Out of an abundance of legal caution, many cryptocurrency projects exclude U.S. residents from token airdrops.
U.S. crypto users – even insiders at similarly cautious projects - regularly find ways to claim tokens anyway.
This "hypocritical" behavior may undermine the effort by some in the industry to avoid U.S. jurisdiction, lawyers said.
The U.S. presents a paradox to some cryptocurrency startups.
They can't afford to ignore the tech-savvy American workforce. They also can't let their brand-new crypto tokens run afoul of the world's toughest financial regulatory regime.
EigenLayer, one of Ethereum's hottest projects, embraced a solution common in crypto: it employed U.S. developers through a U.S. company. Meanwhile, a separate legal entity issued its EIGEN token from an island where U.S. securities and tax laws don't apply.
Two projects in EigenLayer's realm, Renzo and Ether.Fi, went even further: they explicitly barred U.S. residents from claiming tokens in their respective airdrops.
Apparently, It didn't work.
Wallets with links to at least 10 U.S. employees of Eigen Labs – engineers, directors, a c-suite executive, the chief lawyer – claimed hundreds of thousands of dollars-worth of free money from Renzo and Ether.Fi, according to a CoinDesk analysis of blockchain data.
CoinDesk generally does not report on individuals' personal finances. But many Eigen Labs employees chose to claim their crypto "out in public," according to a blog post that detailed the company's discontinued efforts to help EigenLayer ecosystem projects airdrop tokens to Eigen Labs staff.
Furthermore, their on-chain activity suggests an attitude of selective compliance that crypto insiders said pervades the industry.
"It's hypocrisy," said one U.S.-based founder of multiple crypto startups. "But it's driven by risk alignment – you're minimally at risk when receiving an airdrop. If it's you in the hot seat, different story."
An open secret
Few crypto teams believe the tokens associated with their inventions should be classified as securities. Still, fear of U.S regulators prompts most to distribute their brand-new (and often valuable) crypto-assets under terms that theoretically block out Americans.
The theory may be closer to a farce.
Over a dozen U.S.-based industry insiders who spoke on condition of anonymity said they have found ways to sidestep other projects’ safeguards in order to collect off-limits airdrops.
Ignoring, bypassing, and flouting geoblocks is widespread in the American crypto scene, they said.
One U.S.-based industry lawyer privately said he had previously claimed tokens from projects that had tried to protect their airdrops with geofencing.
Messy compliance practices are “an unfortunate but predictable result of the lack of regulatory clarity the industry has been dealing with for years,” this lawyer said.
Risk-reward
Given the U.S Securities and Exchange Commission’ years-long crackdown on the industry, most teams minting their own money would rather not draw attention to their airdrops.
Projects try to avoid releasing their tokens into regulatory hazards. They bar U.S. claimants with restrictive terms-of-service agreements. They set up geofences that catch web traffic coming from the U.S.
Seldom do projects conduct stringent know-your-customer (KYC) identity checks when distributing new tokens, as banks and other financial institutions are required to do when opening accounts.
Perhaps unsurprisingly, the weaker safeguards don't work too well.
Geofences “cover your ass,” said one U.S. executive at a startup that issued tokens in a restricted airdrop via an off-shore entity – and who privately acknowledged using VPNs to claim off-limits airdrops from other projects.
Terms of service agreements are an even weaker deterrent. EigenLayer's airdrop barred people who tried to claim EIGEN from within "prohibited jurisdictions" such as the U.S. and Canada, as well as anyone using a VPN.
for us plebians who are located in geoblocked regions, how can we bypass these restrictions to claim EIGEN?asking for a friend
— Sundel (@sundelcrypto) May 10, 2024
Sundel, a pseudonymous EigenLayer user who claimed his EIGEN tokens in Canada, called EigenLayer's geoblock a “silly" protection against the SEC's "overreach."
Undeterred by EigenLayer's legalese, Sundel said he got his tokens with the help of a VPN and some web code configurations.
One former employee of a well-known crypto company said the jurisdiction-avoidance tactics were “just posturing” for potential regulatory investigations. A European crypto consultant claimed companies deliberately set weak restrictions.
“Banning U.S. users is always purely a legal protection. But you want and need U.S. users. You want U.S users to have the easiest possible way of getting" airdrops, the consultant said.
U.S. crypto employees' own admission to CoinDesk that they commonly flout geoblocks may be indicative of what multiple people called a "wink, wink, nod, nod" attitude.
"If you know that people are knowingly violating the terms and conditions and you know that people are lying about not being in the U.S., that's not going to help" if the regulators ever come knocking, said attorney Dan McAvoy, a co-chair of the Blockchain+ practice for Polsinelli PC.
Offshore tokens
EigenLayer's developer, Eigen Labs, is headquartered in Seattle, a city suffused with software developers. Eigen Foundation, the entity that ran EigenLayer's airdrop, is setting up office space in the Cayman Islands, whose friendly laws attract many crypto companies.
Right down the hall (literally) from the foundation's future digs is Ether.Fi, one of the biggest restaking projects on EigenLayer. Its CEO, Canadian expat Mike Silagadze, moved to the Caymans to start Ether.Fi after his home country's regulations pushed him out, according to Canadian tech news site Betakit.
