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Why US Crypto Startups Are Moving Overseas

crypto startups

US regulators for the most part have adopted a hardline stance towards crypto – preventing US crypto startups from thriving stateside. Bear markets have gotten a reputation for being the perfect time to BUIDL in crypto, and devs are getting bullish for 2023 to be the year that Web3 will start to impact the real world.

As more devs are responding to the growing interest of bringing real world assets (RWA) on-chain and bringing regenerative finance (ReFi) to the mainstream, the global crypto industry is poised for much growth.

Jurisdictions like Dubai have brought regulatory clarity through its new Virtual Assets Regulatory Authority, even offering supervision to oversee the sector within Dubai. Hong Kong and the United Kingdom are seeking public opinion on how to regulate the industry. However, a global economic superpower is lagging behind in exploring this upcoming technology.

The United States remains an outlier in attitudes towards crypto, resorting to enforcement as a means of regulation, with not much clear policy and regulations put into place. US regulators seem to be one-tracked in their approach to crypto, focused on whether some tokens should be classified as a security or commodity in tax reports.

Clear action is nonexistent

Things aren’t looking so good in the US from crypto startups. Most crypto firms in the US are under much uncertainty as the U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler is pushing to execute crypto stateside, starting off with declaring all tokens as securities.

Rather than providing regulatory clarity, the SEC, Department of Justice, and other US regulatory bodies have opted for scare tactics, threats, and fines. The US could have been home to a thriving crypto industry, but unpredictable attitudes in the US prevent the industry from flourishing.

There are many lawmakers in Congress aware of the inaction, and consequences of it – and all are convinced that this lack of regulatory clarity poses a risk to the US as a leader in financial technology, as crypto and blockchain technology has been adopted by industries all over the world.

Hostility towards crypto staking, crypto startups, and more

A few weeks ago, the SEC announced its war against crypto staking, a fairly popular crypto activity. 

Just a month ago, the SEC forced Kraken to shut down its crypto staking business, representing 10% of its annual revenue, and pay a $30 million fine. Keep in mind, Kraken is a centralised and highly regulated exchange based in the US.

It’s fairly ironic that Kraken has been operating legally for years in the US, in compliance with laws and regulations as much as possible, but has been struck by the SEC’s banhammer. At this rate, a whole sector in the crypto industry may disappear stateside.

Not only that, Coinbase is under threat from the SEC – and is under much deliberation due to its reputation for not having a headquarters in any country.

As a result in order to escape from US scrutiny, many companies opt to move offshore, away from the reach of US regulators and SEC regulation by enforcement. This move, although done by some truthful and legitimate crypto businesses, has also been done by fraudulent companies  and actors like Sam Bankman-Fried and FTX – all because moving offshore is a chance for growth.

In summary, the US isn’t the best place to launch a crypto startup.

What crypto startups are saying

“As a crypto startup founder myself, every single lawyer we have met with has advised us against considering the U.S. due to the regulatory uncertainty,” says Boyd Cohen, CEO and co-founder of Iomob, who developed WheelCoin. 

In token generation events (TGE), overseas crypto companies are often advised to use know-your-customer (KYC) processes to avoid selling tokens to the US, at the risk of having their token labelled a security.

No one quite knows what constitutes a security stateside, it’s pretty difficult to expand business to the US as builders hope to expand the reach of their tokens while avoiding the SEC’s watch.

While the SEC is only banking on the Howey Test to determine digital assets as securities, there’s actually not much criteria beyond that for not only regulators but also the SEC to pinpoint what’s allowed to be traded, leaving many questions unanswered. Thus, developers who build in good faith are anxious, as they aren’t intentionally planning to sell securities to US retail investors.

At this point, token-generating projects aren’t going to have much of a future in the US. With many other territories like Dubai, Singapore, Switzerland, and the UK providing better regulatory clarity for token issuers, many US-based token issuer-hopefuls are shifting their focus to start business overseas.

The US is globally known for being the birthplace of venture capital and innovation, and these setbacks by the SEC are only harming the US’s reputation for being at the forefront of financial technologies. If the US does not step its game up and develops clear regulations that everyone in the industry can transparently adhere to, the rise of a whole new generation of financial technologies is at risk.

America may lose the best crypto projects to come, and lose its potential of being a crypto hub, if regulatory certainty is not put in place.

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