Regulation surrounding both initial coin offerings (ICOs) and general cryptocurrency guidance by country remains hazy as regional trade practices continue to warrant scrutiny. Indeed, the US's Securities and Exchange Commission (SEC) yesterday reiterated that it's aiming to protect investors from fraudulent ICO fundraising. SEC Commissioner Robert Jackson told CNBC, ”Investors are having a hard time telling the difference between investments and fraud…. Right now we are focused on protecting investors who are getting hurt in this market.”
Just last week, during testimony before the US Congress, SEC Chairman Jay Clayton said cryptocurrencies such as Bitcoin, which function exclusively as mediums of exchange, are not securities, unlike ICO tokens, which are.
Though many start-ups say they are trying their best to align with US securities regulations when issuing digital tokens for fund raising, uncertainty continues to permeate the marketplace. So much so that others are finding ways to skirt the still unclear regulations.
Security, Property or Commodity?
Many industry participants remain frustrated by what they see as a continued lack of clarity from regulators. Barak Ben-Ezer, CEO of Neema, a fintech startup says:
“It is clear that global regulators are finding it easy to declare that cryptocurrencies are not legally ‘money’. At the same time they cannot agree as to what they are: a security? A commodity? A piece of property?The legal definition of money is ‘something which is a legal tender of a sovereign nation’. Sovereign, decentralized fiat, [that will be] the first crypto which is legally real money.”
Shane Brett, co-founder and CEO of GECKO Governance, a regulatory solution for bank and fund financial compliance, believes that at last week's Congressional hearing, representatives of the SEC provided a clear indication that ICOs are considered a security but also appeared to confirm that tokens such as Bitcoin and other cryptocurrencies are not likely to be treated as such.
“This divergence in thought could pose some practical implications for companies who wish to market an ICO in the US; particularly as other jurisdictions have not taken this approach. The overarching message from this hearing is that there is a clear need for regulation so consumers can make informed decisions about participation in ICOs."
Technology has always driven politics forward notes Gary Bernstein, the CEO of CoTrader, a decentralized fund management platform. He says the original purpose of the SEC, which was established in 1933 during the Great Depression, was to combat financial fraud. Their mandate can be easily complied with for ICOs without banning the events entirely. In his view the agency merely has to adjust and simplify their guidelines for tokenized securities, some of which can be supported by code contracts, such as standard ERC 884, which "allows for the use of blockchains to maintain corporate share registries."
No additional regulation needed
Statements by Congressional representatives suggesting that additional regulation is necessary in a 'decentralized market' are not helpful says Trace Schmeltz, a partner in the Chicago and Washington, D.C. legal offices of Barnes & Thornburg LLP. Countries such as France and Bermuda, and even the government of Puerto Rico, are making great strides to be competitive in the cryptocurrency market, he adds, without agency oversight. Schmeltz believes that current laws in the United States are sufficient to regulate ICOs; nothing further is needed.
Elsewhere on the regulatory front, Taiwan’s Minister of Justice has indicated that the country is anticipating that there will be a regulatory apparatus for cryptocurrencies by November 2018. Bermuda's Monetary Authority (BMA) says it is seeking public feedback on an anti-money laundering law that would regulate domestic cryptocurrency activity.
In the Middle East, the Financial Services Regulatory Authority (FSRA) of Abu Dhabi's Global Market (ADGM) published a regulatory consultation paper on cryptocurrencies. It addresses the risks posed by cryptocurrency trading.
Although most investors and analysts agree that additional clarity is still needed, many industry players are voicing concerns that heavy-handed regulation will strangle innovation. Chad Pankewitz, CEO of Coinage says:
“Extensive regulation and bans on ICOs and cryptocurrencies will only stifle the amazing innovation in financial technology and investing that has already begun. In addition, blockchain has spurred a revolution towards distributed technologies and applications. With too much and too onerous regulation, the shift to distributed will happen much faster, and even more activity will go underground and become out of the reach of regulators."
Added clarity and a balanced approach to regulation would mean strong investor protection and a solid foundation. Gabriele Giancola, co-founder and CEO of qiibee points to the Switzerland's regulatory body, the Swiss Financial Market Supervisory Authority (FINMA), as a good example of a government organization that recognizes the innovative potential of the blockchain industry as a whole and is trying their best to help implement this new technology in the Swiss financial sector.
“FINMA also recognizes that many ICOs are increasingly being exposed as scams and therefore regulation is necessary to increase the efficiency and fairness of the ICO market. This includes enforcing the Anti-Money Laundering Act which requires that financial intermediaries establish the identities of the beneficial owners, for instance. Regulations such as this help alleviate the risks of money laundering and the financing of terrorism.”
Giancola disagrees with US House Financial Services Committee member, Brad Sherman, whose view that cryptocurrencies should be banned in order to eliminate problems such as tax evasion and drug trafficking has raised the ire of many in the industry. Giancola notes that this already happens on a daily basis with legal tender, thus banning cryptocurrencies would do little to mitigate these problems.
Scott Nelson, CEO of Sweetbridge, a global alliance leveraging blockchain to enable frictionless commerce is optimistic that governments are getting closer to a comprehensive, regulatory framework and that globally we're moving forward with laws that will help foster innovation and growth, from both investor and enterprise perspectives.