1. Investor protection
I think the point here is pretty clear. A short summary:
Many tokens will likely be classified as securities in some jurisdictions.
This makes mandatory disclosure requirements applicable to token offerings.
Mandatory disclosure gives investors more information to try to rationally base their decisions on.
The information provided to investors will be more reliable, as developers would be liable for misrepresentations about their projects.
Developers would be obliged to actually do what they claim to do.
Moreover, exchanges will now have to comply to relevant regulations on the trade of securities as well.
This will impose mandatory transparency and quality standards for exchanges.
Pump and dump schemes and order spoofing will become less prevalent, as exchanges will have to comply to the stricter regulations that apply when selling securities.
2. Decreasing association with illegal practices
If crypto stays a wild west for long enough, regular investors will likely start associating the space with the problems they hear about: illegal practices, scams etc. This will make interest in the space go down rapidly.
Know your customer (KYC) and anti-money laundering (AML) regulations will also help in this respect. A clear implementation of such rules will help crypto to get rid of claims that cryptocurrencies and tokens are only used by criminal and terrorists.
3. Increasing (quality of) investment in the space
Regulatory uncertainty is a concern for many (institutional) investors. If alleviated, we will see more investments by angels, (corporate) venture capitalists, and hedge funds. These parties bring knowledge and industry connections with them — something that is needed for this space to mature. Moreover, they will provide legitimacy to the space, which starts a positive feedback loop.
However, I have to say that an active venture capital fund in the space indicated to me that they love the current legal uncertainty. My belief is that they love it because it reduces competition in a space they know will eventually thrive.
4. Regulatory certainty reduces barriers to entry
“If you cannot estimate the risk of your business, then you are a brave man to try and succeed.”
If rules are clear, legal risks can be addressed. At the moment, these risks can only be estimated. Reducing regulatory uncertainty will reduce barriers to entry for all that are not comfortable with the current legal landscape.
Think, for example, of an exchange. Right now, exchanges could potentially be subject to SEC regulations on securities exchanges, alternative trading systems (ATS), broker-dealers, transfer agents, and clearing agencies, as well as the Financial Crimes Enforcement Network’s
money transmitter laws in each individual state and KYC/AML. And I am not even talking about other jurisdictions yet! Being able to make informed decisions on compliance makes it easier to enter the market.
New regulations and legal sandboxes could also substantially reduce the regulatory burden of trying to apply a wide variety of currently existing regulations
The big disadvantage of regulation
Understandably, there are fears that regulation will stifle innovation. If regulation is too strict, it could actually increase the burden to entry for many companies. Having to comply with all securities regulations worldwide would impose huge costs on startups — which they cannot afford.
Moreover, rules in a space that as innovative as crypto often do not age well: they could be incompatible with future innovations. This is a huge concern, as regulators might not fully understand the potential of distributed ledger technologies.
Two points are worth considering however.
Regulators are aware of this. In fact, it is the reason why they been taking a wait-and-see approach for so long now. They have no interest in stifling innovation. They know that if they make rules too strict in their country, innovators will move away to more ‘innovation friendly’-jurisdictions, which is economically not desirable.
This awareness leads to jurisdictional competition for who can craft the best regulation (see, for example, the emergence of regulatory sandboxes in Mauritius, Australia and the UK)
In other words, regulators will have to do a balancing act between protecting vested interests (e.g. the protection of investors) and crafting the most innovation friendly regulation possible.
The above arguments do not take away all fear for bad legislation. Regulators might not fully understanding the potential of certain innovation. They could also be subject to lobbying from traditional industries that are not too keen on disruption. Therefore, it is up to the crypto community to actively participate in educating regulators and working together in thinking about, and drafting, regulations. This is of great importance, and it is why I have great appreciation for parties like
Additionally, we should also think about how we can take away the regulators’ pain points. Taking investor protection with regards to ICO’s as an example again, the crypto industry should work together in establishing a reasonable framework of best-practices or standards. This could for example involve the drafting of a classification-system for different tokens (cryptocurrencies, protocol-tokens, utility-tokens etc.) and voluntary compliance regimes for each, to increase transparency and protect investors from parties acting on their moral hazards.
Moral hazards have led to many problems in the crypto space, which in turn have attracted the attention of regulators, which will be looking to address these.
This is not a bad thing, as long as they are addressed properly.
Currently, the moral hazards means that the costs of the ‘immoral behaviour’ of some is being socialized on all of us in the industry. Crypto is (yet again) starting to get a bad reputation, just when people started to accept Bitcoin as a digital currency that is not only used by terrorist.
Addressing the regulators pain-points is necessary, as they are well-founded. Ideally, we should work towards regulation that protects interests of legislators and is no burden to innovation whatsoever. However this is not as easy as it sounds, as it involves an extremely difficult balancing act between (partly) misaligned interests.
It is therefore our duty as an industry to assist regulators in this process, by educating them where necessary and together thinking about possible approaches to be taken, including self-regulation. After all, if we as a community do not take the time to fully understand and address the regulator’s pain points, then why would they take the time to consider ours?