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dYdX to Move to Cayman Islands: Is US Regulatory Atmosphere Too Hot To Handle? 

Last Updated April 3, 2024 12:43 PM
Shraddha Sharma
Last Updated April 3, 2024 12:43 PM
By Shraddha Sharma
Verified by Peter Henn

Key Takeaways

  • The dYdX community supports a move to the Cayman Islands for the DEX to continue operations.
  • dYdX Operations Trust will transition to a Cayman Islands Foundation Company.
  • Crypto businesses find a haven in the Cayman Islands as US regulatory framework tightens in April.

Decentralized exchange (DEX) dYdX has announced its decision to relocate operations to the Cayman Islands. This decision comes after a community vote showed strong support for the transition. The move aims to place the foundation on firmer ground amid legal and regulatory hurdles in the US.

dYdX Transition Plan

The dYdX Foundation revealed in a post on Twitter that the community vote favored the move. According to the platform, 77% turnout out of 60 active validators led to 93.1% votes in support.

The transition plan includes establishing the dYdX Operations Foundation (DOF) as a Cayman Islands Foundation Company. This new setup is expected to grant the dYdX community more control and conclude the Trust Period, thereby terminating the DOT (dYdX Operations Trust) in favor of a more decentralized governance model.

The proposal labels the transition as “partial legal restructuring.”

In 2023, the United States Securities and Exchange Commission (SEC) proposed that Decentralized Exchanges (DEXs) should be classified as exchanges, aligning them with the same regulatory standards. Following this, the Treasury Department also announced that DEXs, platforms trading in Non-Fungible Tokens (NFTs), and wallet services facilitating digital asset transactions are likely to be categorized  as brokers for regulatory adherence.

In February 2024, the SEC adopted rules that would bring DEXs under the agency’s jurisdiction. Effective from April 29, the SEC aims  to regulate participants as dealers or government securities dealers, and include liquidity providers under its umbrella.

Why the Cayman Islands?

The Cayman Islands quickly became a popular destination for cryptocurrency startups due to their favorable regulatory framework. According to Tracxn, the island hosts web3 startups like BitKeep, Polygon, and Wormhole.

According to Lexology , the Cayman Islands Monetary Authority (CIMA) oversees a legal framework for virtual assets. The framework comes under the Virtual Asset (Service Providers) Act (VASP Act) with standards set by the Financial Action Task Force (FATF) and includes both licensing and registration for virtual asset service providers (VASPs).

At the same time, the move by the dYdX Foundation to the Cayman Islands raises questions about the regulatory atmosphere in the United States. Increasing DeFi scrutiny, SEC clampdown, and lawsuits have led to some crypto entities exploring other jurisdictions.

Recently, SEC Commissioner Hester Peirce criticized  the SEC’s approach to crypto custody businesses.

Is the US Atmosphere Unfavorable?

The dYdX Foundation’s relocation to the Cayman Islands points to strategic decisions web3 companies are taking to thrive. As the industry continues to evolve, the balance between innovation and regulation will remain a central theme. Meanwhile, businesses are dealing with regulatory hurdles as agency lawsuits are becoming frequent in the US.

However, the complex US waters could provide a blueprint moving forward.

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