Credit…Gabby Jones for The New York Times
The wave of government enforcement against cryptocurrency companies is beginning to remake the industry.
Coinbase, the largest crypto exchange in the United States, has opened a business in Bermuda. Gemini, a rival firm based in New York, is seeking a license in the United Arab Emirates. And Bittrex, an exchange in Seattle, has shut down its U.S. operations.
After years of trying to shape federal regulation in the United States, a growing number of American crypto companies — particularly the exchanges where customers buy and sell digital tokens — are exploring plans to build their businesses abroad. They are expanding into new markets and weighing the possibility of leaving the country entirely.
The moves are a response to a growing law enforcement crackdown that has made the United States one of the strictest regulators of crypto in the world. On Tuesday, the Securities and Exchange Commission filed a long-anticipated lawsuit against Coinbase, arguing that the exchange was marketing securities without the proper registration. A day earlier, the S.E.C. sued the international crypto exchange Binance, seeking to bar its founder from the U.S. securities market.
The enforcement is a turning point for an industry that seemed to be gaining mainstream acceptance just a year ago. Cryptocurrencies were created with an antigovernment ethos, as a decentralized finance system that would operate beyond the reach of regulators. But as the market surged in 2021, crypto companies set up a lobbying apparatus in Washington and sought to rebrand themselves as a compliant business eager to work with the government.
That effort has largely failed. Last year, a series of crypto meltdowns created widespread suspicion of the industry. Congress, regulators and the public have become increasingly hostile.
These days, the possibility of leaving the United States is “the No. 1 thing that crypto start-ups are talking and thinking about,” said Nic Carter, a founder of Castle Island Ventures, a crypto venture capital firm. “You can move to the Caymans or London or Bermuda, or have a significant faction of your executives there, or Hong Kong or Dubai.”
In theory, a large exodus from the United States could eventually make it harder for Americans to trade digital currencies and experiment with new crypto products. But not all American crypto companies are seeking to relocate: Firms that specialize in Bitcoin mining, an energy-intensive process, have flocked to the United States in pursuit of cheap power. And even crypto companies that are expanding internationally plan to fight for more favorable rules in Washington.
Still, tensions between the industry and U.S. regulators have been growing since early 2021, when Gary Gensler, a staunch crypto critic, was appointed chair of the S.E.C. For two years, the S.E.C. has argued that almost all cryptocurrencies should be classified as securities, like stocks traded on Wall Street, which would force crypto firms to register with the agency and subject them to strict disclosure requirements.
A new round of hostilities began in November after the collapse of FTX, the crypto exchange founded by Sam Bankman-Fried. Over the following months, the S.E.C. sued a series of crypto lending firms and cracked down on an investment product marketed by Kraken, a popular U.S. exchange.
At the same time, several top financial regulators issued statements warning banks about the risks of crypto. The industry’s supporters labeled the government actions Operation Choke Point 2.0, alluding to an Obama-era law enforcement campaign to prevent banks from working with certain businesses.
“Things definitely took a big turn after the FTX collapse,” said Perianne Boring, who runs the Chamber of Digital Commerce, a crypto advocacy group. “We had a lot of good-faith efforts underway at the S.E.C. and even with other policymakers that are now the big critics.”
As the largest U.S. crypto company, Coinbase has been at the center of the regulatory debate.
After it was founded in 2012, Coinbase rose to prominence by marketing itself as the most trustworthy and compliant crypto exchange. Two years ago, it went public, a watershed moment that seemed to signal the industry’s growing role in U.S. commerce.
Since then, Coinbase has clashed repeatedly with federal regulators. In September 2021, after the S.E.C. stopped the firm from offering a popular investment product, the company’s chief executive, Brian Armstrong, accused the agency of “really sketchy behavior.”
In Washington, Coinbase and other major U.S. crypto companies have fought back against the intensifying regulatory regime, lobbying legislators to create rules tailor-made for the digital asset industry. But as those efforts have fallen apart, some crypto firms have started looking abroad.
At a conference in London in April, Mr. Armstrong said the United States needed clearer rules governing crypto. “If the U.S. doesn’t have this,” he said, “these firms are going to be built in offshore havens.”
Coinbase was already beginning to move in that direction. In May, the company said it was opening an international exchange, based in Bermuda, that would allow overseas users to make a type of high-risk, high-reward trade that is barred in the United States.
In a statement announcing the business, Coinbase said it “remained committed to the U.S.” But it noted that other countries were starting to “strategically position themselves as crypto hubs.” The company did not respond to a request for comment.
“We see countries that instead of trying to litigate, they’ve actually sat down, assessed the risk in the marketplace and established new rules,” said Kristin Smith, the chief executive of the Blockchain Association, a crypto advocacy group. “We’re going to see different projects and developers launch and operate initially overseas.”
Still, a wholesale abandonment of the United States is unlikely anytime soon. The crypto industry has always had global reach, with companies scattered throughout Europe, Asia and the Caribbean. Coinbase is planning to challenge the S.E.C.’s lawsuit, and a victory could give the industry new ammunition to push for the laws it wants.
But as the enforcement actions pile up, other U.S. crypto companies are taking steps to expand their businesses overseas.
Last week, Gemini, the crypto exchange founded by Tyler and Cameron Winklevoss, said it was seeking a license to operate in the Emirates. The announcement cited statistics showing that the Emirates had outpaced the United States in crypto adoption. A Gemini spokeswoman did not respond to a request for comment.
In March, Bittrex announced that it would halt operations in the United States, citing “the current U.S. regulatory and economic environment.” A few weeks later, the S.E.C. sued the crypto exchange; its U.S. arm has filed for bankruptcy, while the company’s global exchange continues to operate abroad.
In a statement, Oliver Linch, the chief executive of Bittrex’s global operation, said it was “no surprise” that crypto companies were looking overseas. “The chaotic regulatory environment in the U.S. is only serving to compound the woes of the crypto winter and the scandals of 2022,” he said.
For business founders with relatively small crypto companies, a move is especially tempting. “For new start-ups, it’s easier,” said Mr. Carter of Castle Island Ventures. “There’s definitely an appetite to consider other jurisdictions.”
David Yaffe-Bellany covers cryptocurrencies and financial technology. He graduated from Yale University and previously reported in Texas, Ohio, Connecticut and Washington, D.C. @yaffebellany