Our General Counsel concludes his look into the regulatory environment surrounding blockchain and crypto
In part 1, as you may recall, we saw how some forward-looking regulators had given some encouraging signs for the blockchain and crypto sectors. Now let’s look at the other side of the coin and how CDRX intends to tackle these.
The flip-side
Not all regulators are cut from the same cloth. There are still several regulators that remain more cautious towards the development of the industry, resulting in more restrictive or unpredictable regulations.
Often, the nub of this fractious issue is the categorisation of ICO tokens and whether or not they are regarded as securities. This has implications as to whether or not they need to be licensed and comply with other securities laws. In the USA, there is no unified stance on this as regulations differ from state to state.
There are also differing opinions within the main regulator. In June this year, Jay Clayton, the Chairman of the US Securities and Exchanges Commission (SEC) advised would-be ICO-issuers to consult the agency before proceeding but at the same time, stating that whether or not each ICO would be deemed a securities offering should be based on specific facts. This was followed by comments from William Hinman, the SEC’s director of corporate finance, saying that he was not inclined to treat ether, Ethereum’s cryptocurrency, as a security, because of its “decentralised” nature.
The USA is just one example where presenting a fractured position perhaps has a more ambiguous impact on the industry. For one, without clear regulations, innovation in these fields is being stifled domestically. Wary entrepreneurs and other legitimate players sit on the sidelines, or worse, choose to exit, for fear of inadvertently running afoul of the law, while investors hold back their proverbial horses because of uncertainty surrounding valuations. This can set the industry on a downward slope as other jurisdictions with a more coherent stance, lure innovators and investors away from the United States, creating rules that make their jurisdictions more hospitable to this growing asset class. Another knock-on effect is that most ICOs these days place restrictions on investors from the US, further impeding the growth of these industries.
The industries’ reactions and CDRX’s approach
Nonetheless it is heartening to see the alacrity and nimbleness of adoption and innovation that has proved integral to the success of the crypto and blockchain communities, has also been applied to regulatory approaches. The industry is steadily moving towards a stronger emphasis on investor protection and regulatory compliance with more proactive initiatives like the establishment of self-regulating organizations (SRO). These organisations often draft their own codes of conduct, which address gaps in regulations and offer consultation with regulators and law-making bodies, to help support market-friendly rules.
Another example is adopting new ways of onboarding investors including and using KYC as an early benchmark to separate bad and good actors.
At CDRX, we are already in discussions with several regulators in respected jurisdictions. We will be in line with regulations before launching our securitised token product (Crypto Depository Receipt or CDR) and trading platform. We are also engaged with various regulatory sandboxes around the world, and are committed and supportive of global rules, intending to flourish within such regulatory bounds and being fully prepared on this front.
Finally, our team make-up and knowledge is perhaps the firmest testament to our commitment to being regulatory-compliant: we have both a general counsel and a former-MAS executive as our head of regulatory affairs on our management team, and other key members of our team have significant experience in implementing the technological and operational aspects of major regulations including SOX, MiFID II, Dodd-Frank/Volcker, just to name a few.
Conclusion
In the end, it is certainly safe to say that most industry participants want to achieve the same goals as the regulators. Huxley wrote in his most celebrated dystopian novel, Brave New World, that “if one’s different, one’s bound to be lonely”, and how true it rings: it doesn’t pay for a crypto or blockchain company to be different from a regulatory perspective. It will invariably find it exceedingly expensive and at high risk of being rendered obsolete, being lonely, in the ever-changing regulatory landscape is the path to ruin.
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