Last week was an especially volatile one for financial markets–particularly the so-called “FAANG” stocks, which collectively lost more than $1 trillion in value. Other tech sectors have also suffered of late; for instance, Bitcoin has lost about 80 percent of its value since last December.
While no one can accurately deconstruct the causes of stock swings, the spectre of government action undoubtedly played a critical role in both of these price declines. Social media companies and others whose business models rely on exploiting the voluminous data they collect on their customers rightly fear a regulatory crackdown on their business models.
Crypto assets suffer from the same spectre of regulatory uncertainty. The cryptocurrency space has been afflicted by regulatory incoherence since its inception. The absence of regulatory clarity was undoubtedly a good thing in the early stages, but new innovations in this realm have undoubtedly been hampered by a lack of clarity regarding who will regulate this sector and how this regulatory authority might function. Until that ambiguity is dealt with, the companies themselves and potential investors are going to be reluctant to commit in this sector.
One question at the top of the agenda for the industry concerns how the government will ultimately classify cryptoassets–-particularly whether they will be considered to be securities. The initial signals from the U.S. regulatory authorities have done little to clarify things: for instance, while Securities and Exchange Commission (SEC) officials have made pronouncements that Bitcoin and Ether, two of the most popular crypto assets, are commodities and not securities, earlier this month the SEC fined two other cryptocurrency firms for not registering their tokens as securities.
This haphazard regulatory approach is particularly troublesome for utility tokens. Whereas “mined” cryptocurrencies like Bitcoin are created purely to generate value–and as a result can be very volatile — utility coins are developed to facilitate transactions rather than being investments. Entirely new businesses have been constructed upon the specific applications of utility tokens, and they represent a new way to exploit blockchain technology. However, classifying utility tokens as securities threatens to stifle this innovation.
The best known example of a utility token is XRP, an open-ledger asset designed to facilitate global payments. Because utility tokens like XRP are “pre-mined”, they are inherently more independent and more decentralized than Bitcoin and its imitators, thereby insulating users from the so-called “hash wars” that plague Bitcoin and have contributed to its volatility.
The fintech company Ripple recently announced a new version of its xCurrent product offering that will allow XRP to act as a something akin to a bridge currency, which could potentially render the decades-old headache of SWIFT payments obsolete.
XRP has other potential uses as well; last month the Bill and Melinda Gates Foundation publicized its partnership with Ripple to explore “pro-poor payment systems.” Financial institutions ranging from PNC to Santander Bank to Mitsubishi UFJ Financial Group have signed up, which bodes well for the commercial viability for the platform.
Despite these promising developments, the SEC has yet to pronounce a definitive position on XRP’s classification, even though the United States Financial Crimes Enforcement Network (FinCEN) declared back in 2015 that XRP is not a security. Separately, XRP’s 2013 token sale occurred well before the 2016 cutoff point for the SEC’s enforcement of unregistered security sales. Given that the currency is well-established today and has been comfortably integrated within the financial services realm, experts contend that the downstream effects of an SEC action constraining its usage would impact a host of stakeholders.
Herbert Sim, the chief commercial officer at Singapore-based Cryptology, a company that facilitates investments in blockchain and cryptocurrency, observed that “[i]n order for the space to move forward and investor confidence to settle, regulators need to put standards in place to separate the weeds from the roses in the cryptocurrency world.” These standards should ideally take the form of legislation that clarifies that the priorities of the SEC and other regulatory agencies should be first and foremost to protect consumers and prevent bad actors from subverting cryptocurrencies for their own ill-gotten gains.
Such legislation would ideally put all companies on a level playing field, and obviate the need for issuing piecemeal regulations pertaining to individual currencies.
Ultimately, a modicum of regulatory certainty would speed the adoption of viable cryptocurrencies and promote broader innovation in the industry. Doing so would give U.S. regulators the ability to play an outsized role in influencing standards elsewhere as well, giving U.S. firms an advantage over their global counterparts while concomitantly helping to usher in the next era of fintech innovation.