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01/10/24
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Geofencing: Crypto Founders’ Response to U.S. Regulatory Challenges
In recent times, crypto founders have been increasingly considering geofencing as a potential response to the ongoing regulatory challenges in the United States. This practice involves creating a virtual barrier that restricts access to certain products or services based on a user’s geographical location. As regulatory scrutiny intensifies, many firms are exploring this strategy as a means of compliance.
Essentially, geofencing serves as a fallback mechanism for companies unable to meet stringent regulations such as disclosure requirements and Know Your Customer (KYC) protocols. By implementing this strategy, firms can block users from regions with heavy compliance obligations, such as the U.S. This approach, however, is seen as a drastic measure—effectively abandoning the U.S. market when no other alternatives appear viable.
Data from TRM Labs indicates that in 2023, over 70% of the global cryptocurrency market faced tighter regulations across 17 jurisdictions. Notable entities have taken steps in this direction; for instance, the decentralized finance protocol formerly known as Maker, now called Sky, faced backlash after it restricted VPN access to its Spark Protocol as a means to prevent U.S. user participation, inadvertently blocking all VPN-associated IPs.
Similarly, Binance, the leading cryptocurrency exchange, employs geofencing by displaying a message to users trying to access its services from U.S.-based IP addresses. Other platforms, like the Ethereum restaking protocol Eigenlayer, have also followed suit, limiting access for users from several countries, including the U.S. and parts of Asia.
Experts highlight that while geofencing allows crypto firms to explore new markets while remaining compliant, it is still seen as a costly and extreme response to U.S. regulations. Best practices for executing effective geofences include utilizing data like IP addresses and GPS information, along with leveraging infrastructure outside the United States to mitigate risks associated with domestic compliance demands.
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