Nicky Gomez

The crypto market has recently witnessed a substantial surge, reflecting a heightened interest in the potential of digital assets. The recent approval of spot bitcoin ETFs by the US Securities and Exchange Commission stands as a landmark event, signaling a step toward regulatory acceptance.&nbsp;



But despite this, the crypto landscape continues to face increased regulatory scrutiny. Companies are finding themselves at a crossroads — particularly in the US.



Operating in a regulation-by-enforcement environment is akin to building a house without a blueprint — it’s chaotic, unpredictable and increases the likelihood of failure.&nbsp;



To foster a healthy and thriving crypto industry, the US should take cues from its more nimble neighbours in the Caribbean. More open, communicative and collaborative regulatory strategies provide a more solid foundation on which crypto businesses can thrive.



<h2 class="wp-block-heading">The crypto regulatory landscape in the US</h2>



The lack of crypto-specific legislation or clear guidelines from regulators on how existing laws apply to crypto has left US crypto companies in a perpetual state of uncertainty.



Only four of the world’s top centralized crypto exchanges are reportedly <a href="https://www.vaspnet.com/articles/how-regulated-are-the-worlds-top-crypto-exchanges">regulated</a> by the SEC. Following ether’s transition to a proof-of-stake consensus mechanism, the SEC’s <a href="https://blockworks.co/news/ethereum-foundation-removes-warrant-canary">recent probe</a> into Ethereum Foundation, a non-profit supporting the Ethereum ecosystem, is yet another example of confusing US crypto policy.&nbsp;



Read more from our opinion section: <a href="https://blockworks.co/news/fca-pro-crypto-regulation-skepticism">No, the UK’s Financial Conduct Authority isn’t now pro-crypto ETF</a>



The US’ regulation-by-enforcement approach — characterized by an emphasis on execution over collaboration — makes operating in the country akin to playing a game without knowing the rules. It’s a frustrating experience for businesses trying to navigate the crypto space.&nbsp;



Instead of providing a stable and predictable environment, the current US regulatory stance often feels reactive, leaving companies to second-guess their strategies, stifling innovation in what’s become a booming, global economic market. And given the current political climate in the US and the upcoming election, it is unlikely we will see bipartisan support for any crypto-specific legislation until 2025 at the earliest.&nbsp;



<h2 class="wp-block-heading">The appeal of smaller, nimbler jurisdictions</h2>



Many US crypto companies have begun exploring other jurisdictions for their non-US business, alternatives that embrace innovation while fostering a cooperative regulatory atmosphere. This is evidenced by the fact that 79% of the top centralized exchanges <a href="https://www.vaspnet.com/articles/how-regulated-are-the-worlds-top-crypto-exchanges">registered</a> with the Financial Crimes Enforcement Network (FinCEN) are also regulated in at least one other country.



Regions with a quicker-moving approach to crypto regulation have taken the opportunity to lead internationally on the innovation of crypto regulation. For example, Gibraltar implemented the DLT Provider Regime back in 2018 and became the first jurisdiction to supervise crypto service providers with a principles-based regulatory framework. 



In addition, the allure of the Caribbean as a burgeoning crypto hub is hard to ignore. Several countries in the region are taking positive steps by reflecting on, learning from and working to adapt their existing crypto legislation.&nbsp;



On Feb. 13, the Ministry of Financial Services in the Cayman Islands <a href="https://github.com/MinistryFinancialServices/Virtual-Asset-Amendment-Consultation">launched</a> a consultation on amendments to the Virtual Asset (Service Provider) Act. The changes build on its existing registration regime focused on anti-money laundering, counter-terrorist financing, and cybersecurity. They also introduced a licensing regime for virtual asset trading platforms and custodians.



On Feb. 29, the Bermuda Monetary Authority (BMA) <a href="https://www.bma.bm/viewPDF/documents/2024-02-29-16-55-24-Notice---Consultation---Digital-Asset-Business-Custody-of-Client-Assets-Rules-2024.pdf">launched</a> a consultation on its proposed Digital Asset Business (Custody of Client Assets) Rules 2024, which will enhance its current regulatory regime for digital assets, providing further clarity on the BMA’s expectations of any digital asset business holding client assets.



In 2023, the <a href="https://www.linkedin.com/company/securities-commission-of-the-bahamas/">Securities Commission of The Bahamas</a> (SCB) held a consultation with key crypto stakeholders on its proposed Digital Asset and Registered Exchanges Bill. We anticipate the SCB’s revised regulatory regime will soon come into force. In addition to strengthening the existing regime, the bill proposes to bring more novel services such as staking under the regulatory remit, and includes specific provisions for stablecoin issuances.



