For much of the last decade, offshore jurisdictions were the only option crypto startups and decentralized finance (DeFi) projects could rely on, owing to how hostile governments were to digital assets as a whole. Crackdowns, enforcement actions, and public skepticism, limited the options of firms to offer crypto services, but that chapter may be closing fast.
After pro-crypto US President Donald Trump won the November elections, several jurisdictions around the world, including China, Morocco and Ukraine, have been contemplating on changing the legality status of crypto trading. The re-considerations is placing the viability of traditional offshore setups in question.
Many offshore jurisdictions, looking at the “change of heart” from world leaders on crypto, are being pressured by the public to conform to standardized rules.
Regulated jurisdictions like the United Arab Emirates (UAE), are currently offering what offshore markets increasingly cannot: access to institutional infrastructure and regulatory clarity. If more countries embrace digital currencies, business for offshore firms could go down significantly.
Legal limbo turned clear frameworks
Entrepreneurs have been facing years of stiff resistance from governments, which are frequently issuing warnings and asking enforcement agencies to prosecute founders. In the US, naysayers insisted that watchdogs like the Securities and Exchange Commission (SEC) were stifling crypto adoption through “regulation by enforcement.”
The SEC’s approach led to several high-profile cases that saw project leaders sentenced to prison, and others, like XRP parent company Ripple pay a fine worth $50 million. For regulators, the story behind crypto was fraud, narcotics, and illicit finance.
Under such conditions, launching a blockchain project within such an unclear regulatory regime was virtually unthinkable. Entrepreneurs fled to offshore jurisdictions that they could “afford,” all with characteristics of having a looser legal oversight and minimal reporting requirements.
Since 2015, the Caribbean, Eastern Europe, and Southeast Asia have all helped crypto projects to operate without immediate regulatory threats. Yet today, governments in regions such as the EU, Hong Kong, and the UAE now have detailed legal frameworks to govern activity.
The UAE, far from treating crypto as a threat, is courting blockchain startups, Web3 developers, and fintech innovators with what some might consider the “most progressive crypto regulations in the world.”
DeFi companies operating in the UAE have access to local banks, fiat payment gateways, and secure digital asset custody services, resources that are often out of reach in offshore setups.
In Europe, the Markets in Crypto Assets (MiCA) regulations have made 80% of European financial institutions see the importance of blockchain technology to an economy.
“MiCA has provided the clarity needed to accelerate innovation in the EU’s crypto economy… In the US, we’re seeing a clear pro-innovation policy, with serious momentum behind stablecoin and market structure reform. Europe can’t afford to watch from the sidelines,” said Coinbase France manager Côme Prost-Boucle in an interview early May.
DeFi projects may still need offshore flexibility
Although more countries are becoming more friendly to digital assets, offshore jurisdictions are still imperative to projects working in decentralized finance in its early stages.
Decentralization is a big ask for companies trying to fit into traditional compliance models. Regulators have yet to establish workable systems that oversee DeFi operations without compromising its very core principles like permissionless access and decentralized governance.
“A lot of the stuff people are building on DeFi would be illegal if tried in real life. Can’t start an exchange (like Uniswap) in meat space without registering with the SEC/CFTC, or build a bank (Maker) without getting a charter, or an MSB (Curve) without getting an MSB license,” said economics author John Paul Koning.