BitOoda Global & Regulatory Analysis, 3/2/2020: Back to Basics: U.S. Regulatory Drivers Moving in Reverse
The two biggest near-term influencers in the U.S. regulatory landscape — SEC’s lawsuit against Telegram and its decision on Wilshire Phoenix’s bitcoin ETF proposal — show that there are still some basic questions that need to be addressed before we will see real progress in regulatory modernization. The degree to which market surveillance is needed to mitigate manipulation, the fundamental question of when an asset is a security or commodity, and how decentralized a token network needs to be in order to be exempt from the Howey Test: it’s hard to imagine a scenario in which the market can really mature in the eyes of regulators until those issues are understood and meaningfully clarified.
Although the level of industry engagement with government agencies has grown, resulting in an increasingly sophisticated understanding by regulators of the digital asset space, the SEC broadly continues to manage crypto products and proposals through a skeptical lens. This is among Commissioner Peirce’s arguments in her dissent to the Wilshire rejection: that the SEC’s overall mindset “impedes innovation and institutionalization,” and that its standards for bitcoin-related products are ambiguous and inconsistent with other assets. We at BitOoda continue to participate in discussions surrounding the need for surveillance as an element of a fair and orderly market, but the nascency of the digital asset market infrastructure and the distinct and specialized nature of most firms in the space have led to slow progress in explorations of how surveillance mechanisms might be developed and deployed. In our view, this is one of several key gaps in the market’s current structure, but one that is clearly at the forefront of regulators’ minds.
On the other hand, the questions about asset classification and decentralization have been and continue to be debated in every conceivable forum. Nevertheless, the Telegram case indicates that the question of when a digital asset offering is a security and when it is a commodity is far from resolved. Perhaps this case, into which the CFTC has officially waded at the judge’s request, will provide the precedent needed by players in both the government and industry communities to navigate the issue more confidently. The case, as had been stated throughout the regulatory community, has significant implications for the space as a whole, and possibly the broader private equity markets as well. The fact that we’re still discussing this basic question is indicative of not only the complexity of the issue, but also how slowly regulators have moved to define these critical boundaries.
The other basic question raised by the Telegram case — which is a primary focus of Peirce’s safe harbor proposal — is how decentralized a token has to be in order to pass regulatory scrutiny as a commodity based on its utility in its native network and the nature of any fundraising activity. While we’re not holding our breath on Peirce’s proposal being approved by the SEC’s other leaders, we also welcome clearer guidance on this issue jointly from the SEC and the CFTC to enable projects to pursue legitimate approaches to development and fundraising, and better enable those of us on the capital markets side to operate compliantly.
As an SEC-regulated BD, an NFA-regulated IB, and a founding member of ADAM, we at BitOoda will continue to utilize our position as a market leader to drive these discussions and advance U.S. market development to permit the continued broadening of regulated structured product offerings and strategies our clients can use to optimize their positions.