As the United States steps up regulation of cryptocurrency companies, the industry’s landscape appears to be changing, according to an investigation by The New York Times.
Amid increasing regulation, many crypto businesses, especially those operating digital token exchanges, are considering expanding overseas or even moving out altogether. As the United States has become one of the world’s strictest cryptocurrency regulators due to a growing number of enforcement actions, these companies are exploring foreign markets and considering exiting the U.S. altogether.
Coinbase, the most prominent U.S. cryptocurrency exchange, is establishing operations in Bermuda, while New York-based rival Gemini is looking to obtain a license in the United Arab Emirates. Meanwhile, Seattle-based exchange Bittrex has ceased operations in the U.S.
The regulatory crackdown comes after the U.S. Securities and Exchange Commission (SEC) filed a long-awaited lawsuit against Coinbase on Tuesday, accusing the exchange of offering securities without the necessary registration. Just a day earlier, the SEC filed a lawsuit against international crypto exchange Binance, aiming to prevent its founder from participating in U.S. securities markets.
We previously reported that crypto companies are considering relocating or establishing operations abroad as a result of actions by the SEC and the Commodity Futures Trading Commission (CFTC), a situation dubbed “Operation Choke Point 2.0.”
The recent regulatory enforcement marks a significant change for an industry that once seemed to be entering the mainstream. Cryptocurrencies were originally created to circumvent government control and provide a decentralized financial system, but their growth has been hampered. Although crypto companies have worked hard in 2021 to build a lobbying network in Washington to present themselves as businesses that comply with government requirements, their efforts have been largely unsuccessful. Last year, the industry came under scrutiny due to a series of cryptocurrency crashes, leading Congress, regulators and the public to take a more confrontational stance.
Nic Carter, co-founder of crypto venture capital firm Castle Island Ventures, said relocation from the United States is a top priority for crypto startups. With the possibility of going to destinations such as the Cayman Islands, London, Bermuda, Hong Kong or Dubai, large-scale immigration could have an impact on digital currency trading and the exploration of new crypto products in the United States. However, not every American crypto company plans to move abroad. For example, Bitcoin mining companies are heading to the United States to find reasonably priced electricity. In addition, some crypto companies that are expanding internationally aim to continue advocating for more relaxed regulations in Washington.
Tensions between the industry and regulators have been escalating since the beginning of 2021, when Gary Gensler became chairman of the U.S. Securities and Exchange Commission. The SEC has been advocating for two years to classify the vast majority of cryptocurrencies as securities similar to those traded on Wall Street. Such a classification would require crypto companies to register with the SEC and subject them to strict disclosure obligations.
In November, the collapse of FTX, a crypto exchange founded by Sam Bankman-Fried, triggered a series of lawsuits from the SEC against crypto lending companies. The collapse of TerraLUNA also caused billions of dollars in losses to investors. At the same time, major financial regulators have issued warnings about crypto risks. These government actions have been called "Operation Choke Point 2.0" by industry supporters, similar to the Obama-era initiative to prevent banks from trading with certain companies.
Several crypto advocacy groups believe that FTX’s collapse marks a major shift, with the SEC and other policymakers that were previously supportive of crypto now becoming major critics of the industry.
As the largest crypto company in the United States, Coinbase has been playing a prominent role in these regulatory discussions. Since its founding in 2012, Coinbase has emerged as the most reliable and compliant crypto exchange. Two years ago, it made news with its public listing, a milestone that seemed to indicate the industry's growing influence in American commerce. However, since then, Coinbase has often clashed with federal regulators.
Crypto companies have been resisting increased regulation in Washington, urging lawmakers to develop a regulatory framework for digital assets. However, as those efforts have failed, some crypto companies have begun seeking opportunities overseas.
Brian Armstrong said at a London conference in April that the U.S. needs clearer cryptocurrency regulations. Without them, he warned, companies will set up in offshore havens. In line with that view, Coinbase announced in May that it would open an international exchange in Bermuda that would facilitate a type of high-risk, high-reward trading that is banned in the U.S.
In the announcement, Coinbase expressed its continued commitment to the United States, but also acknowledged that other countries are strategically positioning themselves as cryptocurrency hubs.
A full exit from the U.S. seems unlikely in the near future. Cryptocurrency companies have been operating globally, with branches in Europe, Asia and the Caribbean. Coinbase plans to contest the SEC's lawsuit, which, if successful, could provide the industry with new ammunition to push for its desired law to be passed.
However, other US crypto companies are considering expanding overseas. Recently, Gemini announced that it was seeking a license to operate in the UAE. A few months ago, Bittrex decided to stop operating in the United States due to the regulatory and economic environment. The US division of Bittrex has filed for bankruptcy, while its global exchange is still operating.
According to Mr. Carter of Castle Island Ventures, the increasing scrutiny of the industry has led many smaller crypto startups to consider relocating. For new companies, this is particularly tempting because the process of establishing a business overseas is easier.
Related content:
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U.S. Crypto Crackdown Could Restructure the Industry
Operation Choke Point 2.0: US cracks down on cryptocurrencies amid chaos and uncertainty
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