U.S. crypto policy has come a long way in recent years. Once a niche issue that interested only a handful of enthusiasts in Washington, D.C., crypto now commands attention from all three branches of the federal government. Unfortunately, that increased focus has yet to produce clear rules and regulations for the crypto industry, leaving many companies to struggle against outdated laws enforced by hostile regulators.
But regulatory uncertainty hasn’t diminished the excitement and determination of the entrepreneurs we work with every day. We’re fortunate enough to see this first-hand in our work with founders on their regulatory strategy.
Given a lack of clarity as to how many laws apply to crypto products, founders often ask us about geofencing — preventing users in a specific jurisdiction from accessing a particular product so that the laws of that jurisdiction won’t apply. In an effort to provide founders and their counsel with practical guidance, we wrote an in-depth analysis of geofencing, looking at the reasons why a company might want to use it, the legal basis for why it might be effective, and best practices for how to implement it well.
A Practical Guide to Geofencing
At Variant, we work with founders in the earliest days of building and bringing their products to market. Recently, we’ve gotten many questions from founders about when and how to use geofencing as part of their regulatory compliance strategy. Inspired by conversations with founders in our portfolio and the broader space, we decided to share our views on geofencing in the hopes of helping founders make better decisions when they launch new products.
Geofencing works by taking a company outside the territorial scope of U.S. law, thereby eliminating the need to satisfy the regulatory compliance obligations that would otherwise apply to products and services offered within U.S. borders. Geofencing is also an unavoidable fact of life for many crypto companies, which have no choice but to geofence jurisdictions like North Korea and Iran in order to comply with U.S. sanctions laws.
Yet, within crypto, geofencing is often poorly understood and improperly implemented. Some companies that should be geofencing the United States aren’t doing so well enough for the strategy to be effective, and some aren’t geofencing at all. Meanwhile, other companies that don’t need to geofence the United States are doing so anyway, suffering the unnecessary cost of passing up the U.S. market. The crypto industry can do better.
In this guide, we seek to arm crypto companies and their counsel with the information and analysis they need to determine when and how to establish a U.S. geofence for products and services regulated under federal law. Although this area of law is uncertain and still evolving, our review of the case law reveals three key factors that courts often consider when deciding if a given product or service falls within U.S. jurisdiction. We hope that our analysis of those factors will enable crypto companies to make better decisions when it comes to geofencing.
This guide includes three sections. First, we define geofencing and explain its role in a crypto company’s overall regulatory compliance strategy. Second, we explore the territorial scope of the federal securities laws covering offers and sales of digital assets as well as other relevant U.S. regulatory frameworks. Third, we outline best practices for crypto companies to consider in establishing an effective U.S. geofence.
Read the full article on our website.
From the archive
Recent and relevant pieces from us
Jake: On Non-Transferability, Geofencing, and the Regulatory Risk Spectrum of Token Distributions
The SEC has refused to provide a workable pathway for the registration of digital assets. So what is a risk-averse lawyer to do?
Daniel: How Enforceability of Terms of Service Relates to UI
Sometimes the difference between enforceable and unenforceable terms of service comes down to the color of text and buttons. Really.
Daniel: Examining SEC v. Consensys
Building a project with swaps? Take a stroll with me as I walk through the broker test, which the SEC is pulling from to levy charges against two wallet providers: Coinbase and MetaMask.
Jake + Amanda Tuminelli: Crypto Goes on Offense in the Courts
If you’re looking for a regulatory read that leaves you feeling optimistic, this might be it. I give a brief explanation of “impact litigation” and detail how cryptocurrency advocates and companies are deploying the strategy against the SEC.
If this newsletter gave you ideas (or prompted more questions), we want to hear from you. Give a shout to Jake, Daniel, or anyone on the Variant team.
Thanks for reading. We’ll see you next issue.
Disclaimer: This post is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice or investment recommendations. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by Variant. While taken from sources believed to be reliable, Variant has not independently verified such information. Variant makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. This post reflects the current opinions of the authors and is not made on behalf of Variant or its Clients and does not necessarily reflect the opinions of Variant, its General Partners, its affiliates, advisors or individuals associated with Variant. The opinions reflected herein are subject to change without being updated.
1/ As U.S. regulators continue their war on crypto, many founders are thinking about geofencing as a compliance strategy. It can work, but only if it's done right. That’s why @dbarabander and I wrote this Practical Guide to Geofencing: https://blog.variant.fund/newsletter-legal-regulatory-affairs
2/ Our guide explains what you (and your counsel) need to know about geofencing. Geofencing means stopping people in a certain "geography" from accessing a product by creating a virtual “fence” around it. We start by explaining when it's useful as a compliance strategy.
3/ Geofencing is essentially a “when all else fails” fallback option when a company can’t: - satisfy applicable compliance obligations, like registration, disclosures, KYC, etc.; or - design the product in such a way that no compliance obligations apply in the first place.
4/ Geofencing is useful when neither of those options work. It’s a pretty extreme solution to the problem of regulatory uncertainty — completely abandoning the US market — but sometimes there’s just no other way. We then do a deep dive into the case law on geofencing.