U.S. Firms Looking for Greener Pastures Abroad as Regulatory Action Strikes Home

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As the U.S. ramps up its regulatory measures against cryptocurrency firms, the landscape of the industry seems to be changing, according to a New York Times investigation in the matter.

In light of increasing regulation, a number of crypto enterprises, particularly those running digital token exchanges, are considering options for expansion overseas or even complete relocation. With the U.S. emerging as one of the world’s most stringent crypto regulators due to mounting law enforcement action, companies are exploring foreign markets and mulling over exiting the U.S. entirely.

The U.S’s most prominent crypto exchange, Coinbase, is establishing a presence in Bermuda, while competitor Gemini, based in New York, is looking to secure a license in the United Arab Emirates. Meanwhile, Seattle-based exchange Bittrex has ceased its operations in the U.S.

This regulatory clampdown comes after a long-awaited lawsuit filed by the Securities and Exchange Commission against Coinbase on Tuesday. The SEC accuses Coinbase of offering securities without the necessary registration. Just a day prior, the SEC filed a suit against Binance, an international crypto exchange, aiming to prevent its founder from participating in the U.S. securities market.

We have previously reported that crypto companies were looking to relocate, or establish presence, abroad, in light of the actions of SEC and CFTC, a situation that has got the moniker “Operation Choke Point 2.0“.

The recent regulatory enforcement marks a significant shift in an industry that appeared to be entering the mainstream not too long ago. Cryptocurrencies, originally conceived with a view to sidestepping government control and providing a decentralized financial system, have found their growth impeded. Despite efforts by crypto companies to establish a lobbying network in Washington in 2021 as their market soared, their attempts at portraying themselves as government-compliant businesses have largely been unsuccessful. The industry has come under scrutiny due to a series of crypto crashes last year, leading to a more adversarial stance from Congress, regulators, and the public.

Nic Carter, co-founder of crypto venture capital firm Castle Island Ventures, has indicated that the idea of relocating from the U.S. is a top concern for crypto start-ups. With the possibility of moving to destinations such as the Caymans, London, Bermuda, Hong Kong, or Dubai, it seems that a mass exodus could potentially affect American digital currency trading and the exploration of new crypto offerings. However, not every American crypto firm is planning to move abroad. Bitcoin mining companies, for instance, are heading to the U.S. in search of affordable power. Moreover, some internationally expanding crypto companies aim to continue advocating for more accommodating regulations in Washington.

This industry-regulator tension has been escalating since the start of 2021, around the time Gary Gensler, a vocal critic of cryptocurrencies, became the SEC’s chair. The SEC has been arguing that the vast majority of cryptocurrencies should be categorized as securities akin to Wall Street-traded stocks for the past two years. Such a classification would require crypto firms to register with the SEC and subject them to rigorous disclosure obligations.

A Wave of Disasters: When Friends Become Enemies

In November, FTX, the crypto exchange established by Sam Bankman-Fried, collapsed, setting off a wave of lawsuits against crypto lending firms from the SEC. The collapse of TerraLUNA is another event that caused billions of losses to investors. Simultaneously, various leading financial regulators issued warnings to banks about crypto risks. These government actions were dubbed “Operation Choke Point 2.0” by industry supporters, reminiscent of an Obama-era initiative to prevent banks from dealing with certain businesses.

Several crypto advocacy groups believes the FTX collapse marked a significant shift that gave the SEC and other policymakers who were previously supportive of crypto a reason to now become major critics of the sector.

Coinbase, the largest crypto firm in the U.S., has been a major player in these regulatory discussions. After its establishment in 2012, Coinbase gained prominence as the most reliable and compliant crypto exchange. It made headlines two years ago with a public offering, a milestone that seemed to indicate the growing influence of the industry in U.S. business. However, since then, Coinbase has frequently clashed with federal regulators.

Crypto companies have been resisting these heightened regulations in Washington, urging lawmakers to establish a regulatory framework specific to digital assets. However, as these endeavors fall apart, some crypto companies have begun to seek opportunities overseas.

Brian Armstrong, speaking at a London conference in April, suggested the U.S. needs clearer crypto regulations. He warned that without these, firms would be established in offshore havens. True to this sentiment, Coinbase announced the opening of an international exchange in Bermuda in May, which would facilitate a kind of high-risk, high-reward trading prohibited in the U.S.

In the announcement, Coinbase expressed its ongoing commitment to the U.S., but also acknowledged that other countries were strategically positioning themselves as crypto hubs.

The prospect of an all-out exit from the U.S. seems unlikely in the near future. Cryptocurrency companies have always operated globally, with branches across Europe, Asia, and the Caribbean. Coinbase plans to contest the SEC lawsuit, and if successful, this could provide the industry with fresh ammunition to push for the laws it desires.

Nevertheless, other U.S. crypto companies are considering their own overseas expansions. Recently, Gemini announced it was seeking a license to operate in the Emirates. A few months earlier, Bittrex decided to halt its U.S. operations due to the regulatory and economic climate. Bittrex’s U.S. branch has filed for bankruptcy, while its global exchange remains functional.

The increasing scrutiny of the industry is leading many smaller crypto start-ups to consider relocation, according to Castle Island Ventures’ Mr. Carter. This is especially tempting for newer companies due to the easier process of setting up overseas.