Will New US SEC Rules Encourage Crypto Companies to Return Onshore?

Once, long ago, 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 to try to do things in the real and blockchain world. The effect of this change has been dramatic: Practically all major cryptocurrency issuers started in the US 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 US 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 US.

The Shift in the Crypto Landscape

The story of US 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 report called “The DAO Report.” For the first time, the SEC argued that the homebrew cryptocurrency tokens that had developed since the 2009 Bitcoin 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 shared his views that Bitcoin and Ethereum were not securities due to their decentralized nature.

Understanding the SEC’s Framework

To clarify this distinction, the commission developed 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 US. 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 US company would generate a massive tax liability.

Challenges Faced by Crypto Companies

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 US project. 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 US if they stuck to the script.

New Developments in Regulation

As the landscape evolved, the SEC’s approach began to shift. The agency started to signal a willingness to engage with the cryptocurrency industry, which has led to speculation about potential new regulations that could ease the burden on crypto companies. The recent discussions about eliminating capital gains tax on cryptocurrency transactions have also sparked interest among industry leaders. This change could significantly alter the financial landscape for crypto firms, making it more attractive for them to operate within the US.

The Future of Crypto in the US

For the first time in years, there is a glimmer of hope for cryptocurrency companies looking to return to the US. The combination of new regulatory frameworks, potential tax reforms, and a more open stance from federal agencies could create an environment conducive to the growth of the crypto industry on American soil. However, the path forward is not without its challenges. Companies will need to navigate the complexities of compliance and ensure they are meeting all regulatory requirements.

Expert Opinions on the Matter

Industry experts believe that the SEC’s evolving stance could lead to a renaissance for cryptocurrency companies in the US. Many are optimistic that a clearer regulatory framework will emerge, allowing for innovation while ensuring consumer protection. The sentiment among crypto entrepreneurs is shifting towards a more positive outlook, with many expressing a desire to bring their operations back to the US.

Conclusion: A New Era for Cryptocurrency

As the cryptocurrency landscape continues to evolve, the potential for new SEC rules to bring crypto companies back onshore is becoming increasingly likely. The combination of regulatory clarity, potential tax reforms, and a more welcoming environment from federal agencies could reshape the future of the crypto industry in the US. While challenges remain, the possibility of a thriving domestic crypto market is on the horizon.