By embracing the potential economic benefits of crypto innovation, countries such as the Bahamas, Bermuda and the Cayman Islands are actively courting industry leaders, offering a regulatory framework that balances regulatory objectives with the freedom to innovate.&nbsp;



<h2 class="wp-block-heading">The way forward for crypto regulation</h2>



2024 is set to be a huge year for the crypto industry. Progressive regulatory regimes allow innovative firms to flourish, while regressive ones punish good actors and create conditions for bad actors to capture market share.&nbsp;



The migration of crypto firms to these more adaptive jurisdictions signifies a broader shift in the industry’s landscape. While the US is home to many key players in the crypto space, firms are seeking out jurisdictions that not only understand the technology underpinning crypto, but also actively engage in collaborative efforts to shape effective regulations.



As the industry navigates these changes, it’s clear that jurisdictions willing to embrace innovation while working hand-in-hand with industry leaders will be at the forefront of shaping the future of crypto regulation.&nbsp;



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<div class="wp-block-post-author-biography">Nicky is the Senior Partner at XReg Consulting, a boutique public policy and regulatory affairs consultancy specializing in cryptoassets. A former regulator with 15 years of experience in the crypto and financial services industries, Nicky leads the development of XReg’s presence in the Americas, with a strategic focus on Latin America, the Caribbean and North America.

Since founding XReg, Nicky has supported governments and international public bodies with the development and implementation of risk-based, outcomes-oriented cryptoasset regulatory frameworks and strategies that mitigate risk and leverage smart innovation.

He also provides strategic regulatory advice to some of the largest crypto businesses in the world and has successfully secured licenses and authorisations for clients in Europe, Gibraltar, the Caribbean and Asia. As the co-chair of the Global Digital Finance (GDF) AML working group, he helps shape global cryptoasset regulatory standards that mitigate risk and encourage innovation.

Prior to founding XReg, Nicky spent over nine years at the Gibraltar Financial Services Commission (GFSC) as the Head of Risk and Innovation, where he was part of the team that led the design and implementation of the world’s first bespoke regulatory framework for firms using Distributed Ledger Technology (DLT).</div>


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America should look to the Caribbean for crypto regulation

Bessie Liu

<div id="highlights-block_7dd1b740fa024ba548cd708c0322d92f" class="highlights">
 <ul>
 <li>The implementation of the new legal structure received unanimous support from community members</li>
 <li>DAO members cast 11 million voting tokens in favor of the proposal</li>
 </ul>
 
</div>



SushiDAO, the governing body of decentralized cryptocurrency exchange SushiSwap, is implementing a new legal structure after receiving <a href="https://snapshot.org/#/sushigov.eth/proposal/bafkreibawm6u4tsq4e5lqwz5yo3rg2k4p6upg5eqaeen33ghmuwxttiaqm" target="_blank" rel="noreferrer noopener">unanimous support</a> from community members.



Sushi’s current administrative structure includes a DAO of community members with voting privileges, alongside an execution team that manages smart contracts and the front end of the protocol.



The new legal structure will split Sushi into three new entities: a Cayman Islands DAO Foundation, a Panamanian Foundation and a Panamanian Corporation.



The Cayman Island Foundation will oversee all administrative aspects of the DAO, including treasury, grants and on-chain governance management. It will also facilitate proposals and voting, and enter into agreements with service providers as part of the grant-making process.



Smart contracts related to Kashi — the exchange’s lending and margin trading platform and automated market maker — will be handled by the Panamanian Foundation, as well as staking.



The Panamanian Corporation, which will be a wholly owned subsidiary of the Panamanian Foundation, will manage and assist with developing and maintaining the web-facing apps that make Sushi’s protocol accessible to the public.



According to <a href="https://forum.sushi.com/t/recommendation-for-sushi-legal-structure/11158" target="_blank" rel="noreferrer noopener">proposals</a>, Sushi also looked into setting up governance in Switzerland but determined that it was inappropriate as the regulatory and taxation model was “not favorable to growth companies.”



<h2 class="wp-block-heading">SushiDAO opts to avoid &#8220;flawed&#8221; DAO legislation in Wyoming</h2>



Panama is an attractive place to incorporate due to its free economic zones, non-existent income and tax withholdings and physical proximity to the United States.



But Neil Bhasin, a community member of SushiDAO, <a href="https://forum.sushi.com/t/recommendation-for-sushi-legal-structure/11158/16" target="_blank" rel="noreferrer noopener">said</a> Panama was chosen to host its protocol governance as “Panamanian foundations are non-commercial in nature and do not have beneficial owners.” 



Further, Bhasin highlighted that “the corporate formation process results in two entities that can separately house the protocol and GUI [graphical user interface] layers, which reduces the need to form additional entities.”&nbsp;



It is interesting to note that Wyoming, a US state which has catered to DAO LLCs, was not considered an appropriate home.



