By Danny Nelson, Sam Kessler, CoinDesk
Compiled by: Felix, PANews
Key points:
Many crypto projects exclude U.S. users from token airdrops out of legal caution.
U.S. crypto users (and even equally cautious project insiders) often find ways to claim tokens.
Lawyers said the "hypocritical" behavior could undermine efforts by some in the industry to avoid U.S. jurisdiction.
The United States presents a paradox for some crypto startups.
These companies cannot ignore America’s tech-savvy workforce, nor can they allow their brand new tokens to fall foul of the world’s strictest financial regulatory regime.
EigenLayer, one of the hottest projects on the Ethereum network, adopted a solution common in the crypto space: hiring American developers through a U.S. company. At the same time, a separate legal entity issued EIGEN tokens on an island where U.S. securities and tax laws do not apply.
Two projects in the EigenLayer ecosystem, Renzo and Ether.Fi, even explicitly prohibit U.S. users from receiving tokens in airdrops.
But the move clearly didn't work.
According to an analysis of blockchain data, wallets associated with at least 10 Eigen Labs U.S. employees (engineers, directors, executives, lead attorneys) received hundreds of thousands of dollars worth of airdrops from Renzo and Ether.Fi.
CoinDesk doesn’t typically report on an individual’s financial situation. But according to a blog post from Eigen Labs, many Eigen Labs employees choose to receive their cryptocurrencies “publicly.” The blog post details that the company has banned EigenLayer ecosystem projects from airdropping tokens to Eigen Labs employees, and that if they want to airdrop to Eigen Labs, they can only airdrop to the company.
Furthermore, their on-chain activity suggests a selective compliance attitude that crypto insiders say is prevalent across the industry.
An open secret
Few crypto teams believe that the tokens they issue should be classified as securities. Still, most projects theoretically exclude U.S. users from airdrops out of fear of U.S. regulators.
This theory may be more of a farce.
More than a dozen U.S. industry insiders who spoke on condition of anonymity said they had found ways to circumvent the project’s prohibitive measures to obtain airdrops.
Ignoring and circumventing geo-blocking is common in the US crypto space.
One U.S. industry lawyer privately said he had previously received tokens from airdrop projects that attempted geo-blocking.
The lawyer said the chaotic situation was "an unfortunate but predictable result of years of lack of regulatory clarity in the industry."
Risk-Reward
Given the U.S. SEC’s crackdown on the crypto industry over the years, most teams that issue their own coins are reluctant to draw attention to their airdrops.
Projects try to avoid exposing their tokens to regulatory risk. They ban US users through strict terms of service agreements. They set up geo-blocking to capture web traffic from the US.
Projects rarely conduct rigorous KYC when distributing new tokens, as banks and other financial institutions must do when opening accounts.
Perhaps not surprisingly, weaker safeguards did not work as well.
Geo-blocking can “protect you,” said a U.S. executive at a startup that issues tokens through offshore entities and privately admitted to using VPNs to claim restricted airdrops from other projects.
Terms of service agreements are a weaker deterrent. EigenLayer’s airdrop blocked Eigen from “prohibited jurisdictions” like the U.S. and Canada, as well as anyone using a VPN.
Sundel, an anonymous EigenLayer user who received EIGEN tokens in Canada, called EigenLayer’s geo-blocking a “silly” protection against “overreach” by the SEC.
Sundel said he was not fooled by EigenLayer’s terms and was able to obtain tokens with the help of a VPN and some network code configuration.
A former employee of a prominent crypto firm said that strategies to circumvent jurisdiction are “just preparation for potential regulatory investigations.” A European crypto consultant claimed that companies intentionally set weak restrictions.
Banning US users has always been purely legal protection. But you want and need US users. You want US users to be able to get the airdrop in the easiest way possible.
Workers in the U.S. crypto industry admit that they generally don’t care about geo-blocking.
“If you know someone is intentionally violating terms and conditions, and you know someone is falsely claiming to be outside the U.S., that’s not going to help if regulators come knocking,” said attorney Dan McAvoy, co-chair of Polsinelli PC’s blockchain + practice.
Offshore Tokens
Eigen Labs, the developer of EigenLayer, is headquartered in Seattle, where many software developers gather. The Eigen Foundation, which is responsible for the EigenLayer airdrop, is setting up an office in the Cayman Islands, where friendly laws have attracted many crypto companies.
According to the written registration address, across from the future office of Eigen Foundation is Ether.Fi, one of the largest re-staking projects on EigenLayer. According to Canadian technology news website Betakit, its CEO, Canadian expatriate Mike Silagadze, moved to the Cayman Islands to start Ether.Fi after being forced to leave by regulations in his own country.
When Ether.Fi launched its new token in March, it allocated a large number of ETHFI tokens to each of Eigen Labs’ employees. Silagadze said the project had previously asked Eigen Labs to provide its employees’ crypto wallets.
