12 November 2020
How Financial Regulation Has Altered The Crypto-Asset Landscape
Over the last few years I’ve been writing on this topic I’ve found myself asking three questions. Where is the regulation of crypto-assets heading? What are the implications of that direction for development of the technology? Are there alternatives?
Directions
In July 2017, things changed. The U.S. SEC had identified The DAO as an investment contract subject to securities laws. Although the U.S. CFTC had indicated in 2015 it regarded Bitcoin as subject to commodities laws, the SEC’s report was the marker buoy that chartered a new course. By early 2018 everyone from the BIS, to the FSB to the IMF were assembling their views on the growing interactions with the global financial system. ICOs morphed into STOs. Jurisdictions started thinking about their own laws: apply, develop or expand.
Policy-makers had few other tools than to apply financial regulation. The adoption of an incrementalist approach based on pre-existing regulatory constructs resulted in “fit-to-existing-regulation” (FER) taxonomies that fitted all crypto-assets into existing regulatory silos. Problem solved.
Except it wasn’t. Tokens could take on different characteristics at different times, or could simultaneously fit into all FER categories. Various premises of securities regulation don’t apply particularly well to crypto-assets. This ranges from assumptions about accountability and institutional arrangements to the utility of product siloing and how markets can be regulated. Labelling a token as a security doesn’t mean that granular rules developed for traditional securities can be sensibly applied. While questions must be asked about the sustainability of applying securities regulation, regulatory bodies globally have set a course that applies the language and strategies of FER taxonomies and the securities market to crypto-assets.
Implications
The shift to STOs changed the way technologists raise development capital. But it also had an impact on the development of the technology itself because it represents a significant redesign of the notion of a token – what it is, does or might one day be capable of doing. The SAFT structure might have been a workaround but now looks untenable.
Applying securities law reinforced the traditional corporatized relationship, and centralized barrier, between an issuer and the providers of capital whose interests become limited to the prospect of a financial return. It may also have inadvertently bolstered an existing interest in crypto-assets as speculative investments. Certainly, the much broader concept of disintermediated economics has been shifted to the production of an array of essentially financial products built around a financial capital model, as witnessed by the growth of DeFi.
Consequently, other uses of the technology that have been proposed or thought of lag in terms of development and implementation. The deficiency of exploration leaves an almost existential uncertainty about the wholly different business models that may be possible. For example, such as those that might be built around open data networks that promote shared value creation - because the underlying network is an open database that anyone can build on, value is primarily created from products and services that do not rely on exclusively owned proprietary data protected by intellectual property laws.
This has had an obvious effect on ecosystem development. Non-financial iterations of the technology face survival challenges in an environment that is determined by the prevailing political, economic and regulation infrastructure, which is heavily coloured by extant financial frameworks...
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