Forecasting Cryptocurrency Regulation

By Daniel Araya

For regulators, the overarching concern is that digital tokens sold during ICOs may eventually be redeemed for goods and services. Tokens serve as currency, but they also function as an instrument for betting or prediction mechanisms as well as traditional securities. Tokens sold during ICOs, for example, may be traded on secondary markets, making them securities and subject to SEC oversight.

What we do know is that that the exact regulation needed to differentiate between security tokens and utility tokens is not readily apparent. The Canadian approach to ICOs, for example, appears to apply the established regulatory system for securities so that issuers who distribute coins or tokens may require dealer registration. Of course, neither the Canadian Securities Administrators (CSA) nor the SEC has categorized all cryptocurrency as a security. But instead both government bodies have simply chosen to rely on regulatory precedent.

(1) Promoters need to either (a) demonstrate that the currency or product is not a security, or (b) comply with securities laws.

(2) Brokers, dealers and other market participants that accept payment in cryptocurrencies and/or use cryptocurrencies to facilitate securities transactions should exercise caution and not lose sight of anti-money laundering and “know your client” obligations.

One growing fear is that unnecessary regulation will undermine innovation by squelching risk-taking. The rapid ascendancy of ICOs, and their ability to raise funds for start-ups has democratized access to capital in new and innovative ways. This suggests the need for a different set of regulatory obligations specifically designed to allow smaller cash-poor companies to raise funds from a wide range of funders.

What is clear is that there is significant confusion when it comes to ICOs, in part because governments around the world have taken such widely divergent positions. While some countries have decided to ban ICOs (China), others (Singapore, Switzerland, Estonia) have thrown their full support behind them. Nonetheless, the writing is on the wall. The broad shift from hard cash to digital currencies is a long-term global trend that neither financial institutions nor government regulators can simply ignore.

Opinions expressed here are the author’s and do not necessarily reflect the official position of CGBlockchain or any of its affiliates.

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