US SEC Rules Could Spur Crypto Companies’ Return Onshore
The landscape of cryptocurrency regulation in the United States has undergone a dramatic and cyclical shift over the past two decades. Once, cryptocurrency companies operated relatively freely, conducting initial coin offerings (ICOs) and using the raised funds to build blockchain-based projects. Now, a significant portion of these firms have established offshore entities, primarily through foreign jurisdictions, operating “geofenced” within the US. This shift has presented considerable challenges for regulators and industry participants alike. The movement to “re-shore” operations—returning to a US-based structure—has been hampered, until recently by a complex and rapidly changing regulatory environment. However, a confluence of developments—including new regulatory rulemaking, proposals for tax relief, and a shift in regulatory attitudes—has introduced a glimmer of hope for companies seeking to establish a legitimate presence within the US cryptocurrency market.
The origins of this offshore trend trace back to 2017, a period when the Securities and Exchange Commission (SEC) took a relatively hands-off approach to these emerging digital assets. The SEC’s initial stance, articulated in a document called “The DAO Report,” classified cryptocurrency tokens as investment contracts—effectively treating them as securities. While SEC Director of Corporate Finance William Hinman publicly stated in 2017 that Bitcoin and Ether were not securities, the subsequent issuance of a framework in 2019, alongside the DAO Report, established a clearer line of demarcation. This framework identified factors to evaluate a token’s security status, noting that a “stronger their presence, the less likely the Howey test is met.” This led many to speculate that functional uses of tokens would insulate projects from securities concerns. However, this approach quickly became problematic.
Concurrent with these regulatory developments, significant tax implications emerged. Tax advisors determined that token sales were fully taxable events in the US, unlike traditional financing instruments such as simple agreements for future equity (SAFEs) or preferred equity. Simple agreements for future tokens (SAFTs)—contracts to issue tokens in the future—faced similar tax treatment, with the taxable event deferred until the tokens were released. This created a major disincentive for US companies to conduct token sales domestically, resulting in a massive tax liability. This situation encouraged companies to establish foundations in offshore jurisdictions, such as the Cayman Islands, Zug in Switzerland, or Panama, to manage their token offerings and distribute tokens. These structures would also give them a simple way to avoid US tax law.
The rise of offshore operations was not solely driven by regulatory concerns or tax implications; it was fundamentally fueled by hope. Companies desperately sought a path to operate legally within the United States. Establishing offshore decentralized autonomous organizations (DAOs) became the primary strategy. These entities would raise funds and sell tokens, often under a Regulation S exemption from US securities law – a key legal construct that allows foreign companies to offer securities to investors worldwide. Alternatively, they would distribute tokens through airdrops, essentially distributing free tokens to a wide audience. The creation of these structures was coupled with an effort to decentralize operations, believing that the SEC’s focus on distributed networks would exempt them from securities concerns.
The regulatory challenges created significant instability in the cryptocurrency ecosystem. Landmark enforcement actions by the SEC under Chair Gary Gensler, including its moves against Ripple and Telegram, and the shutdown of Diem (formerly Libra), further destabilized the environment. However, a pivotal case, SEC v. LBRY, introduced a critical shift in legal interpretation. Judge Paul Barbadoro’s ruling in this case, involving a minor cryptocurrency project, effectively undermined the SEC’s framework and the preceding DAO Report. Despite acknowledging that the token may have consumptive uses, Judge Barbadoro argued that “nothing in the case law suggests that a token with both consumptive and speculative uses cannot be sold as an investment contract,” adding that “some [token] purchases were made with consumptive intent” did not automatically render the sale a securities offering. This interpretation essentially removed the key factor of “promoter” from the Howey Test.
This legal outcome had profound implications. The holding in LBRY established that— regardless of whether some token purchasers had consumptive intent, the possibility of a profit expectation was enough to trigger securities regulations. It meant that any evidence suggesting a token was marketed as offering potential profits could be used against any issuer. The increased level of scrutiny introduced by LBRY resulted in an abrupt halt to the growth of the cryptocurrency industry as project founders became fearful of triggering security concerns.
Responding to this crisis, companies sought refuge in offshore decentralized unincorporated nonprofit associations (DUNA) created by lawyers like David Kerr and Miles Jennings at a16z. The DUNA structure offered a means of legitimizing autonomous organizations under US law. The regulatory outlook began to change as well, and, as a result, the possibility of US operations began to grow again.
Finally, there are developments toward a more open regulatory environment. SEC Commissioner Hester Peirce has taken the lead in the SEC’s Crypto Task Force and is advocating for retroactive relief and a “third way” – one that treats token launches as non-securities through the SEC’s Section 28 exemptive authority. Further efforts have focused on tax incentives. Projects have benefited from novel fundraising methods like token warrants to navigate the existing system, which is opening the door to offshore operations. Furthermore, recent discussions led by a16z and Commissioner Peirce’s Crypto Task Force underscore the value of guidance on token distributions—a trend that could stem the tide of tokens being exclusively offered to non-US persons.
As the situation stands, a renewed sense of optimism is emerging. The prospect of a more welcoming regulatory environment, combined with ongoing shifts in legal interpretation, presents a pathway for companies to re-shore operations and contribute to the growth of the US cryptocurrency market.
