(Bloomberg) -- A spate of crypto probes in the US is prompting battered digital-asset firms to look toward financial hubs overseas, clouding the country’s position as a cornerstone of the industry.

Singapore, Hong Kong, Europe and Dubai are more enticing for cryptocurrency companies thanks to their regulatory efforts, tax advantages and friendlier governments, according to interviews with more than a dozen executives, former regulators, investors and analysts. 

Managers decried what they called “regulation by enforcement” in the US, which has seen authorities crack down on rule-bending activity rather than come up with new laws specifically tailored to digital assets. 

Read: US Crackdown Seeks to Push Crypto Back to Fringe of Finance

“Given the increasing level of regulatory scrutiny and enforcement we have seen, several US crypto investors are growing a bit nervous,” said Zhuling Chen, the chief executive officer and founder of Singapore-based staking firm RockX, who’s been fielding calls from investors including hedge funds, mutual funds and small centralized exchanges. “Whoever has interest and wants to stay in crypto will choose friendlier countries, where the rules are clear.”

In just over a week, there’s been a burst of enforcement by the US Securities and Exchange Commission. The watchdog announced a $30 million settlement with crypto exchange Kraken on Feb. 9, ordering the company to suspend its so-called staking services. A few days later, stablecoin issuer Paxos Trust Co. announced it was halting issuance of one of its stablecoins under the orders of its state regulator and after receiving notice from the SEC that it intended to sue the firm.  

The federal regulator capped the week by suing crypto fugitive Do Kwon and his company Terraform Labs, alleging fraud involving the failed TerraUSD stablecoin that wiped out more than $40 billion of market value last year. The SEC has also proposed changes to rules on crypto custody that could make it harder for hedge funds to find companies to hold their digital assets.

The rising scrutiny whipsawed cryptoassets. Bitcoin started a steady fall as news of the SEC’s Kraken deal broke and then skyrocketed on Thursday. The token was down 3% on Friday morning in New York, painting a sea of red with most other digital coins.

The flurry of activity has encouraged some to consider friendlier shores. 

Several investors have started talks with RockX to expand their activities beyond US borders and “diversify their regulatory risks,” Zhuling told Bloomberg News. Staking is a process whereby investors lock up their assets on a blockchain to help order transactions and receive rewards in return.

In Hong Kong, regulators announced plans last year to roll out a mandatory exchange-licensing regime from June, while Dubai published a final framework for rules governing crypto firms this month, allowing them to get a full regulatory license in the city. Singapore is also strengthening its regulatory position, proposing tighter rules on crypto trading for retail investors after the collapse of local hedge fund Three Arrows Capital. 

Some jurisdictions like Dubai and Singapore also offer advantageous tax rates, adding to their allure with crypto entrepreneurs and investors.

Shifting Goalposts

Crypto companies have long complained of amorphous rules in countries that already have large, established financial industries. Clear regulations — even strict ones — are better than trying to follow general guidance, they say, which runs the risk of creating an environment where the goalposts are endlessly shifting, making it hard to grow a business.

The issue is unlikely to improve any time soon in the US, where lawmakers have been unable to agree on several bills proposed to manage the industry — even after sentiment soured toward crypto following the collapse of the FTX exchange in November. 

Jeff Dorman, chief investment officer at Arca, said the new companies his digital-asset investment firm is talking to, or has invested in, are “not even bothering with the US.” 

“From a precedent standpoint, there are companies here in the US who tried to comply with the laws, and those are the ones being targeted right now,” he said. “It’s very challenging to operate in an unknown environment.”

By favoring enforcement instead of passing rules in line with other regions, the US has left both regulators and companies grappling with what is “essentially a guessing game as to what might come next,” said Sheila Warren, CEO of advocacy group Crypto Council for Innovation. 

Over the last year, the G20, the Financial Stability Board and the Financial Action Task Force unilaterally recommended greater global coordination on crypto, including on nascent areas such as decentralized finance. That would make it harder for businesses to pick and choose between jurisdictions based on regulatory convenience. 

Read: Crypto Risks Require Same Scrutiny as Wall Street, FSB Says

In the meantime, regions outside the US are making headway cementing new rules. 

The European Union’s Markets in Cryptoassets directive — a key piece of legislation that the bloc has been working on since 2020 — is set to be finalized in April. British Prime Minister Rishi Sunak has made strategy for the digital industry an important part of his agenda and the UK unveiled plans this month to bring crypto companies under existing financial industry laws.

According to Coinbase Global Inc.’s EMEA Vice President Daniel Seifert, the US would do well to look to the example of governments in the EU, the UK and Dubai. The crypto exchange has expanded its European footprint in recent months, including making senior leadership appointments and registering its business in the UK, Ireland, Italy and the Netherlands. 

“It’s probably a no-brainer that the US as a framework is making it a less attractive place to invest,” Seifert said in an interview. “You will always hear that businesses like certainty and they like to know where they stand, and the US at the moment is not really providing that for crypto firms.”

Crypto exchange Kraken, which shuttered its staking product in the US as part of its settlement with the SEC this month, is focused on international growth despite recently closing its operations in Japan and Abu Dhabi. Blair Halliday, the ex-Gemini UK boss Kraken poached as its new country manager in October, said the country is one of Kraken’s top markets internationally with over 200 staff based there.

In a January interview, he pointed to pro-crypto sentiment from the UK government and the country’s well-established pool of fintech and financial-services talent.

Catching Up

To be sure, Coinbase and Kraken’s home market is still by far the best-funded destination for crypto companies — though others are rapidly gaining ground. 

Businesses in the US have raised $449.3 million from venture capital investors so far this year, about 40% of all global funding so far this quarter, according to data from PitchBook. That’s down from 57% in the same quarter last year, while Europe more than tripled its share from 5.7% to about 25% in the period.

And the notion that digital asset firms welcome rules, tough or not, just so long as they’re clear, hasn’t always been borne out. 

When the New York Department of Financial Services introduced a new licensing regime in 2015, crypto companies threatened to quit the state. But New York remains a hub for digital assets, with many firms still choosing the city as a key US base.

Existing rules and guidance from US authorities have been clear enough, according to John Reed Stark, former chief of the SEC’s Office of Internet Enforcement and now a cybersecurity consultant. 

“There’s lots of regulatory clarity, all they need to do is look on the SEC website,” he said. “Crypto companies just don’t like the answers they get when they come in to talk to the SEC, because if they want to register their offering, it requires a level of disclosure that these companies don’t want to make.”

--With assistance from Joanna Ossinger, Ben Bartenstein and Olga Kharif.

©2023 Bloomberg L.P.