The current state of regulation in the cryptocurrency and blockchain space leave many perplexed. With an uncertain road ahead, a unified regulatory framework for blockchain and cryptocurrency will be crucial to unlocking its full potential.
By: Nelson M. Rosario, Principal at Smolinski Rosario Law P.C., Adjunct Law Prof at Illinois Tech – Chicago Kent College of Law
Recently, I had the good fortune to speak at LawAhead Hub at IE Law School about the law related to blockchain and crypto assets in the United States. The presentation and the discussion afterward focused on the many questions that arise regarding the current regulatory environment for the blockchain sector in the United States, which is complex and at times unclear.
Today, well-meaning blockchain companies, as well as individuals investing in this technology space, may not know how to comply with the relevant laws—or what the relevant laws even are. The reasons for this confusion are many, but recently regulators have been signaling their desire to provide much-needed guidance for this new area of technology.
As background information, both blockchain companies and individual investors must to be concerned with the regulatory authority of a variety of entities. Generally speaking, the most common agencies that regulate the blockchain space exist at the federal level. These agencies include the Financial Crimes Enforcement Network (FinCEN), the Internal Revenue Service (IRS), the Securities Exchange Commission (SEC), and the Commodities and Futures Trading Commission (CFTC). Additional federal agencies, such as the Federal Trade Commission (FTC), the Office of Foreign Asset Control (OFAC), and other corresponding state agencies, also play a role. Each one of these organizations treats cryptoassets differently.
From 2013 to 2016, there was a limited amount of guidance issued in the US. This lack of guidance started to change in 2016-2017 with the Initial Coin Offering (ICO) boom. The number of projects that utilized ICOs to raise funds drew the attention of many different authorities.
Although blockchain and crypto asset space is global in nature and a global framework may be beneficial to deal with this new asset class, the truth is that, in the short term, common framework for regulation seems unlikely.
What to do about ICOs was a main topic of the discussion after the talk. In particular, what steps, if any, will be taken to regulate—or not regulate—ICOs? Will regulators declare all tokens from an ICO to be securities? Is a utility token possible? Based on recent comments from the SEC, the answers to these questions seem to be: no, not all tokens are necessarily securities, and yes, utility tokens are possible.
Another topic of discussion was the possibility of international collaboration among regulators in different countries. For example, is it possible that regulators would develop a common framework with which to regulate ICOs? The answer seems to be yes given that recently the Financial Stability Board (FSB) issued a report to the G20 nations recommending the development of a common framework on how to regulate ICOs. The problem is that any cross-border framework will face many technical difficulties in identifying participants in ICOs and verifying the organizers and promoters of those ICOs.
Given that the blockchain and crypto asset space is global in nature, it might be natural to think that a global framework may be beneficial to deal with this new asset class. This could eventually turn out to be true, but in the short term, many countries are competing to appear blockchain-friendly, and a common framework for regulation seems unlikely.
Although there is now a lot of confusion concerning what regulators will do about the blockchain industry, the outlook, in the long run, is positive. Each new regulatory action provides clarity for the industry, and this clarity allows participants to better coordinate their activities and plan for the bright future that lies ahead for the blockchain technology space.
Nelson Rosario is an attorney and adjunct professor at IIT Chicago-Kent College of Law where he teaches a class on Blockchain, Cryptocurrency, and the Law. He is interested in the intersection of law, technology, and society. His practice is focused on providing intellectual property counseling for clients in the following technology spaces: cryptocurrency, blockchain, and smart contracts; financial technologies; business methods; trading systems; network and internet communication; and navigation and routing.
Note: The views expressed by the author of this paper are completely personal and do not represent the position of any affiliated institution.