US cryptocurrency exchanges are setting up offshore venues in a hunt for overseas customers and to escape being ensnared in a regulatory blitz from US authorities.
Two of the largest venues, Nasdaq-listed Coinbase and Gemini, have stepped up plans to launch marketplaces outside the US following enforcement cases against domestic crypto companies.
US regulators have toughened oversight of the digital assets market following the failure of lenders such as Celsius Network and FTX, the exchange run by Sam Bankman-Fried. Besides targeting individuals, watchdogs have also deemed some products illegal in the US and forced companies to pull lucrative business.
By contrast US crypto exchanges’ offshore rivals have been able to launch products and take market share with less fear of reprisal. Binance, which says it has no headquarters, has become the world’s largest crypto exchange with daily volumes that dwarf US rivals.
“For crypto companies trying to engage in compliance, they get punished in the marketplace by competitors that believe it’s better to beg for forgiveness than ask for permission,” said John Reed Stark, former head of the Securities and Exchange Commission’s internet enforcement division.
Coinbase said securing a licence in Bermuda would increase “economic freedom and opportunity” for its customers. But the US crackdown has also heightened investors’ nerves about using the US market.
Since the start of the year Kraken agreed to end its staking business in the US, in which customers agree to lock up their tokens in other crypto projects in return for a high yield, as part of a settlement with the SEC.
Paxos shut down further issuance of BUSD, the Binance-branded stablecoin, a token used to help traders move more quickly in and out of the crypto market; the SEC warned Coinbase it may face an enforcement action; and Bakkt quickly delisted 25 of the 36 available tokens on purchase of Apex Crypto, citing “regulatory guidance”.
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As uncertainty lingers, US marketplaces are losing ground to offshore rivals. Since January Coinbase’s share of the spot crypto market has almost halved to 5 per cent, according to data from Kaiko. Binance gained 30 per cent, partly on the back of free trading.
Smaller rivals such as Turkish crypto platform BtcTurk, Korea’s UpBit and EU-based Bitpanda have recorded double-digit gains in cumulative trade volume in the first four months of 2023, compared to the previous four-month period. Coinbase and Gemini have declined in the same period, Kaiko also found.
Without common global standards, exchanges are looking around the world for a favourable regime as a base for their growth plans. From offshore locations Coinbase and Gemini will both launch perpetual futures, a type of derivative widely favoured by regular traders, and a source of income for companies such as Binance.
“Regulation and standards for this market have been rolled out differently in different markets, in some cases there’s bespoke regimes, in some cases there’s no regime . . . it’s all very much a moving target at this moment in time,” Eva Gustavsson, head of public affairs at digital assets company Copper.co, told an FT conference last week.
The type of money most commonly used in crypto markets has also flowed out of the US in recent months. Most daily trading is done through buying and selling popular tokens such as bitcoin with stablecoins like tether. Stablecoins are normally pegged to the world’s biggest currencies and act as a bridge between crypto and traditional markets.
Since January the market share of British Virgin Islands-registered Tether has risen by a fifth to $82bn, representing more than 60 per cent of the market.
In contrast Circle, a stablecoin issuer that holds an array of US money transmitter licenses, has lost a third of its market share in the same period. Only $30bn of Circle’s USDC coins are now in circulation.
Hester Peirce, an SEC commissioner, argued solid US rules for governing crypto would reverse the flow, as investors would be attracted by predictable rules.
“When you have . . . central companies that are dealing with customers, it’s very likely you’re going to want to have some regulatory regime around them because you find out that centralised companies do the same kind of dastardly things whether or not they’re in crypto or something else.”
But many crypto executives acknowledge there are limits to escaping US rules.
“Crypto firms considering offshore locations like Bermuda in response to intensifying regulation may view this as an appealing short-term solution . . . if you want to serve the US market, then you need to work with US regulators,” said Thomas Hook, chief compliance officer at Bitstamp, a European exchange.
Moreover the criminal charges brought against some of FTX’s senior management, and civil charges against Binance for illegally serving US customers, underscore how US authorities have long extended their reach across borders, when it affects consumers or the dollar.
“US law is very clear on this: you can be a foreign entity but as soon as you touch American customers you have established jurisdiction for US regulatory agencies, period,” said Charley Cooper, former chief of staff at the Commodity Futures Trading Commission.
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