Do crypto teams still need offshore foundations?
Attorneys weigh in on the issue in light of a changing US regulatory environment
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Now that the US regulatory climate around crypto has shifted, some, like a16z’s Miles Jennings, have declared that crypto foundations like those set up in the Cayman Islands are no longer necessary and should be a thing of the past.
Jennings, who is the venture firm’s head of policy and general counsel, wrote in a recent blog post that foundations became standard initially to increase decentralization. But over time, he argues, foundations’ lack of economic incentives, combined with existing legal and economic constraints, have made it difficult for the nonprofits to be productive or broadly financially successful.
“Most foundation setups require projects to spend upwards of $500,000 and several months working with an army of lawyers and accountants. This not only slows innovation, it’s cost prohibitive for small startups,” Jennings said.
“The situation has gotten so bad that it’s now increasingly difficult to even find attorneys with experience setting up foreign foundation structures, because many have given up their practices. Why? Because they now just collect fees as professional board members on dozens of crypto foundations,” he argued.
Jennings concluded that companies are just better. Foundations have turned into controlling entities, but could evolve into other formats like Decentralized Unincorporated Nonprofit Associations (DUNAs), while developer firms could become Public Benefit Corporations (PBCs).
How do other blockchain attorneys feel about crypto foundations, especially when they have historically been set up to address regulatory and taxation concerns?
“Foundations for token issuances are neither needed nor would they be particularly effective in instances where there was a concern whether or not the token constitutes a security,” David Otto, managing partner at Martin Davis PLLC who led defense in the recently-dismissed SEC lawsuit against DragonChain, told me in a message.
“There generally is no longer the perception that one needs to create a foundation (other than for specific jurisdictions that provide for tax benefits) in connection with a token issuance,” Otto added.
Moish Peltz, co-managing partner of Falcon, Rappaport & Berkman’s Digital Assets Group, said that offshore foundations can still have a role in crypto, but “rationale is narrowing as US rules catch up.”
Peltz suggested that US teams should look into starting US-based UNAs or DUNAs instead — or set up an LLC as a for-profit option.
He advises to “only look offshore if (a) a significant share of contributors cannot participate under U.S. securities or tax laws, or (b) the project’s community is already truly global and wants a neutral flag. Even then, they should expect to satisfy disclosure, KYC, and board-independence standards they would face here.”
“The real barrier is the tax,” Peltz continued. “Token treasuries often appreciate before they are spent. If the IRS provides clearer deferral or charitable-like treatment for bona-fide decentralized or public-goods projects, many of the remaining reasons to go offshore will compress.”
Tyler Harttraft, a partner at Bull Blockchain Law, told me that crypto foundations remain essential for US teams launching tokens. He noted that the tax breaks are the main reason crypto has been drawn to Cayman Islands foundations in the past, and this will likely remain the preferred pathway until new US regulation is solidified.
“The current US regulatory landscape offers no clear issuance pathway: Although the SEC is exploring exemptive relief and Congress has proposed measures like the Clarity Act and the Digital Asset Market Structure draft, none have yet created a formal safe-harbor for new token launches. As a result, advising a crypto firm to establish a separate non-US foundation remains the only reliable option for legal and tax certainty,” Harttraft said.
Video streaming- and data storage-focused network Livepeer is one example of a crypto ecosystem that just launched a foundation earlier this month in the current climate.
“We’re creating something leaner, more focused, and better suited to the actual needs of a mature, multi-entity, decentralized network,” Livepeer cofounder and CEO Doug Petkanics told me in a message. “Many foundations have become bloated intermediaries that exist as a regulatory workaround, and neither accelerate decentralization nor improve execution.”
The current political climate suggests foundations may not be needed for much longer, which would be a drastic change from the status quo of the past decade.
While some foundations serve more of a purpose than others, setting up something leaner or doing away with the model entirely would increase competition and aid scrappy startup builders in the US looking to bring tokenization to their consumer apps. Progress!
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