Regulation is Driving Rapid Acceptance of Security Tokens

If you have been following the rise of blockchain since the early (sub $1/BTC) days, you are by now, most likely quite familiar with cycles of hype, mania, and contraction. The BitGold, Satoshi’ paper, Bitcoin’s launch, native coins, Ethereum, the DAO, initial coin offerings, and now…security tokens.

By now, we have seen enough industry cycles to recognize the pattern — the difference with security tokens is that the enterprise financial market is eagerly watching and waiting. Security tokens will be the first major industry adoption of blockchain and their use will push the limits of the technology. Not unlike how the banking sector was the first to adopt and fuel innovation in both mainframe computing and distributed ledgers in the 1970s.

Only a few years ago I walked out of the worst pitch of my life. After approaching a leading US blockchain and ICO firm I presented my case — the DAO fiasco will bring regulatory oversight to the industry. I presented my case for why this was in fact the biggest opportunity for global adoption of blockchain.

By ensuring our dApps, tokens, and network participants were built according to best practices of cybersecurity, privacy, securities, custody, know your client, and anti-money laundering regulations we could overtake traditional banking and capital markets firms. The technology promised end to end transparency and the financial industry regulations offered a developer specification handbook.

“Ya this regulation stuff is not my jam and if you think the SEC is going to stop crypto you are naive. You should probably go back to your banking world.”

They weren’t kidding either, it was a ‘get out of my office’ end to the conversation. I picked up my laptop and left, they didn’t get it. I wasn’t suggesting that all cryptocurrency would be securities, but rather that the capital markets were the perfect early adopter for cryptocurrency in mainstream finance.

Unfortunately, the banking world was not open to the idea either. Traditional firms simply were not ready for the transparency required on an open and public blockchain. Instead they tried to regroup, looking for ways to preserve their role as intermediaries within blockchain finance. In one case, global banking heavyweights came together to counter the crypto threat and created the R3 consortium — a move that only resulted in governance issues, politics, and the Frankenstein-esque blockchain Corda.

Fast forward to today. Facebook buys digital identity and KYC provider, Confirm.io, shuts down cryptocurrency advertising and ads payments to Facebook Messenger. Microsoft becomes the first of the software giants to contribute to open source blockchain scalability with Ethereum Proof of Authority on Azure. Coinbase and other crypto exchanges acquire and partner with various, and in some cases previously sanctioned, US broker dealer firms to ensure they have a license to hold, trade and sell securities for their users.

This trend towards regulation includes fintech platforms such as Robinhood are moving away from being the ‘anti-bank’ to applying for the own banking and investment firm licenses. Recently, Coin News Telegraph reported that the SEC’s Office of Compliance Inspections and Examinations (OCIE) will be reviewing the US broker dealer firms that engage in cryptographic transactions.

What started as Tech became Fintech, and now we see Fintech operating in the capacity of plain old Finance. Nowadays it seems that every company out there is making a Fintech play, most with little understanding or regard for the regulations already in place and others who simply pretend the regulations do not apply to them because they are “.COM”, then “just a data company”, then “only a Fintech startup”, and now “only a decentralized computing network”.

The bottom line is if you are building software to manage, trade, hold, or transfer the assets of another person you are likely moving into regulated territory. Don’t run from it, embrace it as part of the global acceptance and adoption cycle — hell, if you can, be the first to market!

Given the $1.4 Billion USD of cryptographic funds lost in only the first quarter of 2018 a review seems appropriate. Blockchain projects need smart contract audits and cybersecurity standards such as PCI to demonstrate their willingness to security and investor protection.

Blockchain and more specifically, security tokens, represent a global transition of $160 Trillion USD in assets readily available for tokenization today. Today you can buy tokens for ownership in real estate, debt, equity, royalties, and derivatives.

In February, the CFTC forecast for cryptographic markets was $20 Trillion USD by 2020. This transition will reshape our access to capital and investment opportunities — capitalizing innovation, but the tipping point still hasn’t hit. We will only see acceptance once investors have confidence in the integrity, security, and authenticity of all parties involved.

The simplest path to confidence is third party authentication, verification and reporting — this holds true whether you are a local cafe owner on Yelp, a lawyer with a bad Google Maps review, or an ICO looking to raise capital to change the world. If you have worked on a successful ICO in the past you will know the importance of leveraging third parties for validation.

We see the concepts of reporting, verification, and authentication emerging throughout the cryptographic markets. Reddit threads are now used to blacklist wallet addresses. There are hundreds of websites offering ‘independent third party reviews’ on dApps, ICOs, and exchanges. Most of them require the entity being reviewed to pay for the review and many even require you to pay extra for a good review. These sites are rife with conflicts of interest and hardly a model for integrity in our new world of financial freedom.

While it may feel like FUD and makes for great media headlines, the truth is the regulatory reviews and investigations into cryptocurrency transactions is good for the entire industry. Many entrepreneurs I know worry about the lack of clarity in whether and how existing regulations apply to their businesses. They are not looking to break the law, they simply need to understand the guardrails so they can take their innovation to market.

For my company, iComply, we chose to hire the #1 financial auditing and assurance firm in the country to dig into our books and business — and to be honest it was not the horrific experience Tether makes it out to be — in order to provide us with written reports. This not only made us the first cryptocurrency company in the world (to my knowledge) to have a Big 4 firm provide us with full assurance services and IFRS financial statements, it also gave us further credibility in the market when talking to potential investors and strategic partners. Documented instances of transparency are incredibly rare in cryptographic markets — simply stepping up to the plate in full disclosure has given us a huge edge in gaining the ear and excitement of securities regulators around the world.

Matthew Unger is CEO of iComply Investor Services, the leading global compliance platform for digital finance and cryptocurrencies. iComply enables cryptocurrency exchanges, security token platforms, and ICO issuers to simplify multi-jurisdictional compliance, reporting, and record keeping on a country by country basis. You can find @iComplyICO on LinkedIn, Facebook, Twitter, and Telegram

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