The Paradox of U.S. Cryptocurrency Startups
The U.S. cryptocurrency landscape is marked by a unique paradox for many startups. On one hand, they are drawn to the tech-savvy American workforce that is crucial for innovation and development. On the other hand, they must navigate the complex and stringent regulatory environment that governs financial markets in the United States, which is known to be one of the toughest in the world. This duality creates challenges for these startups, especially when it comes to launching new crypto tokens.
EigenLayer: A Case Study in Regulatory Evasion
EigenLayer, one of the most promising projects in the Ethereum ecosystem, has adopted a strategy commonly seen in the cryptocurrency space. It employed U.S. developers through a registered U.S. company while simultaneously creating a separate legal entity that issued its EIGEN token from a jurisdiction where U.S. securities and tax laws do not apply. This approach highlights a growing trend among crypto projects aiming to circumvent regulatory scrutiny.
Two projects connected to EigenLayer, Renzo and Ether.Fi, took this strategy a step further by explicitly prohibiting U.S. residents from participating in their airdrops. However, despite these restrictions, an analysis by CoinDesk revealed that wallets linked to at least ten U.S. employees of Eigen Labs claimed hundreds of thousands of dollars in tokens from these projects. This raises questions about the effectiveness of geoblocking measures and the adherence of crypto teams to their own policies.
Selective Compliance and Hypocrisy in the Industry
The behavior of these employees suggests a culture of selective compliance within the cryptocurrency industry. Many insiders have noted that while projects often claim their tokens are not securities, the fear of U.S. regulators drives most to implement measures that theoretically exclude American participants from claiming new tokens. However, these measures are often poorly enforced, leading to widespread circumvention.
According to a U.S.-based founder of multiple crypto startups, this selective compliance is indicative of a broader hypocrisy within the industry. “You’re minimally at risk when receiving an airdrop,” he stated, highlighting the discrepancy between the risks faced by project developers and those of individual claimants. This risk-reward dynamic fosters an environment where bypassing geoblocks has become commonplace.
The Role of Legal Protections and Compliance Practices
In light of the U.S. Securities and Exchange Commission’s ongoing crackdown on the cryptocurrency industry, many projects prefer to remain under the radar. They implement restrictive terms of service agreements and geofencing to limit access to their tokens, all in an effort to avoid regulatory hazards. However, these safeguards are often insufficient, as many U.S. crypto insiders have found ways to bypass these restrictions.
A U.S. executive from a startup that issued tokens through an offshore entity openly admitted to using VPNs to claim off-limits airdrops from other projects. This admission underscores the futility of such compliance measures, as many projects do not conduct thorough know-your-customer (KYC) checks that financial institutions typically require.
Geoblocking: A Weak Deterrent
The use of geoblocks and terms of service agreements is a common practice among crypto projects trying to prevent U.S. claims. For example, EigenLayer’s airdrop prohibited individuals from claiming tokens from “prohibited jurisdictions,” including the U.S. and Canada. Despite these measures, individuals like Sundel, a pseudonymous EigenLayer user, managed to claim tokens using a VPN, illustrating the ineffectiveness of such protections.
Industry insiders acknowledge that the practice of banning U.S. residents is ultimately a legal protection tactic. A European consultant noted that while companies set weak restrictions, they still desire U.S. users to have easy access to airdrops. This contradictory stance creates a “wink, wink, nod, nod” culture, where compliance is more about posturing than genuine adherence to regulations.
Offshore Entities and the Quest for Compliance
EigenLayer’s developer, Eigen Labs, is headquartered in Seattle, a hub for software development. However, the Eigen Foundation, which managed the airdrop, is establishing its office in the Cayman Islands, a jurisdiction known for its favorable regulations towards cryptocurrency companies. This strategic move reflects the growing trend of crypto projects relocating offshore to evade stringent U.S. regulations.
Ether.Fi, another project within the EigenLayer ecosystem, also implemented geoblocking measures to restrict U.S. web traffic. The project’s CEO, Mike Silagadze, moved to the Caymans due to regulatory pressures in Canada, further illustrating the lengths to which crypto entrepreneurs will go to avoid unfavorable conditions.
Complications from U.S. Employee Participation
Despite their stated efforts to prevent claims by U.S. residents, the reality is that many employees of Eigen Labs, who are based in the U.S., participated in the airdrops from both Ether.Fi and Renzo. CoinDesk’s examination of blockchain data confirmed numerous instances where wallets associated with these employees claimed substantial airdrops, raising potential legal implications for the projects involved.
The intersection of these airdrops with U.S. securities law remains speculative, as no regulators have accused any projects or individuals of wrongdoing. However, legal experts caution that knowingly allowing U.S. employees to claim tokens could jeopardize a project’s ability to claim exemptions under securities laws, complicating their compliance narratives.
Conclusion: The Irony of Compliance Measures
The irony of U.S. employees receiving restricted airdrops while their company implements geoblocking measures is not lost on industry observers. Eigen Labs’ actions call into question the sincerity of their compliance efforts. As the cryptocurrency landscape continues to evolve, the challenges posed by regulatory environments and compliance practices will remain at the forefront of the industry’s development.
In response to the situation, Eigen Labs announced the implementation of “standardized blackout periods” after airdrops, effectively banning employees from selling their claimed assets for a specified duration. This policy, however, raises further questions about the integrity of compliance measures and the motivations behind them.
As the cryptocurrency industry navigates these complex waters, the need for clear regulatory guidelines and effective compliance practices becomes increasingly urgent. The future of crypto in the U.S. hinges on the ability of startups to balance innovation with the realities of regulation.
