Yet, in spite of the spectacular growth of blockchain token-based funding, nobody seems to possess a transparent idea of what sort of rules to introduce. The resulting uncertainty (not to say ridicule) is left hindering progress as money flows to unviable projects and investors are left susceptible to evil – exactly what regulation is meant to stop .
Perhaps a replacement approach is required .
But to ascertain where this might go, it’s worth stepping back and asking what we expect the regulation to try to to .
First, why can we need regulation, not just of finance, but of anything at all?
To protect us. At its roots, that’s the most role of state – to guard its citizens from avoidable harm and extreme loss caused by others or from our own lack of sense . When it involves securities, that sometimes means stopping us from making poor decisions.
After all, the word “security” means “safety,” from the latin securus, or “free from care.” Obviously, with time, the first intent of monetary securities got buried in market myth, and therefore the promise of high returns changed the connotation, implying risk.
As markets got more complex, instruments emerged that creatively skirted round the rules, which fostered innovation but also fragility, as we saw in 2008. Many argue that stronger oversight and tighter limitations could have prevented the crash – but at the time, innovation appeared like the higher option.
This is especially relevant now that digital token sales have entered the image .
Second, given the danger inherent in ideas with no working model, barely any documentation and doubtful liquidity, should the state intervene to “protect” us from token sales? the priority is that heavy-handed control would quash the fascinating progress happening within the space.
However, a wait-and-see approach is probably not doing enough to stop extreme loss.
In applying a blanket rule with few specifics, the SEC seems to be taking a hybrid approach. additionally to its previous admonitory statements, this past week it announced not one but two new task forces to strengthen its footprint in token activity and investor protection.
While this is often little question designed to both reassure and warn the market, it’s still lacking in concrete guidance, requires case-by-case analysis and relies on post-hoc measures.
A more solid and fewer resource-intensive solution might be to focus more on prevention than penalties.
This could be done by making it harder to sell newly issued tokens, no matter structure, through disclosure and due diligence conditions.
Similar to the filing requirements for an IPO, tighter pre-sale rules could confirm that participants see the relevant documentation, while analysts have greater access to pertinent information and controlled alternative exchanges – like the one revealed by tØ earlier in the week – have time to make sure a minimum level of liquidity.
Establishing disclosure requirements would also streamline the regulators’ workflow, and set clear guidelines for brand spanking new ideas without eliminating either risk or creativity. What’s more, it might impose a discipline on issuers, while leaving the last word decision on whether or to not participate to better-informed investors.
While passing through hurdles to urge authorization doesn’t necessarily mean that a problem may be a good value or maybe honorable, it could serve to filter the flow and mitigate a number of the danger .
And, obviously, not everyone thinks that regulation in financial instruments may be a good idea – or maybe that it’s possible.
But for buyers that want protection and issuers that want respectability, official support can open up new areas of opportunity and growth.
The SEC has already shown its willingness to forgo full-IPO levels of disclosure, with its Regulation A+ exemptions. a special category might be introduced for blockchain tokens that harness a number of the benefits of this new distribution mechanism while ensuring a particular level of probity.
It would mean higher issuance costs than the present situation, which can push some contenders out of the market. However, projects with solid prospects and decent fundamentals should be ready to cover those costs, either through existing revenues or through the intervention of angel and risk capital investors.
This type of collaboration could perhaps put a welcome end to the talk about ICOs “replacing” traditional financing methods, and encourage more stable, hybrid approaches.
It would also help bypass the prickly got to determine, on a case-by-case basis, whether a token may be a security or a “utility coin.” It wouldn’t matter – ideally, they might all be a touch of both.
As well as simplifying the regulation of the world – giving it a solid base from which to innovate while offering a particular level of comfort and upside to buyers – this approach would help shift us from the set mindset that new concepts are often defined by old categories. That alone might be enough to unleash another wave of creativity, giving rise to new functions, ecosystem and terminologies.
Who knows, perhaps we could come up with a far better word to explain this new paradigm-changing concept, more in line with its potential. And “security” could return to meaning something secure.
And “security” could return to meaning something secure.