How we regulate cryptocurrencies and ICOs is key to their success
Governments around the world are experimenting with regulations that
safeguard investors while allowing innovation
“Every ICO I’ve seen is a security”, US Securities and Exchange Commission chairman Jay Clayton told a Senate hearing on February 6 this year, before conceding that not one ICO (initial coin offering) had been registered with the SEC as a securities offering. This somewhat tenuous position on regulating ICOs is typical of many jurisdictions, Hong Kong included.
And yet, getting regulation right is the key to making ICOs and the enterprises they support succeed. As in other jurisdictions, ICOs in Hong Kong are typically structured as sales of utility tokens that will provide access to a platform and/or a means of payment for its services. Provided that the holders will not receive a share of the return offered by the platform, these ICOs are not thought of as securities.
But given the range of activities that are possible with ICOs, there are plenty of grey areas to sort out. Around the world, governments are experimenting with ways to deal with this phenomenon in the hope of realising the promise of blockchain technology, without squelching it.
Wild price fluctuations and news of thefts and scams have focused attention on regulation, even from cryptocurrency industry insiders themselves. In the US and the UK, bank participation in cryptocurrencies is minimal. The advantage of regulation would be to bring cryptocurrencies into mainstream finance and facilitate the real development of blockchain technology and its applications. Other issues are related to consumer protection and facilitating efficient capital raising for companies.
Effective regulation gives legitimacy, and what is lacking now in cryptocurrency markets is that kind of legitimacy and trust. Regulation helps us distinguish between legitimate ICOs and scams and Ponzi schemes. Regulation will hopefully also discourage bad actors from entering the market. The current lack of regulation, therefore, works to the detriment of legitimate ICO issuers.
Regulators worldwide are grappling with the question of how to regulate cryptocurrency transactions, ICOs and cryptocurrency trading on online exchanges. The range of concerns runs from investor protection to preventing money laundering.