According to Bhasin, this was because “the Wyoming DAO legislation is widely accepted by those in the industry, including myself, as being flawed.”&nbsp;



“It’s also untested in the courts. We’re meant to be offering protection to devs and ops [developers and operations] folks, not exposing them to experimental, untested, poorly drafted legislation,” he said.



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SushiDAO Seeks Shelter in Cayman Islands, Panama

Sam Reynolds

<div id="highlights-block_6127d6e93bb39" class="highlights">
 <ul>
 <li>Binance recently hired former Singapore Exchange chief Richard Teng and registered a new company in the city in June while its Monetary Authority is reviewing its payment license </li>
 <li>But it’s unclear when the company plans to make the move, as a search of the Cayman Islands corporate directory shows it hasn’t been ‘struck off’ as some claim</li>
 </ul>
 
</div>



Singapore could be the new home of Binance as the company begins the process of registering a presence on the fintech-friendly island and staffing its operations with influential hires. 



However, the narrative of Binance needing to rush to Singapore expeditiously because its corporate structure in the Cayman Islands is on the verge of being deleted isn’t exactly the case as corporate filings from the offshore territory have revealed.&nbsp;



Recently, the exchange announced it had hired former Singapore Exchange executive Richard Teng as CEO of Binance Asia Services Pte, a company it registered in Singapore in 2018. But the company also has <a href="https://www.scribd.com/document/521828902/Binance-Singapore-Corporate-Registry" target="_blank" rel="noreferrer noopener">registered another firm</a>, Binance Pte, as of June 2021. Binance also has a firm called Binance Blockchain Technology Development Pte in the city. A month prior, Binance <a href="https://twitter.com/thesamreynolds/status/1412841996809506818" target="_blank" rel="noreferrer noopener">registered another firm by the same name</a>, Binance Ltd, in Hong Kong. 



According to experts Blockworks spoke with, Binance’s Asia Services corporation in the city exists to employ staff and provide a vehicle for registration with regulators for financial supervision. Binance’s Blockchain Technology Development Pte firm exists to license the technology behind Binance’s software to regional subsidiaries i<meta charset="utf-8">n exchange for remitting back trading fees and therefore reducing tax liability in its operating region.



Currently, Binance has <a href="https://twitter.com/thesamreynolds/status/1412843086317641728" target="_blank" rel="noreferrer noopener">dozens of local subsidiaries around the world</a> where it employs staff and markets itself to traders. This is similar to the Dutch Sandwich or Double Irish structures employed by US technology companies like Apple or Microsoft to migrate profits from intellectual property over to tax-friendly jurisdictions. 



At this time, Binance is not licensed in Singapore under the city state’s Payment Services Act as a digital payment token services provider. The Monetary Authority of Singapore says it&#8217;s reviewing the application, but the exchange is allowed to operate under a grace period that exists until the application is approved, rejected or withdrawn.



<h3 class="wp-block-heading">Rushing off to Singapore?</h3>



But does Binance really need to hurry over to the capital of Southeast Asia’s financial industry? 



The narrative has been that the exchange is packing up and leaving the Cayman Islands via a “strike off” (a form of dissolution), and an <a href="https://twitter.com/MinusWells/status/1429920586944286741" target="_blank" rel="noreferrer noopener">apparent filing</a> from Cayman’s corporate registrar says it’s due to be dissolved on October 29. 



However, <a href="https://www.scribd.com/document/521836526/Binance-Registry-Cayman-Islands" target="_blank" rel="noreferrer noopener">a filing retrieved by Blockworks</a> from the island’s corporate registry has no such reference on it and says the company is still active.  



Regardless of whether Binance needs to hurry over to Singapore, it might be in the best interest for the exchange to do so given Singapore’s reputation compared to the Cayman Islands.&nbsp;



&#8220;Singapore is widely considered to be the blue-chip destination for financial and regulatory security and oversight. Setting up shop in Singapore effectively gives Binance the &#8216;Good Housekeeping&#8217; stamp of approval and should help to eliminate some of the headwinds they have been facing recently in other jurisdictions,” Michael Conn, CEO of Singapore-based Zilliqa Capital, told Blockworks. “Setting up their business in Singapore will make it much easier for Binance to pursue a traditional equity raise, since Singapore is not seen as a tax haven or a place for shady dealings.”



Conn calls Binance’s steps toward Singapore “exciting news” given its strong regulatory protection that doesn’t handicap innovation. 



But time will tell if Binance actually sets sail and declares a headquarters on the island.  Even though Binance has been facing an endless supply of regulatory hurdles, the market thinks this might be soon coming to a close as its eponymous token, BNB, is up nearly 60% in the last month, <a href="https://www.coingecko.com/en/coins/binance-coin" target="_blank" rel="noreferrer noopener">according to CoinGecko</a>.



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