Can Crypto Culture Tolerate Regulation?

When the Bitcoin whitepaper was released by the pseudonymous Satoshi Nakamoto in 2009, it spawned a following of cryptocurrency enthusiasts embracing an ethos of autonomy and decentralisation. It stands to reason that, when the regulators come knocking, this following does not take kindly to their efforts.

China’s Crypto Regulation

In late 2017, China set a radical new precedent in the regulation of cryptocurrency and tokenised assets by outright banning Initial Coin Offerings (ICOs). Since, several other countries have implemented their own regulatory provisions, with varying degrees of severity. And every time this happens, the crypto markets react poorly as investors express doubt for cryptocurrency’s long-term viability where legality is concerned.

Whilst cryptocurrencies and the exchanges they are traded on are currently largely unregulated in the US, they have been garnering increased scrutiny from the SEC. In a March statement, the SEC reiterated their position that a large number of crypto assets should be classed as securities, and thus, should be regulated as such. This firm stance would seem to foreshadow inevitable regulation in the US.

Of course, the use cases for digital assets are hugely varied, and sweeping regulation would be problematic as a result, all digital currencies are not created equally. Indeed, some stay true to the currency moniker more than others, take Bitcoin for one, which is intended to facilitate peer-to-peer transactions without going through a centralised intermediary.

Utility Tokens

In stark contrast are digital tokens that represent shares in a company, a category unto themselves. These appear to be the ones attracting the most attention from the federal regulators. These assets have given rise to an obscure grey area, as they do not offer a formal stake in a company, whilst at the same time, they do not carry any intrinsic value outside of the company other than as a tradeable asset.

In the interim between currency and shares are the wildly popular utility tokens, the purpose of which is to facilitate data transfers within a blockchain platform. These are considered primarily functional, and not so much profitable. Take, for instance, an identity management platform, or a proof-of-existence one. In order to interact with a service in the blockchain ecosystem, it is incredibly easy to purchase access with a token native to the system, versus using a traditional payment vector.

Utility tokens are better thought of as akin to corporate currency, loyalty points, or gift cards than as digital currency. Just as how Microsoft Points or Facebook Credits evade being classed as securities, it is likely that regulators will follow the same logic in ruling on the status of utility tokens. Indeed, a CoinDesk report in February was optimistic that the decision made by the courts in the state of Wyoming, which exempted utility tokens from securities laws, would be echoed by other states. It is worth remembering, though, that this is still only at a state level, and does not necessarily reflect an open-minded approach by the federal government. That said, such developments are only serving to further educate both the public and governmental entities on the various nuances of blockchain tokens, and fostering a growing appreciation for the unique distinctions that make up the space.