The current state of blockchain innovation in the United States is a tale of two asset classes. On one hand, the Securities and Exchange Commission’s reluctance to embrace or endorse blockchain-based securities has ground the innovation in that sector to a crawl. On the other hand, regulators in the banking, money transmission and commodities spaces have demonstrated a willingness to work with blockchain companies to permit the offering of assets and asset classes in those spaces. As a result, non-securities blockchain-based assets and businesses have proliferated in recent years.
Years after the initial coin offering craze, the SEC and the Financial Industry Regulatory Authority, or FINRA, continue to be reluctant to embrace these asset classes. FINRA has approved only a few of the many crypto broker-dealer applications it has received. Despite retail demand and myriad bids, the SEC has yet to approve a Bitcoin exchange-traded fund, citing concerns about market manipulation while sustaining enforcement efforts to enjoin the distribution of tokens it considers securities, including in the Telegram and Kik cases.
As a result, activity in the blockchain-based securities space remains limited. For example, on July 10, 2019, the SEC qualified Blockstack’s offering of Stacks (STX) tokens under Tier 2 of Regulation A. However, for U.S. purchasers, as of August 2020, there is no authorized exchange or alternative trading system, or ATS, where investors can actually buy, sell or trade the tokens. Or consider tZERO, which operates an ATS that facilitates trading of security tokens. While tZERO obtained SEC approval to offer trading of certain assets to non-accredited investors, as of August 2020, tZERO lists very few tokens for trading.
In contrast, non-securities blockchain assets and businesses have proliferated in 2020. U.S. cryptocurrency exchanges, such as Coinbase and Gemini, have added new assets. The tokens with the largest global market capitalizations and trading volume are non-security tokens. Bitcoin (BTC) alone has a market capitalization of over $200 billion. Following next are Ether (ETH), Ripple (XRP), Tether (USDT), Bitcoin Cash (BCH) and others — all non-securities. The relative clarity and flexibility of U.S. regulatory pathways in this space have attracted the bulk of the industry’s innovation.
To be sure, the creation, sale and trading of non-security tokens in the U.S. are not without regulatory complexity. Companies working with these digital assets must comply with various Anti-Money Laundering and counter-terrorist financing obligations under the Bank Secrecy Act. Money service businesses, such as exchanges and wallet custodians, must register with not only the Financial Crimes Enforcement Network but also many of the states in which they operate. More than half of the states now have some form of licensing for businesses dealing with digital currencies.
In addition, the Uniform Law Commission issued the Uniform Regulation of Virtual-Currency Businesses Act based on the assumption that predictable regulations tailored to virtual-currency businesses will provide them with assurances that states are regulating them like other financial service providers.
The international Financial Action Task Force, or FATF, has published its own recommendations on how digital asset issuers and trading platforms should combat money laundering. Thus, blockchain businesses in the non-securities space have their own maze of regulations to navigate, although governing regulatory authorities have demonstrated greater willingness to work toward solutions.
Indeed, some of these authorities have even shown enthusiasm for blockchain technology. Of particular note, the Office of the Comptroller of the Currency, or OCC — an independent bureau within the Treasury Department that charters, regulates and supervises national banks — is currently headed by acting comptroller Brian Brooks, the former chief legal officer of cryptocurrency exchange Coinbase. Many see Brooks as eager to establish the OCC as a leader in cryptocurrency regulation. The OCC recently announced that national banks may provide cryptocurrency services, and in May, Brooks put forward the concept of exploring a national payments charter for crypto firms.
Not to be left out, U.S. states have competed to establish themselves as blockchain innovation hubs. For example, the New York Department of Financial Services, or New York DFS, has rapidly responded to innovations by licensing technology-based money transmitters under New York’s money transmitter law and digital currency exchanges under New York’s financial services law. In addition to granting a digital currency license to numerous companies under the New York Bitlicense, Gemini and Paxos (formerly itBit Trust Company) received trust company charters from New York DFS as early as 2015, and last year, Bakkt Trust Company LLC was granted a limited purpose trust charter.
Crypto custodians Anchorage and BitGo both registered as trust companies in South Dakota, enticed by the state’s innovation-friendly regulatory climate. Likewise, Wyoming has enacted a state law to establish a special financial institution for holding cryptocurrency, dubbed a special purpose depository institution. In August, the New York DFS greenlit a number of tokens for sale, trade and custody, allowing licensed digital currency businesses to deal in these tokens without prior approval. In contrast, blockchain-friendly securities regulators such as SEC Commissioner Hester Pierce, who floated a safe harbor proposal for token securities, appear to be the exception.
Overall, despite some movement from U.S. securities regulators, the blockchain-based securities space continues to move slowly. In contrast, innovation has shifted to the non-securities space, which is exploding with new assets, asset classes and technologies that will likely continue into the foreseeable future.
This article was co-authored by Margo Tank and Michael Fluhr.
The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Margo Tank of DLA Piper focuses her practice on advising commercial enterprises and technology companies on the full spectrum of regulatory compliance matters related to money transmission, digital currencies, emerging payment mechanisms, and the use of electronic signatures and records to enable digital transactions. An early advocate for the financial services industry’s acceptance and implementation of electronic signatures, she served as counsel to the Electronic Financial Services Council and assisted the group draft and advocate for the Electronic Signature in Global and National Commerce Act (ESIGN Act) and is currently counsel to the Electronic Signatures and Records Association.
Michael Fluhr of DLA Piper counsels and defends companies in a wide variety of complex, commercial disputes. Michael focuses his practice on the financial sector, including the blockchain and digital asset space, where he advises and defends exchanges, issuers and related companies. Sought-after for his deep understanding of the space and technology, Michael has been quoted in media and regularly publishes and speaks about issues germane to blockchain and digital assets.