One thing is certain about regulation of cryptocurrencies and other digital assets. We’re in the earliest of stages.
And we’re caught between industry participants clamoring for clarity and regulators taking varied and measured approaches. It’s an awkward time for this markets as new ideas and uses for initial coin offerings range from the next great financial payment system on blockchain to the world’s first blockchain toothbrush that lets you mine coins by brushing your teeth.
Last month, the Institute For Financial Markets hosted its second Smart Regulation Roundtable event, Implications of Cryptocurrencies, which covered just where we are and where we may be headed with regulation on coins and ICOs. You can find the report John Lothian Productions wrote, The Dawn of Crypto Regulation for the IFM.
What we have now in the US is a collection of federal and state agencies trying to figure out how best to address these assets. Sure the Securities and Exchange Commission worked out that ICOs are securities (mostly), and the Commodity Futures Trading Commission claimed cryptocoins as commodities. But we also have the US Treasury, Department of Justice, Office of the Comptroller of the Currency and then 50 state regulators trying to figure out their slice of it.
Based on the comments from attorneys at the IFM event, there is a fair bit of confusion over ICOs. Sara Hanks, CEO of CrowdCheck, said there are SEC laws, corporate laws, tax laws and other considerations for firms looking to launch an ICO. In some cases, she said, firms are just using the ICO process to try to circumvent SEC rules – a big mistake. In other cases, Hanks said she’s not even sure if her clients are being compliant with securities laws because things like secondary trading of the tokens falls into an undefined gray area.
Or how about the SEC case against Kirill Bensonoff, who set up his company, called Caviar, in the Cayman Islands, and promoted the ICO to non-US investors. He apparently did not think there were any issues with state regulators until the Massachusetts Securities Division charged him with violating state securities and business laws.
Meanwhile, there are real people behind cryptocurrencies and blockchains. How should those groups be regulated and by whom? Angela Walch, associate professor at St. Mary’s University School of Law, said those governing these blockchains hold a tremendous amount of theoretical processing power. Walch has written extensively on the topic, and has pushed for treating core developers and large miners of blockchains as fiduciaries. She also advocated for oversight by regulators for possible collusion when they make decisions over how to handle issues on their blockchain.
Rostin Behnam, commissioner of the CFTC, advocated for a “holistic approach” to overseeing this space. Pulling all the relevant regulators together may accomplish this, but its not going to happen quickly. In the meantime, regulators will continue to pursue cases and it’s likely a few may end up in court. That may help provide clarity but on an incremental basis.
This is the sausage making that is regulation of a new asset class. There’s still a long way to go before we have the details that make it a smooth and well defined system.