Mike Lempres, chief legal and risk officer at Coinbase said the market is being chilled by developments as regulatory uncertainty combined with a great deal of market growth seems finally coming to a head.
The SEC has been considering cryptocurrencies to be securities. Some entrepreneurs have had the idea of creating and selling cryptocoins to investors as "utility tokens" intended to represent the share of a blockchain protocol; but in response to the crackdown, many are giving up on this idea.
Those who are issuing tokens as securities are also having problems. There is not any broker dealer in the U.S. as yet capable of trading security tokens. Issuers are shifting to issuing their tokens under a Regulation D exemption, but there is still a 12-month lockup required by the rules.
Coinbase said in written testimony to the US Congress: "Unfortunately, the current regulatory environment — in particular regulation by enforcement without enough clear guidance on what is permissible — is harming healthy innovation in the U.S. There is so much uncertainty about the definition of a security and the scope of regulatory control that the market is being chilled. This is bad for everyone because the technology won’t stop — it will simply move overseas and we will miss out on the opportunity to cultivate the benefits in the U.S. "
U.S. regulators may consider all tokens as securities
Nick Ayton, CEO of the blockchain funding platform Chainstarter speaking on a panel at the MIT Bitcoin Expo predicted that U.S. regulators could come to consider all tokens as securities saying: "Most exchanges are listing coins that are securities, and our view is a large number of these exchanges are going to be closed."
In order to keep operating many existing exchanges would need to seek exemptions under the rules for securities. MIT Professor Gary Genseler said: "I think it is without a doubt that numerous exchanges will have to seek exemptions under alternative trading system [rules] because many of the exchanges, not all, have tokens that are securities trading on them."
Business being held up by a lack of clear regulations
Things may be unclear for exchanges but the lack of clear regulations makes it problematic as well for new businesses to fill market needs. A company may think it knows what the rules are but until regulators specifically address the cryptocurrency area they cannot be sure.
Joshua Klayman of Morrison Foerster said that people who want to comply and are not wishing to do something wrong are left trying to figure out what the rules are.
The Coinbase presentation to the U.S. Congress notes: "For us, the chilling effect can be shown by the difficulty of determining with certainty when a token is not a security. Because we seek to comply with all applicable laws and regulations, we simply cannot take the risk that a token is later found to be a security."
The demise of the utility token idea
A decision by the SEC in the case of an ICO called Munchee last December showed that what the SEC would consider a utility token rather than a security token was getting even smaller.
Although utility tokens might not be traded companies thought they might be given away but even this may violate SEC rules.
Tekin Salami of PolyChain capital said: "I have perceived a trend in the market wherein legitimate projects seeking to issue a native token for functional networks are steering toward relying on the Reg D exemption within the U.S.."
However, this is quite onerous as not only is there a twelve month lockup but purchasers of the product must be accredited investors with a minimum net worth of $1 million or have earned $200,000 for the last couple of years. This limits the number of buyers.
The U.S. needs to develop clear regulations
The rules in the U.S. are simply too unclear and onerous to encourage more entrepreneurs and investors to enter and serve the crypto market.
Lempres summed it up when he said to the U.S. Congress: "If the U.S. does not provide a clear, thoughtful regulatory environment, the investment can move very quickly to other countries."
Coinbase's written testimony to the Subcommittee on Capital Markets, Securities, and Investment is persuasive: "A clear regulatory environment that fosters innovation while protecting investors is an important step in digital currency’s evolution as a technology. Regulatory clarity will encourage and accelerate entrepreneurial activity in digital currency, ultimately resulting in new products and services that benefit consumers and businesses."
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