Geofencing technology has become an essential tool in the regulatory compliance strategies of many cryptocurrency companies. 

As regulatory scrutiny increases in the United States, crypto firms are using geofencing as a last resort to avoid fines, legal battles, or potential shutdowns. 

Jake Chervinsky, chief legal officer at the Variant Fund, points out that geofencing is rising in popularity among crypto founders when “all else fails.”

The Variant Fund, a venture capital firm focused on investing in an internet that "turns users into owners," recently released a comprehensive report titled “A Practical Guide to Geofencing.”

The report was authored by Daniel Barabander and Chervinsky, and it highlights the importance of geofencing technology in navigating regulatory challenges.

Chervinsky noted that crypto companies are “completely abandoning the U.S. market” to avoid restrictive regulatory scrutiny. Agencies like the Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), and the Department of Justice (DOJ) have increased their enforcement actions against cryptocurrency platforms, leaving many crypto businesses no choice but to turn to geofencing.

Geofencing Technology in Crypto

Geofencing technology uses GPS, RFID, Wi-Fi, or cellular data to create virtual boundaries around a specific geographic area.

When a device enters or exits this boundary, the system triggers a predetermined action, such as blocking access to content, sending notifications, or collecting location data. 

This technology is particularly useful in the cryptocurrency space, where platforms may need to block certain users or exclude specific wallet addresses from distributions.

As U.S. regulatory agencies continue to impose strict regulations, many crypto companies use geofencing technology to ensure they do not offer services in regions with unclear or evolving legal frameworks. 

According to the Variant Fund’s report, “Before launching any new product, a company should undertake a regulatory risk assessment to determine what compliance obligations apply in the jurisdictions where the product will be offered.”

Some jurisdictions require companies to gain government approval before launching products, while others may mandate specific disclosures or notices. 

If a company is unable to comply with these regulatory requirements, geofencing becomes the most practical solution.

The report states, “In that case, the most viable way to avoid violating the laws of a given jurisdiction is simply to avoid that jurisdiction entirely.”

Best Practices in Geofencing

Given the complex U.S. regulatory landscape, it is vital for crypto companies to conduct a thorough regulatory risk assessment. The report outlines three best practices for establishing an effective geofence in the U.S.:

1. Block all U.S. users
2. Use non-U.S. infrastructure
3. Set up offshore entities

The process recommends that companies prevent users in the United States from accessing services that are subject to the country’s regulations.

Operating outside U.S. jurisdiction provides additional layers of protection. If a company establishes entities outside the U.S., they can offer products and services to non-U.S. customers.

The report provides detailed guidance on how companies can implement these practices.

Effective Geofence Blocking

An effective geofence requires blocking U.S. persons from accessing regulated activities.

This includes implementing "know-your-customer" (KYC) procedures using all available information about users to identify those located in the US.

Companies can monitor the following data points to identify U.S. users:

• Physical address
• Email address
• IP address
• GPS location

By implementing geofencing blocking measures, cryptocurrency companies can reduce their risk of violating U.S. regulations and ensure their services are offered only to users in jurisdictions where compliance is feasible.