Taking the easy route almost always causes unnecessary difficulties and limits future opportunities. A common theme in the digital asset space is for businesses to seek jurisdictions with the lowest regulatory standards to get their offerings to market fastest. This decision is short sighted, and I believe those that have taken this path have created their own “regulatory glass ceilings.”
In today’s digital age, almost every company is global immediately. So these global companies leveraging lower regional bars for regulation by taking an easier path through safe havens, like Malta, the British Virgin Islands and the Seychelles, limit opportunities later on in historically higher value markets. While certain jurisdictions may present these companies with a smoother process for getting up and running with far less legal ramp-up, choosing to circumvent stricter regulatory standards, like those found in the U.S., will limit them later. Conversely, those companies that take the time to navigate the regulatory landscape in more regulated markets will benefit from limitless upside.
It’s Chess, Not Checkers
Digital assets are creating new asset classes and investment models that challenge the narrow definition of a security under existing securities regulations. In the absence of new laws dealing specifically with this new asset class, the SEC, Commodity Futures Trading Commission and the IRS have done interpretive gymnastics to provide guidance in applying existing laws that were not designed for the complexities of digital assets. Digital assets themselves can take varied forms, and a singular digital asset can have multiple attributes and functions. Ethereum, for example, which serves as both a means of paying transaction fees to run computations on the network (gas fees) and a tradable asset, among other uses, was once identified by the SEC as a security that later transformed into a non-security commodity.
The difficulty in enforcing existing laws in the blockchain industry is compounded by the fact that innovation happens fast. The SEC, in particular, has been reactive instead of proactive when it comes to providing guidance as to what constitutes a security and has been selective when it comes to enforcing existing securities laws in the digital assets space. In the case of Kik Interactive, Inc., the SEC filed suit against the company for running an unregistered securities sale a full two years after the token sale. On the other hand, TurnKey Jet, Inc. requested, and the SEC issued, a “no-action” letter, in what amounts to the SEC’s blessing for their token sale.
But despite this regulatory uncertainty, there are proactive steps companies can take to ensure compliance with existing regulations. These include enlisting trusted partners who are well-versed in the intricacies of digital asset regulation.
Playing The Regulatory Arbitrage
The uncertainty around the regulatory status of digital assets in established markets, like the U.S., is creating a vacuum that is driving innovation and capital to more forward-thinking nations, such as Switzerland and Singapore. These countries, and other smaller economies around the world, are in a race to attract talent and investment by adopting progressive policies toward digital asset regulation.
Some companies dealing with cryptocurrencies have employed a strategy of hedging their regulatory risk by diversifying their business across a number of friendly jurisdictions. Binance, which owns one of the fastest-growing digital asset exchange platforms in the industry, operates out of blockchain-friendly environments such as Jersey and Malta. While this strategy may enable the company to differentiate itself in the short term, over the long run, it could be placing a regulatory glass ceiling on its future. Recently, Binance stopped serving U.S. customers after announcing plans to establish a regulated fiat-crypto exchange in the U.S., but it remains to be seen if the exchange can regain favor with U.S. regulators.
Stay Close To Uncle Sam
If you’re not in compliance with U.S. regulations, U.S. institutions will not do business with you. Companies on the wrong side of the U.S. regulatory regime may never be acquirable by key players in the traditional financial services space.
As the digital asset space evolves and gains more exposure, regulators will start to pay closer attention to the industry. In 2017, U.S. startups thought they could avoid regulatory scrutiny by selling “utility tokens” in safe haven jurisdictions. While SEC commissioners have commented that, “tokens sold for use in a functioning network” would be out of their purview, companies wishing to take the utility token route must deal with the increased likelihood of regulatory scrutiny. Companies failing to comply with existing U.S. regulations, despite the continued lack of regulatory clarity, could put them on the radar of the SEC and other regulatory agencies, risking their access to a large source of private and public capital.
Blockchain technology is borderless. Regulation is not. Each jurisdiction enforces its own standards of securities law and anti-money laundering legislation. For companies issuing and investing in tokens, it may seem like a wise move to eschew the U.S. for safe havens with less oversight and hassle from regulators. However, by gaining freedom of operation in the short term, these companies risk alienating regulators and investors in the largest mark