US Regulatory Uncertainty Drives Crypto Firms to Consider Geofencing: Jake Chervinsky

• Geofencing is emerging as a significant strategy for ensuring compliance in the volatile regulatory landscape of the United States.
• Crypto founders are exploring geofencing to navigate the stringent requirements and uncertainties posed by US laws.
• Jake Chervinsky, Variant Fund’s chief legal officer, notes the drastic yet necessary nature of geofencing for regulatory adherence.

Geofencing as a Compliance Solution: A New Paradigm in Crypto Regulation

The Rise of Geofencing in the Crypto Industry

Crypto founders are increasingly gravitating towards geofencing as a response to the stringent regulatory environment in the United States. According to Jake Chervinsky, this shift is a testament to the mounting legal pressures that crypto entities face. Regulators continue to clamp down on the sector, compelling many companies to consider geofencing as a viable compliance mechanism.

Defining Geofencing and Its Applications

Geofencing involves creating a virtual barrier that prevents users from specific regions from accessing certain products or services. It is particularly useful when a company cannot meet specific regulatory requirements, such as disclosures and Know Your Customer (KYC) protocols. For instance, a company may block users in jurisdictions with rigorous compliance standards, effectively mitigating legal risks.

Impact of Regulatory Tightening on Crypto Firms

The intensification of global crypto regulations has induced many firms to adopt geofencing. In 2023, jurisdictions accounting for 70% of the global crypto market tightened their regulations, as reported by TRM Labs. High-profile cases include the DeFi protocol Sky, which faced criticism for blocking VPN access to prevent US users from engaging with its Spark Protocol. This measure inadvertently affected other users globally but underscored the lengths to which firms would go to ensure regulatory compliance.

High-Profile Examples of Geofencing

Large-scale crypto entities like Binance and Eigenlayer have also adopted geofencing. Binance restricts access for users with a US IP address, while Eigenlayer blocked users from over 30 countries, including the US, from claiming its airdrop. Similarly, the Solana-based decentralized exchange Orca has restricted US users from trading via its web interface. These actions highlight a growing trend of geo-restrictions as a mechanism to sidestep complex regulatory landscapes.

Best Practices for Effective Geofencing

Chervinsky’s guide on geofencing outlines several best practices for implementing this strategy effectively. Companies should use information such as IP addresses and GPS data to identify and block US users. Leveraging multiple methods, including IP blocking, user attestations, and monitoring VPN usage, can enhance the reliability of geofencing. Additionally, firms are advised to limit their use of US-based infrastructure and personnel, opting instead for non-US servers and cloud services to minimize regulatory exposure.

Benefits and Drawbacks of Geofencing

While geofencing can offer a strategic advantage by helping firms maintain compliance and expand into new markets, it comes with significant costs and complexities. Advanced geolocation tools can tailor geofences more accurately, but the financial and operational burdens remain substantial. As Chervinsky observes, geofencing is an “extreme and costly measure,” albeit sometimes the only feasible solution amidst regulatory uncertainty.

Conclusion

As the regulatory landscape becomes increasingly stringent, geofencing emerges as a crucial strategy for crypto firms to ensure compliance. Although it entails significant challenges and costs, geofencing allows firms to navigate the complex terrain of global regulations while continuing their operations. Moving forward, the industry must balance these considerations to sustain growth and innovation within regulatory frameworks.