OPINION: The US Won’t Win the Digital Asset Race
No one enjoys coming in second, but the US is not going to be the world leader in digital coins and tokens in the coming years.
It already is playing out in slow motion with the stress on “slow.”
Regulation always trails innovation, and the initial coin offering market keeps widening that gap every day with its rapid evolution and explosive growth.
The chairmen of the Securities and Exchange Commission and the Commodity Futures Trading Commission have testified before Congress that neither regulator has market oversight regarding the new asset classes and that state regulators are providing what little oversight there is.
The two regulators are working hard to apply their existing regulations to assets types that no one knew would exist at the writing of the rules, which never ends well.
The CFTC has deemed that cryptocurrencies are commodities and the US District Court for the Eastern District of New York recently affirmed the regulator’s claim in a memorandum.
Digital tokens, on the other hand, are chimeras sporting characteristics of securities and commodities.
Under the infamous Howey Test, if a transaction is an investment of money, there is an expectation of profits from the investment, the investment is in a common enterprise, and any profit comes from the efforts of a promoter or third party then the transaction is a security.
However, some ICO issuers have created tokens that operate like commodities, in that there is a finite amount and would be consumed in a delivery of a service, such as access to a network or application.
There are also tokens that would start off as securities to raise capital for a venture and then turn in to a commodity when it becomes the means to access the venture’s services.
Under the SEC’s interpretation of Howey, all of these tokens are securities, which need to trade on regulated exchanges.
One solution would be to create yet another regulator specifically regulate the new asset class. Maybe something like The US Digital Asset Regulatory Commission? But it would never fly. Neither agency (or Congressional committee) would cede regulatory authority willingly.
Congress also does not have the stomach to create such an entity. It is far more probable that it would expand the SEC’s and CFTC’s authority to oversee the new asset classes, which would require the regulators to harmonize their approach.
In the meantime, countries that have a single national financial regulator face the same challenge of how to regulate the new market, but not who will regulate it.
These regulators will be able to respond to market-development issuers quicker, which will pull innovation in the digital asset market into their orbit and out of the orbit of the US.
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The expected review likely will further legitimize the asset class.