When Ether.Fi launched its new crypto in March, it allocated lucrative chunks of ETHFI token to each employee of Eigen Labs. The project had previously asked Eigen Labs for a list of its employees' crypto wallets, Silagadze said.
Read more: Top Crypto Startup Drove Other Projects' Airdrops to Its Employees
"We just got a list of 50 addresses, there [were] no names attached to them so we didn't know who it was going to," Silagadze said. (Eigen Labs confirmed it sent a list of all employees' wallets to projects interested in airdropping them tokens).
In a follow-up interview he stated: "We block U.S. persons via geofencing, blocking VPNs and terms of service."
Bullish, the parent company of CoinDesk, is an investor in Ether.Fi.
Another EigenLayer ecosystem restaking project, Renzo, in April issued its token via offshore entities, and also geoblocked U.S. web traffic. "Our Terms of Service clearly state that US persons are not permitted to claim tokens," said Kratik Lodha, a representative for the token's issuer, the RestakeX Foundation.
Dozens of wallets tied to Eigen Labs employees claimed valuable airdrops from Ether.Fi and Renzo, according to blockchain data.
"Token airdrops claimed by Eigen Labs employees are subject to the same rigorous restrictions and verification processes as any other participant," Lodha said.
Onshore treasure
Despite Renzo's and Ether.Fi's stated efforts to ban claims by U.S. residents, their airdrops to employees of Eigen Labs may complicate matters: Most of the company's staff appears to live in the U.S.
Well over half of Eigen Labs' workforce during the airdrop period currently live in U.S. cities such as Austin, San Francisco and Seattle, according to a review of their LinkedIn profiles.
To understand if U.S. residents claimed off-limits airdrops, CoinDesk examined transaction records on the Ethereum blockchain. We compiled a list of all Eigen Labs employees. Then, we searched for crypto wallets with Ethereum Name Service (ENS) nicknames that resembled their names. We narrowed the list down to wallets that claimed at least one of the airdrops. Our final list of nearly a dozen wallets includes only those with apparent links to Eigen Labs staff members who claim to live in the U.S.
CoinDesk has opted not to publicize individual employees' names. We are including just enough details so readers who want to can replicate our findings. None of the employees alluded to in this story responded to requests for comment.
A wallet tied to Eigen Labs' general counsel is a notable apparent claimant of the Ether.Fi airdrop.
In January 2022, the company's future chief lawyer tweeted an ENS nickname. Eleven months later, the wallet that controlled this nickname transferred the ENS to another wallet.
On May 27 of this year, the second wallet claimed 10,490.9 ETHFI (then worth $52,000) from Ether.Fi. (The 2022 tweet with the ENS nickname was deleted hours after CoinDesk asked the general counsel for comment. We archived the tweet beforehand.)
Eigen Labs' director of developer relations once disclosed his ENS on social media. A wallet bearing that ENS name claimed 10,490.9 ETHFI (then worth $33,000) on March 18 and claimed 66,667 REZ (then worth $12,000) on May 3.
On April 12, a wallet whose ENS matches the name of Eigen Labs' chief operating officer claimed 10,490.9 ETHFI (then worth over $53,000) from Ether.Fi.
Other wallets tied to Eigen Foundation's chief strategy officer, Eigen Labs' director of protocol development and a number of engineers collected hundreds of thousands of dollars worth of tokens combined from Ether.fi and Renzo. All of them are U.S. residents according to their respective LinkedIn profiles.
Legal review
How the Ether.Fi and Renzo allocations may intersect with U.S. securities law remains hypothetical. No regulator has accused the projects, Eigen Labs or its employees of wrongdoing.
“All the lawyers have been advising everyone to follow securities laws, even the projects that are saying it's not a security" when issuing tokens, said an industry source who follows compliance trends.
Renzo’s RestakeX Foundation said it sought to prevent claims by U.S. persons in order to remain "in full compliance with U.S. securities laws, including Regulation S." Regulation S allows issuers to sell securities without registration provided the buyers are not U.S. people.
It may be harder for projects to claim securities exemptions if they knew their airdrops were going to employees of a U.S. company, said two industry lawyers who spoke on condition of anonymity.
Generally speaking, crypto insiders' self-described disregard for geoblocks could complicate their protocols' attempts to avoid U.S. jurisdiction, a third lawyer said.
Quick buck
That Eigen Labs would help its U.S. employees gain access to restricted airdrops comes with more than a pinch of irony. EigenLayer made it difficult for the populations of entire countries to claim its airdrop, even after the protocol readily accepted their deposits.
Eigen Labs did not return multiple requests for comment.
"Working for a company that geoblocks U.S. persons from receiving airdrops while receiving airdrops from other companies certainly calls into question the strength of the belief in the purpose of geoblocking in the first place," one industry lawyer said.
In the wake of the airdrops, Eigen Labs said it imposed "standardized blackout periods after airdrops," in other words a ban on employees selling their claimed assets for a certain time. Eigen Labs did not say when this policy came into effect.
The wallet tied to Eigen Labs' general counsel claimed its Ether.Fi airdrop on May 27 at 9:46 P.M. Seattle time, according to public blockchain data.
Eighteen minutes later, this wallet had already sold more than half its ETHFI for at least $21,000 in profit.
Sam Kessler contributed reporting.
