In looking at the week’s regulatory developments, it was tough to decide whether to address the joint SEC-CFTC statement on broker-dealer custody of digital assets or SEC’s approval of Blockstack’s proposal to raise funds and begin distributing its Stack tokens under Reg A+. On the one hand, the rare joint statement from crypto’s two main regulators was a landmark issuance that shed light on FINRA’s delays in processing crypto-related BD applications and provided welcome insight on the agencies’ current thinking. On the other hand, the Blockstack approval under Regulation A+ represents a first-of-its-kind endorsement of a new type of digital asset activity, potentially signaling new opportunities for fundraising and token issuance in the post-ICO era.
As we always try to do, we took a more strategic look to draw out a broader takeaway on these developments. However, as with everything in this space, we quickly noted that these regulatory actions raise as many questions as they answer, and found ourselves questioning how far forward these steps will really take us.
Regarding the joint BD custody guidance:
1. Will the SEC-CFTC joint statement have the unintended consequence of delaying the development of a mature cross-vertical market infrastructure for digital assets by splitting custody from other functions?
2. Does this statement represent a real attempt to explain how industry participants should approach their BD and custody compliance structures, or an attempt to slow-roll crypto growth in the U.S.?
Regarding the Reg A approval:
3. If the Stack token isn’t a security (as Blockstack believes), does the firm’s significant effort to obtain this approval set a positive precedent for the industry as a whole, or could this also be seen as unnecessary given the token’s intended applications? If this is an example of a token that changes classification based on its use over time — evolving from an investment contract to a utility token to the subject of secondary market trading — is Reg A+ a viable regulatory channel to pursue in the future?
4. What other licenses or registrations are required for Blockstack and its users, given the planned uses for the token and the various jurisdictions to navigate (MSB with FinCEN, BitLicense from NY’s DFS, etc.)?
Our view is that the SEC-CFTC statement is a genuine attempt to clarify how existing laws and regulations apply to digital assets, which — in the absence of useful congressional action — is critical to the evolution of crypto governance in the U.S. In addition and more importantly, both the joint statement and the Blockstack approval show a more advanced and nuanced understanding by the regulators of some of the complex issues industry participants have been trying to work through. Perhaps we are finally starting to move away from the wait-and-see approach that has stymied real progress to date, and into a period of more proactively addressing some of the tough issues facing the space today.