BitOoda Regulatory & Geopolitical Analysis, 5/26/2020: Tackling Hashpower Regulation
Happy Memorial Day from BitOoda!
As we continue to expand our Mining Services initiatives, we wanted to share our approach to ensuring that our focus on regulatory compliance will extend effectively to this fast-growing vertical. Beyond the skyrocketing demand for our growing suite of financial instruments for miners and other market participants — including the trademarked BitOoda Hash contract, BitOoda Transaction Fee options and swaps, and BitOoda Difficulty swap — we felt it would be useful to apply our regulatory leadership to the licensing and compliance questions surrounding the broadening of crypto mining into traditional finance.
We are seeing a quickening dialogue within the industry, highlighting the need to address — sooner rather than later — how the crypto mining and financial services communities can work together to ensure the evolution of mining-related financial instruments will allow institutional participants to enter the space confidently. We believe there are several important issues to address in these early days of mining regulation:
· Applicable Financial Instruments: As miners increasingly look to use traditional financial products — particularly derivatives — to hedge against losses due to adjustments in hash rate, difficulty, and price, it is crucial for them to be able to use trusted counterparties to assess risk and structure effective strategies using the appropriate instruments. This is why we at BitOoda focus so strongly on compliance, including being regulated by both the SEC and CFTC. We are now applying that same approach to the advancement of the mining industry in a way that benefits both miners and institutional investors, by offering a variety of structured products and strategies to help sellers manage risk and buyers to invest compliantly.
· Asset Classification: A recent editorial attempted to apply the age-old “security vs. commodity” question to hashpower, concluding that most forms of mining pools and marketplaces are managing hashpower as a commodity and noting that it is critical for regulators not to make an overly-broad ruling on the classification of hashpower as a particular type of asset. We certainly agree that the “facts-and-circumstances” or “principles-based” approach typically used by the CFTC should be applied to the mining field as well, but remain wary of the potential for regulatory overreach or a lengthy education period before providing clarity on the treatment of mining products.
· Licensing: The other ever-present question related to digital asset regulation that is now being discussed in the context of mining-related products and projects is what licensing requirements miners, mining pools, and their financial services partners should/must have to transact compliantly. It is anything but clear which portions of the cross-jurisdictional alphabet soup of regulatory approvals (IB, BD, MSB, SD, etc.) do and don’t apply to miners, mining pools, and those transacting in mining-related instruments. Our view is that — like many digital asset activities — the regulatory answer depends on the particular circumstances and participants, which is why a broad stack of regulatory approvals will be increasingly critical as the diversity of instruments and asset types continues to change.
The bottom line for us is that the mining field is quickly becoming more institutionalized and integrated with traditional financial instruments and strategies that must — and will — be regulated. Now is the time to address the types of questions it has taken regulators years to address for other digital asset issues. As we continue to drive the regulatory advancement across the space and work to set industry standards, BitOoda is uniquely positioned to work with miners and those looking to manage risk and enter the digital asset investment space in new ways. We are excited to continue to drive the evolution of the mining field and encourage you to reach out and discuss opportunities to work with us as we pave this new ground.