Once, Cryptocurrency Companies Operated Comfortably in the US

In that quaint, bygone era, they would often conduct funding events called “initial coin offerings,” and then use those raised funds

Once, long ago, cryptocurrency companies used to operate comfortably in the U.S. They would often conduct funding events called “initial coin offerings,” and then use those raised funds to try to do things in the real and blockchain world. Now, they largely do this “offshore” through foreign entities while geofencing the United States.

The effect of this change has been dramatic: Practically all major cryptocurrency issuers started in the U.S. now include some off-shore foundation arm. These entities create significant domestic challenges. They are expensive, difficult to operate, and leave many crucial questions about governance and regulation only half answered.

Many in the industry yearn to “re-shore,” but until this year, there has been no path to do so. Now, though, that could change. New crypto-rulemaking is on the horizon, members of the Trump family have floated the idea of eliminating capital gains tax on cryptocurrency, and many U.S. federal agencies have dropped enforcement actions against crypto firms.

For the first time in four years, the government has signaled to the cryptocurrency industry that it is open to deal. There may soon be a path to return to the U.S.

Crypto firms tried to comply in the U.S.

The story of U.S. offshoring traces back to 2017. Crypto was still young, and the Securities and Exchange Commission had taken a hands-off approach to the regulation of these new products. That all changed when the commission released a document called “The DAO Report.”

For the first time, the SEC argued that the homebrew cryptocurrency tokens that had developed since the 2009 Bitcoin BTCUSD white paper were actually regulated instruments called securities. This prohibition was not total — around the same time as The DAO Report’s launch, SEC Director of Corporate Finance William Hinman publicly expressed his views that Bitcoin BTCUSD and Ether ETHUSD were not securities.

To clarify this distinction, the commission released a framework for digital assets in 2019, which identified relevant factors to evaluate a token’s security status and noted that “the stronger their presence, the less likely the Howey test is met.” Relying on this guidance, many speculated that functional “consumptive” uses of tokens would insulate projects from securities concerns.

In parallel, complicated tax implications were crystallizing. Tax advisers reached a consensus that, unlike traditional financing instruments like simple agreements for future equity (SAFEs) or preferred equity, token sales were fully taxable events in the U.S. Simple agreements for future tokens (SAFTs) — contracts to issue future tokens — faced little better tax treatment, with the taxable event merely deferred until the tokens were released. This meant that a token sale by a U.S. company would generate a massive tax liability.

Projects tried in good faith to adhere to these guidelines. Lawyers extracted principles and advised clients to follow them. Some bit the bullet and paid the tax rather than contriving to create a foreign presence for a U.S. project.

How SEC v. LBRY muddied waters

All this chugged along for a few years. The SEC brought some major enforcement actions, like its moves against Ripple and Telegram, and shut down other projects, like Diem. But many founders still believed they could operate legally in the U.S. if they stuck to the script.

Then, events conspired to knock this uneasy equilibrium out of balance. SEC Chair Gary Gensler entered the scene in 2021, Sam Bankman-Fried blew up FTX in 2022, and an unheralded opinion from Judge Paul Barbadoro came out of the sleepy U.S. District Court for the District of New Hampshire in a case called SEC v. LBRY.

The LBRY case is a small one, affecting what is, by all accounts, a minor crypto project, but the application of law that came out of it had a dramatic effect on the practice of cryptocurrency law and, by extension, the avenues open to founders.

Judge Barbadoro conceded that the token may have consumptive uses but held that “nothing in the case law suggests that a token with both consumptive and speculative uses cannot be sold as an investment contract.”

He went on to say that he could not “reject the SEC's contention that LBRY offered [the token] as a security simply because some [token] purchases were made with consumptive intent.” Because of the “economic realities,” Barbadoro held that it did not matter if some “may have acquired LBC in part for consumptive purposes.”

This was devastating. The holding in LBRY is, essentially, that the factors proposed in the SEC framework largely do not matter in actual securities disputes. In LBRY, Judge Barbadoro found that the consumptive uses may be present, but the purchasers’ expectation of profit predominated.

And this, it turned out,