“We were just given a list of 50 addresses with no names on them, so we had no idea who the tokens were going to,” Silagadze said. (Eigen Labs confirmed that it had sent a list of all its employee wallets to projects interested in airdropping tokens.)
In a follow-up interview, Silagadze said: “We block US users through geo-blocking, blocking VPNs, and terms of service.”
Note: CoinDesk’s parent company Bullish is an investor in Ether.Fi.
Another EigenLayer ecosystem re-staking project, Renzo, issued tokens through an offshore entity in April and blocked U.S. network traffic. “Our terms of service clearly state that U.S. users are not allowed to claim tokens,” said Kratik Lodha, a representative of the RestakeX Foundation, the token issuer.
According to blockchain data, dozens of wallets tied to Eigen Labs employees received airdrops from Ether.Fi and Renzo.
Kratik Lodha said: “Token airdrops received by Eigen Labs employees are subject to the same strict restrictions and verification process as any other participants.”
Onshore treasure
Despite Renzo and Ether.Fi’s efforts to ban U.S. users from claiming the tokens, their airdrop to Eigen Labs employees may complicate matters: most of the company’s employees appear to live in the U.S.
According to their LinkedIn profiles, more than half of Eigen Labs employees during the airdrop lived in U.S. cities such as Austin, San Francisco, and Seattle.
To see if U.S. users had claimed the restricted airdrop, CoinDesk examined transaction records on the Ethereum blockchain and compiled a list of all Eigen Labs employees. Then, it searched for crypto wallets with Ethereum Name Service (ENS) nicknames similar to their names. CoinDesk narrowed the list to wallets that had claimed at least one airdrop, ultimately listing a dozen wallets, including those with clear links to Eigen Labs employees who claimed to live in the United States.
CoinDesk does not publish individual employee names beyond sufficient detail to provide details. None of the employees mentioned in this article responded to requests for comment.
A wallet tied to Eigen Labs’ general counsel was the apparent recipient of the Ether.Fi airdrop.
In January 2022, the company’s now-chief lawyer tweeted an ENS nickname. Eleven months later, the wallet controlling the nickname transferred ENS to another wallet.
On May 27 of this year, the second wallet received 10,490.9 ETHFI (worth $52,000 at the time) from Ether.Fi. (Hours after CoinDesk asked the general counsel for comment, the 2022 tweet with the ENS nickname was deleted)
Eigen Labs’ director of developer relations once disclosed his ENS on social media. On March 18, a wallet with the ENS name claimed 10,490.9 ETHFI (worth $33,000 at the time), and on May 3, 66,667 REZ (worth $12,000 at the time).
On April 12, an ENS wallet matching the name of the Eigen Labs COO claimed 10,490.9 ETHFI (worth over $53,000 at the time) from Ether.Fi.
Other wallets associated with the Eigen Foundation’s chief strategy officer, Eigen Labs’ director of protocol development, and some engineers received hundreds of thousands of dollars worth of tokens from Ether.fi and Renzo. All of them are U.S. residents, according to their respective LinkedIn profiles.
Legal Review
How Ether.Fi and Renzo’s distributions would conflict with U.S. securities laws remains hypothetical. No regulator has accused the projects, Eigen Labs, or its employees of wrongdoing.
“All lawyers advise everyone to comply with securities laws when issuing tokens, even projects that claim they are not securities,” said an industry insider who follows compliance trends.
Renzo’s RestakeX Foundation said it sought to block withdrawals by U.S. users in order to “fully comply with U.S. securities laws, including Regulation S.”
Regulation S allows issuers to sell securities without registration, provided the buyer is not a U.S. person.
Two industry lawyers who spoke on the condition of anonymity said it may be more difficult for projects to apply for a securities exemption if they know their airdrops will go to employees of a U.S. company.
Generally speaking, crypto players profess a disregard for geo-blocking, which could complicate efforts to circumvent U.S. jurisdiction for their protocols, a third attorney said.
Make money fast
It’s somewhat ironic that Eigen Labs helped its US employees access a restricted airdrop, as EigenLayer made it difficult for all US users to claim its airdrop, even though the protocol had previously happily accepted their deposits.
“Working for a company that blocks US users from receiving airdrops, but is able to receive airdrops from other companies certainly calls into question whether the geo-blocking is being done for the right purpose,” said one industry lawyer.
After the airdrop, Eigen Labs said it had implemented a “post-airdrop lockup period,” in other words, prohibiting employees from selling their claimed assets for a certain period of time. Eigen Labs did not disclose when this policy would take effect.
According to blockchain data, a wallet tied to Eigen Labs’ general counsel claimed the Ether.Fi airdrop at 9:46 p.m. Seattle time on May 27.
18 minutes later, the wallet had sold more than half of its ETHFI, making a profit of at least $21,000.
Related reading: Cashing out $5.5 million, sorting out the whole story of EigenLayer employees' "airdrop bribery"
