Trump made DeFi and issued meme coins again. The US law enforcement department opened the back door

Original article: "Are my offshore advisors grilling me with Cayman structures?" Author: wassielawyer Compiled: Zombit

Trump launched a memecoin from the United States, whose price soared to more than 70 billion dollars. Is crime legal now? Is my offshore consultant using a Cayman structure to scam my money? The Cayman Islands structure refers to an offshore structure based on the Cayman Islands, as many blockchain projects utilize offshore jurisdictions such as the Cayman Islands to establish foundations or companies for legal tax planning and securities law compliance

TLDR： The law has not changed at all, and what Trump has done has always been legal.

Cryptocurrencies and Securities Law

This may sound crazy, but from a securities law perspective, memes are the safest token from a token issuance standpoint.

The Securities Law does not prohibit tokens, but regulates the marketing and sale of securities. Not all tokens are securities, but some tokens may be classified as securities.

The Howey Test is used to determine whether an investment constitutes an investment contract and thus becomes a security. I will give two examples to make this concept more friendly to lawyers.

If I come to you, please purchase my token, and I will use the funds to develop a protocol that can earn fees, from which you can receive a portion of the profits... This token is clearly an investment contract. You are investing in my job, and in return, you can enjoy a portion of the benefits. This is securities.

But the situation with meme coins is completely different. If I ask you to purchase a meme coin, we do not expect the funds to be used for any project. It just goes into the seller's pocket, and the seller sells because they believe the price will fall. You bought it just because you thought the next buyer would take over at a higher price. There are no investment contracts here, and there is no intrinsic value. It is purely a speculation on attention. So - it's not a security.

Therefore, from the perspective of securities law, memes are completely legal. Of course, fraudulent behavior may still apply, as most meme projects are highly suspicious, but enforcement in this area has not yet formed a consistent standard.

Not being classified as a security is a good thing. This means that under default circumstances, no disclosure rules, broker trading rules, marketing restrictions, etc. apply. That's why Coinbase can easily list memes, but it takes more time to list 'real memory blockchain projects'.

Therefore, although the meme may be the worst part of the industry, unfortunately, what Trump has done has always been legal.

The Real Memory Blockchain Project and Securities Law

This situation is undoubtedly a cost for memory blockchain projects that truly want to establish value.

As mentioned earlier, the profit distribution mechanism can easily bring a token under the jurisdiction of US securities laws. This has never changed. In fact, many people's anger towards Gary Gensler (SEC Chairman) is not because he enforces securities laws, but because he claims that "all cryptocurrencies are securities," even though many of them may not be.

Haha, are you stupid? The president has already issued memes, so there's no one else enforcing the law

Let's take a look at another project of Trump - World Liberty Finance.

The project clearly states: (a) only governance rights, (b) no economic rights. This is exactly the same as what all other memory blockchain projects claim. So, what are American companies actually operating?

The WLFI token and WLF governance platform are different from the WLF protocol

Yes - Trump does not operate the DeFi agreement in the United States. He runs a governance platform in the United States, which is responsible for providing decision-making guidance to DeFi protocol development companies.

What does this mean?

You can vote. But these votes are not binding at the development company level. The development company may consider your opinion and refer to your voting results when constructing DeFi protocols. And this DeFi protocol is likely to be established in offshore regions (even not in the Cayman Islands or BVI, as these regions already have VASP (Virtual Asset Service Providers) legal regulation).

Looking deeper, in fact, all WLFI tokens are non transferable. Let's take a look at their terms:

If the future seeks to unlock the transferability of $WLFI through protocol governance procedures, such unlocking will only be allowed if it is determined that it does not violate applicable laws, and it may only occur at least 12 months after the token sale is completed. You should assume that these tokens will be non transferable indefinitely

That's right - these tokens are non transferable, at least for 12 months.

Do you know why 12 months is a key number?

Because the design of these tokens is required to comply with the compliance requirements of Reg D (US Qualified Investor Private Equity) and Reg S (Non US Investor Issuance). To put it more simply, it is designed in accordance with the securities law (allowing sales to qualified investors in the United States, as well as non-U.S. persons).

This is why Trump's issue of meme coins is completely legal, but if you want to do a "really valuable memory block chain project", you have to face a lot of compliance obstacles in the securities law. This is obvious, because when they design, they will directly ask whether you are American or non American.

In other words, Trump's DeFi project is playing the same game as all non memento memory block chain projects.

So - crime has not been legalized. In other words, if you are building a 'real' memory blockchain project - even the President of the United States is ensuring that their DeFi project tokens comply with securities laws, then you should do the same.

That being said, if what you are building is purely governance/utility tokens and has almost no securities characteristics, then the likelihood of the SEC randomly identifying your token as a security and attempting to destroy your project will be reduced if Gensler no longer serves as SEC chairman.

Offshore Structures

Whether you believe it or not - the establishment of offshore structures is not to circumvent securities laws.

The securities law is based on the principle of territoriality, so you can establish a company in any non compliant jurisdiction, but as long as your token sale occurs within a certain jurisdiction, the laws of that jurisdiction will apply to you. In other words, whether your project is set up in the United States, the Cayman Islands, or Timbuktu (note: a city in the Republic of Mali in West Africa, here used to describe "anywhere"), as long as you sell tokens to Americans, the U.S. securities law will apply.

The main purpose of establishing an offshore structure is actually governance and taxation. I have written extensively before about the unique advantages of Cayman Foundations for decentralized agreements, so I will not repeat them here.

But there is also a huge advantage in taxation (which I omitted before to avoid making the post too long). The generation and subsequent disposal of tokens will generate taxable events, which may result in significant tax burdens. American tax lawyers may have deeper insights.

Establishing an offshore framework can ensure that these token related transactions do not incur any tax burden until they are onshore in the applicable tax jurisdiction. This is still a huge advantage, unless Trump makes cryptocurrency tax-free (but I think he is unlikely to do so).

How can I provide advice to my clients

Memecoin is cool, but please don't engage in fraud. Securities analysis should be rational, but can be slightly relaxed (that is, we don't need to immediately assume that all tokens are securities, just because Gensler would think so). When selling tokens with securities characteristics, caution still needs to be exercised and conventional legal frameworks followed. It is still recommended that top-level projects use the Cayman BVI governance and minting framework. This is still the cleanest and best choice from the perspective of governance and taxation. Delaware has always been a good choice, but now it will encourage American founders to consider using the Delaware architecture after being scared by the SEC (which they should no longer be afraid of).

Disclaimer

This is not legal or financial advice. I am just a Wassie wearing a suit.