Perspective by: Shane Molidor, Founder, Forgd
For years, initiating a crypto venture in the United States has been a labyrinth of unpredictability. Legal vagueness and a challenging regulatory climate have compelled founders to seek alternatives abroad, making locations such as Switzerland and the Cayman Islands essential centers for blockchain advancement.
With Trump’s ascent to the presidency, progress appeared on the horizon, as a US administration explicitly expressed its aim to be crypto-supportive. However, despite the declarations, no substantial alterations have occurred thus far.
Launching a crypto initiative in the US remains as problematic as ever. US regulatory bodies persist in issuing nothing more than ambiguous threats and “regulation through enforcement” lawsuits. Though America aspires to be a leader in crypto, even under the Trump administration, it has not taken effective steps to cultivate the conditions necessary for that to happen.
Stifling crypto in America
Every crypto endeavor grapples with the same core challenge: Attaining decentralization is vital to avert regulatory oversight, yet until a project issues its token, some level of centralization is inevitable.
The SEC’s antiquated Howey test guarantees that nearly every legitimate crypto venture is categorized as a security. This reasoning is paradoxical. Projects cannot decentralize without launching a token, but launching a token in the US immediately places them in the SEC’s sights.
This isn’t merely a theoretical concern; it has tangible repercussions. Liquidity providers, crucial for any new token issuance, are reluctant to engage with US-based initiatives due to the presumption that their tokens will be deemed securities. Centralized exchanges decline to list tokens issued by US entities for the identical reason. Even decentralized exchanges experience pressure from their legal departments to refrain from actively providing liquidity for American projects. The outcome? US founders are excluded from the global crypto ecosystem before they can even begin.
Offshore locales are gaining ground
This regulatory inadequacy has given rise to a whole market of offshore legal firms focused on establishing token-issuing entities. With its FINMA no-action letter framework, Switzerland has emerged as a vibrant location for crypto projects because it provides one of the rare structured pathways to attain legal clarity regarding a token’s classification. The Cayman Islands and British Virgin Islands have also positioned themselves as crypto sanctuaries, offering flexible corporate structures that allow projects to function with significantly lower regulatory exposure.
Recent: US Treasury aims to sever ties with Huione over connections to crypto illicit activities
The irony is that the actual work — the development, the hiring, the innovation — continues to occur in the US. Token issuance is redirected offshore through “Associations” and “Foundations,” which operate as non-profits independent of US-based development teams. American founders are compelled to allocate funds towards unnecessary legal expenses, overseas operators, and shell foundations to sidestep the impending crackdown from US regulators. This situation is detrimental not only to crypto but also to America. Unless addressed, the US will persist in losing talent, investment, and influence to less narrow-minded jurisdictions.
Make America crypto-friendly
The US has spent years mishandling crypto policy, and now, even with an administration that professes to support crypto, it continues to struggle to effect actual change. The remedy isn’t to promise capital gains tax exemptions on crypto, as some have proposed. That does little to improve the punishing regulatory framework that US-based projects must navigate. If the US genuinely wishes to take the lead in crypto, it must also spearhead efforts to clarify regulations.
This necessitates finally acknowledging that the same regulations which have overseen traditional financial markets cannot always apply to crypto. The Howey test is ineffective. Instead, the government should introduce a new and practical legal structure for the crypto sector.
It’s time for US lawmakers and regulators to recognize that crypto tokens cannot achieve decentralization overnight and generally demand the efforts of a core team to catalyze initial growth and development. The federal government must formulate an alternative to the Howey test that does not automatically label every new crypto token as a security but rather permits tokens a grace period to decentralize. Alongside this, the US must implement fresh safeguards to ensure insiders do not disproportionately benefit from crypto projects as they scale.
In addition to promptly ending the “regulation by enforcement” strategy employed under Gary Gensler’s SEC, a strategy seemingly aimed at gradually stifling crypto activity in the US, the government must furnish clear guidelines. It must be possible for market makers to determine whether US tokens are commodities or securities with a degree of stability and predictability. This is the only means to eliminate the blanket prohibitions market makers have enforced on US tokens and revive crypto innovation in America.
America’s chance is dwindling
Crypto founders are not awaiting Washington’s resolution. Each day, in the absence of clear regulations, more crypto projects are established offshore. The US does not even need to “welcome” crypto. It merely needs to cease actively repelling it.
If this administration genuinely desires to establish the US as the front-runner in crypto, it must transcend campaign rhetoric and begin addressing the fundamental issues that originally compelled this industry overseas. And it must act swiftly.
Perspective by: Shane Molidor, Founder, Forgd.
This piece serves for general informational purposes and is not intended to be construed as legal or investment advice. The views, thoughts, and opinions expressed here belong solely to the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.