In the world of digital assets, change is brewing – and most of it is encouraging. The latest news and developments over the past year signal that the industry is maturing – with sophisticated financial institutions, central banks, and global standard setting bodies all joining the discussion. This bodes well for smart and transparent digital asset regulation that is being rolled out around the world.
The real question is which jurisdictions will lead this important change?
What smart regulation looks like
An example of a smart policy framework is the UK Financial Conduct Authority (FCA) “consultation” on digital assets.
The FCA starts with a rationale: the regulation of blockchain and digital assets should protect the integrity of the market and consumers on the one hand, and provide clarity to the industry on the other. From there, the FCA sets a very clear taxonomy / classification to ensure that market participants understand which rules apply to which assets.
The FCA categorizes digital assets based on their primary use, such as: B. Utility tokens, Exchange tokens or security tokens. Only security tokens that represent a stake in a company are subject to securities regulation. In the UK framework, these securities laws do not apply to the other tokens, although some buyers may only purchase these tokens for speculative purposes.
To get a little bit into the nostalgia of the 90s, it would be akin to buying a beanie baby during their massive heyday with the hope that they will eventually increase in value. But that doesn’t make beanie babies a security. Beanie Babies are still Beanie Babies and Exchange Tokens are still Exchange Tokens.
The UK is not the only jurisdiction that sets transparent rules. Japan, Singapore, Switzerland and the UAE have also developed practical legal frameworks. However, the USA is clearly lagging behind. Not only does this affect the competitiveness of American companies, it also raises national economic and security concerns.
Why the US is falling behind in regulating digital assets
In the United States, the Securities and Exchange Commission (SEC) has taken control of the monitoring of digital assets. The SEC initially took ownership because the abuses had to be stopped during the ICO madness (Initial Coin Offering). After the SEC successfully stopped these dangerous ICOs, which is having a positive impact on the maturity of the industry, it is now stuck.
In essence, the SEC has incorporated digital asset regulation into an old regulatory framework that governs items like orange groves, oil rigs, whiskey, payphones, and even beavers – rules that are simply not appropriate for the applicable purpose of this new technology.
Compare this to the US approach to regulating the then new technology known as the Internet in the 1990s. Fortunately, the US took a much more flexible and forward-looking approach to regulating the Internet than applying rules to rotary telephones or transistor radios.
That’s not to say the SEC hasn’t tried to regulate digital assets. In particular, the SEC published a Digital Asset Framework (DAF) in 2019. However, this broad, expansive, non-binding framework is not clear enough and can essentially be interpreted in many different ways by many different people – and guidelines that can mean something to everyone are by no means guidance at all.
Where does US digital asset regulation need to go from here?
As with the internet, the US has the ability to lead the way in regulating digital assets and there are several ways to get there.
Congress can help by either passing sensible laws or at least holding regulators accountable. Another alternative is for the SEC and the Commodity Futures Trading Commission (CFTC) to join forces and develop a workable framework that will protect the integrity of markets and consumers without stifling US companies that seek innovation.
SEC Commissioner Hester Peirce’s Safe Harbor proposal is an example of what a sensible approach can look like. This safe haven would provide a three year window in which innovators acting in good faith could take advantage of this technology without being knocked down by a myriad of complicated and technical securities laws when they are created.
Whether it is a legislative solution, a safe haven like the one proposed by Commissioner Peirce, or cooperation between the SEC and the CFTC, it is clear that we need a US solution now. It’s bad enough when the US cedes a competitive advantage to companies like the UK, Japan or Singapore. It would be a disaster if the US let Communist China take control of this technology. Unfortunately, that is exactly where the industry seems to be going.
This critical point is examined in the next part of this discussion. In the meantime, find out about current political framework conditions from around the world.