Classifying and Regulating Crypto-Assets

Jan Smit
Jan Smit
Mar 13, 2018 · 4 min read

Out with Howey

Disclaimer: This is not investment advice. Please do your own research before investing into crypto-assets and always seek professional advice before making any investment.

Crypto-securities and crypto-commodities

Utility tokens

Cyber Capital believes that any token which is liquid and which is centrally controlled is ripe for high risk speculation and should therefore receive the same level of consumer protection and individual scrutiny that securities get.

Centrally controlled application layer coins, including utility coins, are often high risk. For example the prices for services and the amount being burned upon each transaction can change without the consent of stakeholders. A proper advance disclosure, potentially through a predefined SEC form, may have to be enforced in instances where the coin economics change.

Such regulations should also be considered in case of crypto-currencies and other protocol level coins which are not fully decentralized even though they may be marketed as such. The CFTC would not want to supervise a security disguised as a commodity. Therefore the SEC and CFTC will have to jointly agree on edge cases such as NEO and XRP, should they want to list on a US exchange. The organisations behind these coins may effectively be in control of the protocol consensus. These firms may need to file annual reports (Form 10-K), report on beneficial owners of more than 5 percent (Form 13) and perform in general the same or similar disclosures as required for traditional securities.

Traditional regulators reimagined

Tokenized assets and stable coins

Smart contracts and DAOs

Timelines

Preliminary conclusions

  • Crypto-securities with a significant war chest may be able to comply with regulatory standards for securities and consequently be able to prevent de-listings from exchanges.
  • Other crypto-securities will probably be de-listed at regulated exchanges, may have to repay their investors and also cease trading.

Truly decentralised crypto-assets which are commodities, such as bitcoin, seem to have little to fear of the new restrictions on crypto exchanges.

It remains to be seen if exchanges can be regulated by the SEC and CFTC simultaneously so you can actually continue to buy crypto-securities with BTC or another crypto-commodity.

Blockchain startups will have to revert to more traditional sources of funding such as angel investors, venture capital and pre-sales (SAFTs).

Cyber Capital research: Alex Fauvel, Fundamental Analyst, and Jan Smit, Portfolio Manager. Cyber Capital is a crypto-asset investment fund based in The Netherlands. The fund portfolio is actively managed and contains up to a 100 different crypto-assets.

Cyber Capital

A cryptocurrency investment fund

Jan Smit

Written by

Jan Smit

Crypto enthusiast

Cyber Capital

A cryptocurrency investment fund