02.05.2019

OPINION: Lack of Tools to Hamper Digital Asset Regulation

02.05.2019

If the US Securities and Exchange Commission did not find it difficult enough to regulate digital assets, it is about to find it will need to do so with one hand tied behind its back.

The regulator issued two requests for information for tools that would help the Commission monitor risk, improve compliance and inform the SEC on issues regarding digital assets at the end of January.

Its first request was for a toolset that can extract data from the most active blockchains by volume and then clean, normalize and present the data while presenting it via a user-friendly GUI. Its second request is for providers that can deliver market-, historical-, and reference data for cryptocurrency and tokenized securities.

The Commission’s requests are more than reasonable— you cannot manage something without being able to measure it. However, expecting to find off-the-shelf tools with these capabilities for the nascent digital asset markets is highly optimistic at best.

Collecting a digital asset’s daily high, daily low, intraday pricing, and daily volume would be easy if it traded on a limit order book and not over-the-counter via a request-for-quote.

To make the task more complicated, US-based securities token issuers typically bring their initial offerings to market under the SEC’s Regulation D, which causes their illiquid secondary markets to trade closer to corporate bond or spot FX markets than cash equities.

A third-party data provider might find an aggregated feed from various digital asset markets a financially viable product at some point, but it is far too early to select which feeds to include. Of the few platforms operators currently trading digital assets, most have seen fewer than a handful of transactions on their platforms. There is no way to tell if these new markets will last or be replaced by a platform provider with a better mousetrap.

There is a reason why the vast majority of crypto-exchanges treat market data as an afterthought. They make the majority of their revenues from fat transaction fees that would make regulated exchanges and designated contract markets blush and have little incentive to productize their market- and historical data.

The SEC may be looking for the proper tools to tame the Wild West of digital assets, but the Commission is too early.
These markets have not reached their Wild West stage yet. At least in the Wild West, communities had the trappings of civilization and the rule of law enforced by US marshals or by vigilance committees. The SEC may sport a badge, but it has not come out of its metaphoric marshal’s office.

If the fragmented digital asset markets reflect any historical period, it is the Cambrian Explosion. Startups are throwing everything against the wall to see what sticks, except for industry standards. Until these markets adopt actual or de facto standards, there will be a significant dearth of third-party tool providers for regulators and market participants.

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