same time the "DAO Report" was released, SEC Corporate Finance Director William Hinman publicly stated that Bitcoin (BTC) and Ethereum (ETH) are not securities.

To clarify this distinction, the commission released a digital asset framework in 2019, which identified relevant factors for assessing a token's security status and noted that "the stronger these factors exist, the less likely it is to meet the Howey test." Relying on this guidance, many speculated that the "consumptive" use of tokens would exempt projects from securities issues.

At the same time, the complex tax implications gradually became clearer. Tax advisors reached a consensus that, unlike traditional financing tools such as Simple Agreements for Future Equity (SAFEs) or preferred stock, token sales are fully taxable events in the United States. Simple Agreements for Future Tokens (SAFTs)—contracts for issuing future tokens—fared little better in terms of tax treatment, merely deferring the taxable event until the token's release. This means that U.S. companies conducting token sales would incur significant tax liabilities.

Projects indeed attempted to comply with these guidelines. Lawyers distilled principles and advised clients to adhere to them. Some gritted their teeth and paid taxes rather than trying to create a foreign presence for a U.S. project.

This continued for several years. The SEC took some major enforcement actions, such as against Ripple (XRP) and Telegram, and shut down other projects like Diem. But many founders still believed that if they strictly followed the rules, they could operate legally in the United States.

Then, events conspired to break this uneasy balance. SEC Chairman Gary Gensler took office in 2021, Sam Bankman-Fried triggered the collapse of FTX in 2022, and an obscure judge, Paul Barbadoro, issued an opinion in a case in the New Hampshire District Court regarding SEC v. LBRY.

The LBRY case was a small case affecting a trivial crypto project, but its legal application had a significant impact on cryptocurrency legal practice and thus affected the pathways available to founders.

Judge Barbadoro acknowledged that the token might have consumptive uses but stated, "There is no case law indicating that tokens with consumptive and speculative uses cannot be sold as investment contracts."

He continued to say that he could not "reject the SEC's view that LBRY offered [tokens] as securities simply because some [tokens] were purchased with consumptive intent." Due to "economic realities," Barbadoro believed that even if some people "may have purchased LBC partially for consumptive purposes," it was irrelevant.

This was devastating. In the LBRY case, Judge Barbadoro found that while consumptive uses might exist, the buyers' profit expectations dominated.

It turned out that this meant almost any token issuance could be considered a security. As long as there is evidence that the token was promoted as having potential profits, it could be used against you. Even the possibility that people bought it to profit could be fatal.

This created a chilling effect. The LBRY case and related case law shook the landscape of cryptocurrency projects. What may have been operable within the framework in the past now left only one hope for legal operation in the United States: to move offshore and decentralize.

Even the SEC acknowledged that Bitcoin and ETH are not securities because they are decentralized. Since no promoters can be held responsible for their sale, they are generated by decentralized networks and cannot be attributed to anyone. Projects in 2022 and 2023 had little choice but to attempt decentralization.

Inevitably, these actions would start from the United States. Some developers would create a project in a small apartment. When they achieved success, they wanted to raise funds—and in cryptocurrency, when you raise funds, investors need tokens. But selling tokens in the United States is illegal.

Therefore, their venture capitalists or lawyers would advise them to establish foundations in more favorable jurisdictions, such as the Cayman Islands, Zug in Switzerland, or Panama. This foundation could be used to "package" a decentralized autonomous organization (DAO) that would have governance mechanisms related to the tokens.

Through this entity or another offshore entity, they would either sell tokens under the regulatory S exemption of U.S. securities law or simply gift tokens through airdrops.

In this way, projects hoped to develop liquidity markets and a substantial market capitalization, ultimately achieving "decentralization," which might allow them to operate legally as entities in the United States again.

In 2023, several cryptocurrency exchanges registered in more friendly jurisdictions Source: CoinGecko

Now, this situation may change. With Donald Trump taking office, the corridors of 100 F Street in Washington, D.C., may be thawing. SEC Commissioner Hester Peirce has taken on a new role, leading the SEC's cryptocurrency task force.

In recent weeks, Peirce has expressed interest in providing forward-looking and retroactive relief for token issuers and creating a third regulatory approach through the SEC's Rule 28 exemption, treating token issuances as "non-securities."

Meanwhile, the evolution of the law is beginning to open doors for operations offshore. David Kerr of Cowrie LLP and Miles Jennings of a16z have pioneered a new type of corporate form, the Decentralized Unincorporated Nonprofit Association (DUNA), which may allow autonomous organizations to operate as legal entities in U.S. states like Wyoming.

Eric Trump has proposed favorable tax treatment for cryptocurrency tokens, and while this may be a stretch, it could provide significant incentives for bringing assets back onshore. Without waiting for any official regulatory changes, tax lawyers have devised more effective fundraising methods, such as token warrants, to help projects navigate the existing system.

As a16z recently stated in a meeting with Commissioner Peirce's cryptocurrency task force, "If the SEC can provide guidance on distribution, it will curb the trend of [tokens] being issued only to non-U.S. persons—this trend is effectively offshoring the ownership of blockchain technology developed in the U.S."

Perhaps this time, they will listen.

Related Articles: Paul Atkins officially appointed SEC Chairman: Shift in crypto regulation, agency downsizing, and the market will welcome a "new normal."

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