Blog

Crypto assets distributed via airdrop are usually not related to regulated activity, but risks are still possible. Using geolocation/geo-blocking or a limited airdrop approach can minimize regulatory risks and ensure successful token distribution.

This captures the essence of your main points succinctly. You are starting your TGE project and considering the jurisdiction. In that case, read our previous post here.

In the latter case, you need to plan how you will distribute the tokens.

To tell the truth, regulation does not properly cover the airdrop process itself. However, by providing an airdrop, you risk being considered (in some cases) as selling tokens as a security, and as the issuer, you are always responsible for the future of the token. In most cases, tokens are treated as utility tokens, but this also depends on the jurisdiction’s regulation where they might be classified as securities. Another issue is that by airdropping, project owners aim to attract more active users to help them get listed on exchanges. The bigger the community, the more likely Tier1 exchanges like Binance will be interested in listing your token. However, some users who receive your tokens may never be able to exchange them for FIAT because they won’t pass compliance checks on properly regulated exchanges. This highlights the need to differentiate between countries, people’s backgrounds, regulations, token functionality, marketing targets, and technological approaches. Quantity does not always mean quality, but it depends on what your project wants to achieve. If you are issuing a memecoin, this may not be so important. But if you are creating a token to support your community and product, it is worth considering the right approach for airdropping your coins.

In most cases, actions related to airdrops do not require following anti-money laundering regulations. Also, if recipients do not have to take any actions, such as making a purchase or providing personal information, there is no investment decision involved, and typically, prospectus requirements do not apply.

Nevertheless, to minimize the future risk of the project being seen as having any regulatory issues, you need to consider how to mitigate the risks. Using geolocation/geo-blocking or a limited airdrop approach can be a good solution.

Geo-blocking is a method used to limit access to specific countries or regions to protect against illegal activity or content that may not be appropriate for certain markets. For instance, with a geoblocker, you can prevent certain people from specific jurisdictions from receiving the tokens by enforcing rules that disallow them. This way, you can select geographical regions to target with your airdrop.

Additionally, when you distribute airdrops (tokens for free), in some cases, these programs might be considered similar to sales. Therefore, it is important to avoid distributing tokens to American users, as the functionality and distribution of free tokens might be interpreted differently by American regulators. If you distribute tokens to countries under SEC sanctions, those individuals will be unable to use them in the future, as they won’t be able to trade them on exchanges that adhere to AML, KYC regulations, and sanction regimes.

Of course, geo-blocking is a technical solution that needs to be implemented through a third-party service provider. VPNs can still mislead tracking and location systems, so it is always useful to include a disclaimer stating that users are responsible for claiming to be in jurisdictions where they are not permitted to receive tokens due to sanctions or regulations.

There are solutions available on the market that can help you with the overall airdrop process, including planning who should receive the tokens and implementing whitelisting and blacklisting elements. This will help you avoid problems in the future.

Moreover, there is a marketing element to consider, which we will discuss in future posts.

Contact us if you need to arrange TGE, Tokenomics, White Papers, Legal Opinions about your tokens, and support with market makers and listing on exchanges. —  smart-shift.io