Change is brewing in the world of digital assets—and most of it is encouraging. Recent news and developments this past year signal that the industry is maturing—with sophisticated financial institutions, central banks and global standard setting bodies all leaning into the discussion. This bodes well for smart and transparent digital asset regulation being adopted around the globe.
The real question is, which jurisdictions will lead this important change?
What Smart Regulation Looks Like
The FCA starts with a basic principle: regulation of blockchain and digital assets should protect the integrity of the market and consumers, on the one hand, while providing clarity to the industry, on the other. From there, the FCA sets a very clear taxonomy/classification ensuring that market participants understand which rules apply to which assets.
The FCA categorizes digital assets according to their primary use, such as utility tokens, exchange tokens or security tokens, but only security tokens that represent a stake in a business are subject to securities regulation. Under the UK framework, these securities laws don’t apply to the other tokens, despite the fact that some purchasers may buy those tokens purely for speculative purposes.
To lean into a bit of 90’s nostalgia, this would be akin to buying a Beanie Baby during their massive heyday, with the hope that they’ll eventually increase in value. That doesn’t make Beanie Babies a security, though. Beanie Babies are still Beanie Babies and exchange tokens are still exchange tokens.
The UK is not the only jurisdiction that is setting transparent regulation. Japan, Singapore, Switzerland and the UAE have also developed practical regulatory frameworks. Noticeably lagging behind, however, is the United States. This hurts not only the ability of American companies to compete, but also presents national economic and security concerns.
Why the U.S. Is Falling Behind on Digital Asset Regulation
In the U.S. the Securities and Exchange Commission (SEC) has seized control of digital asset oversight. The SEC initially took ownership because of the need to stop the abuses seen during the Initial Coin Offering (ICO) craze. But having successfully stopped these dangerous ICOs, which is positive for the maturity of the industry, the SEC is now stuck.
Essentially, the SEC has placed the regulation of digital assets into an old regulatory framework that governs items including orange groves, oil rigs, whiskey, pay telephones and even beavers—rules that simply aren’t fit for the applicable purpose of this emerging technology.
Contrast this with how the U.S. approached the regulation of the then new technology known as the internet in the 1990s. When it came to regulating the internet, the U.S., fortunately, took a much more flexible and forward-looking approach, rather than applying rules designed for rotary telephones or transistor radios.
That’s not to say the SEC hasn’t tried with building regulation of digital assets. Most notably, the SEC released a Digital Asset Framework (DAF) in 2019. However, this broad, expansive, non-binding framework lacks clarity and can essentially be interpreted many different ways by many different people—and guidance that can mean anything to anyone is no guidance at all.
Where U.S. Digital Asset Regulation Must Go from Here
As it did with the internet, the U.S. has the opportunity to lead the way on digital asset regulation and there are several paths to get there.
Congress can help by either passing sensible laws, or at the very least by holding regulators accountable. Another alternative is for the SEC and the Commodity Futures Trading Commision (CFTC) to join forces and develop a workable framework that protects the integrity of the markets and consumers without suffocating those U.S. companies seeking to innovate.
SEC Commissioner Hester Peirce’s safe harbor proposal is one example of what a sensible approach can look like. This safe harbor would provide a three-year window so that innovators, acting in good faith, can leverage this technology without being crushed by a myriad of intricate and technical securities laws as they start-up.
But whether it’s a legislative solution, a safe harbor like the one Commissioner Peirce is proposing or a collaborative effort between the SEC and the CFTC, what is clear is that we need a U.S. solution now. It’s bad enough if the U.S. were to cede a competitive edge to the likes of the UK, Japan or Singapore; it would be a disaster if the U.S. were to let Communist China take control of this technology. Unfortunately, that is exactly where the industry seems to be heading.