Mark Twain said that “history never repeats itself, but it does often rhyme” and the same is true for regulation in digital asset markets.
The most ardent cheerleaders for digital assets and virtual currencies assert these new products and markets are distinctly unique, and they should be left outside of the regulatory framework. In reality, nothing could be further from the truth. Securities laws have evolved over the past ninety years to effectively serve and protect capital markets. It’s time to let history be a guide. The principles and precedents that serve as the foundation for market regulation are also the optimal framework for digital assets.
Regulatory principles should guide digital asset markets
While there are many unique aspects that distinguish this asset class from any other, the guiding principles of regulation, oversight and recordkeeping are common to all financial markets. These principles apply to the digital asset markets as well. In the U.S., this means oversight by the Securities Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).
The SEC and CFTC can effectively regulate these products based upon the binary distinction that they are either a security or a commodity. To this end, the SEC has issued guidance and enforcement actions that assert its authority over digital assets. Regardless of the name or acronym ascribed to a digital asset, the substance of the asset will be viewed through the lens of securities regulation. If a digital asset falls outside of securities law, then the instrument is likely a virtual currency or commodity. This comes under CFTC regulations and oversight.
The passage of the Dodd-Frank Act in 2010 created a successful oversight framework for derivatives, commodities and swaps. Under this framework, market liquidity has greatly expanded. As evidenced by the robust volumes of registered U.S. exchanges, retail investors have greatly benefitted from CFTC and SEC oversight. The application of these same principles to digital assets and virtual currencies will lead to greater volume and liquidity as well.
Oversight is happening. SEC enforcement actions against Initial Coin Offerings (ICOs) speak for themselves. Issuers of ICOs must comply with securities laws and regulatory guidance. Companies should proceed cautiously and seek legal counsel to avoid violating securities laws. The same applies to the latest iteration of digital assets – Initial Exchange Offerings (IEOs). While some promoters claim this structure is outside of SEC jurisdiction, recent guidance from the agency states otherwise. Caveat emptor.
The secret of getting ahead
Digital assets and the underlying blockchain technologies have enormous potential. These technologies will dramatically improve markets for the benefit of all by democratizing capital formation. Regulatory clarity is needed for these improvements to occur. The time has come to apply sensible and proven regulation to digital assets. Many of today’s infrastructure providers have taken notice. They are proactively seeking Broker Dealer and Alternative Trade System registrations as a way to increase certainty and transparency. As Mark Twain pointed out “the secret of getting ahead is getting started.” In this case, getting started is acknowledging the forthcoming regulations and taking steps to comply.