Key Takeaways from RegTech@Wharton: Regulation of Token Offerings (ICOs)
Outlier Ventures was the only venture capital firm invited to join regulators, academics, attorneys, and issuers from around the world to discuss token sales (ICOs) at a closed roundtable event last week.
On the September 16 and 17th the Zicklin Center for Business Ethics Research at the Wharton School of the University of Pennsylvania hosted a closed roundtable session titled: RegTech@Wharton: Perspectives on Regulatory Approaches to Token Offerings. The event was held to discuss and debate potential approaches to regulation, self-regulation, and co-regulation of token offerings from a multi-jurisdictional perspective.
Thirty of the leading practitioners in the space came together to discuss and debate the global issues that surround token offerings and how best to proceed in this fast paced and rapidly evolving new world. The weekend was held under Chatham House Rules, however we can share a few key takeaways from these discussions with many of the World’s leading legal specialists and financial regulatory bodies from across North America, Europe & Asia:
Regulating a Borderless Innovation
Significant discussion revolved around the fact that blockchain technology and the opportunities and utility it affords are border agnostic, while securities and consumer/investor protection regulation is jurisdiction specific. Much progress was made by all stakeholders in furthering the understanding of that regulatory interplay, the need to harmonize vernacular and the potential solutions and suggested methods to deal with differences in existing regulation.
To the group it was clear that tokens can represent almost anything and therefore there is often a need for a case by case assessment by regulators. Enlightened discussion focused on some early options to somehow classify or categorize tokens into broad types, with appropriate and, potentially, varying regulatory treatment that will be durable as we see even more and newer types of tokens in the future.
Utility Token Versus Security
There were mixed views on the relevance of when, and even if, a token’s utility mattered to the question of being a security or not as jurisdictions apply different tests and it was felt the distinction may not be relevant. In addition, there was a desire to not artificially limit participation purely to sophisticated, high net worth investors but allow this new form of capital raising to be accessible to a wider market.
To many, the fact that tokens do not necessarily represent a homogeneous asset class, especially from a global perspective, means that those distinctions should be cultivated and not necessarily standardized. It was widely acknowledged that, on the whole, tokens are likely to foster innovation, both technologically and regulatorily, including in ways many felt we simply couldn’t possibly predict today. It was emphasized that it was important to not lose sight of the token as a driver of commerce in a new digital economy, because doing so has the potential to destroy this emergent source of value and the inherent direct benefits to consumers, investors and the global economy as a whole.
Investor Protection & Self Regulation
Unsurprisingly, investor protection was one of the main discussion drivers. Achieving this through good disclosure, adherence to fiduciary duties, clear and descriptive white papers outlining the use and benefits of the token, use of proceeds and governance was believed to be of fundamental importance for the industry’s progression.
Self-regulation was viewed as being particularly important, especially given that the establishment and harmonization of specific laws across multiple jurisdictions may not be possible or even advisable in the near term. Multiple attendees cited the sheer complexity created by the various different legal interpretations across geographies and the barrier this creates to global harmonization of regulation in this area.
Similarly, there were perspectives that it isn’t desirable to rush to regulate, which could potentially harm new innovative capital creation methods we’ve seen with tokens. However, there was also acknowledgement that objective must be balanced with the need to protect consumers.
The Way Forward
The coming together in such an intensive forum with industry peers was a positive first step to advance understanding and debate in the community in a positive and constructive manner. The presence of key stakeholders and the significant resources being invested by them all to ensure the industry develops in a responsible manner, with the concerns of all stakeholders and their respective constituents considered, served as a great orientation for all concerned. The amount of goodwill that was earned by such a focused and well informed forum should provide powerful momentum for continued debate and future communications from regulators around the world. The same group intends to engage in continuing discussion and communication and to further initiatives.
On behalf of all participants we would like to thank The Zicklin Center for Business Ethics Research at the Wharton School of the University of Pennsylvania, for playing such a proactive role in helping shape debate in the industry.
Greg Murphy is a partner at Outlier Ventures focusing on regulatory, legal and compliance issues around tokens. He is @gmurphy1253 on Twitter.