Crypto backers want special regulatory treatment—here’s why it probably won’t happen

But look at all our users.
But look at all our users.
Image: Reuters/Anindito Mukherjee
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Are crypto tokens investments or do they deserve their own regulatory classification?

Speculation has driven most of the popular interest in virtual currencies, but if you ask the hundreds of entrepreneurs who have created crypto tokens, you’ll likely hear that the answer isn’t that simple. Crypto tokens, they’d argue, aren’t just currencies or “digital gold“—they can also be a new method of transaction, a novel way of enabling trust between people and computers. As such, crypto entrepreneurs often claim that their tokens aren’t investments, at least in the classic sense of the term. Rather, blockchain-based tokens can be pieces of software, which allow a person to access a good, a service, or a platform. There’s even a Merriam Webster’s entry for these “utility tokens.”

The debate about whether cryptocurrencies are investments isn’t academic. If a token is deemed a “security,” it means the associated project and its founders are bound by the same laws that govern the stock market. These include reporting and disclosure requirements—which would likely enhance buyer protection, but also crimp a project’s production and marketing strategy. For unregistered securities offerings, founders and promoters may even face legal consequences and fines. Kik Messenger, whose Kin cryptocurrency has reportedly drawn the attention of the US Securities and Exchange Commission, has started a legal defense fund to fight potential regulation.

Fred Wilson, a prominent venture capitalist supporter of Kik, has criticized the SEC’s regulatory efforts. The SEC, he claims, “cannot seem to understand that not all of these assets are securities, they cannot seem to understand that most are commodities, currencies, or utilities like frequent flyer miles. They cannot understand that crypto tokens are unlike any assets that have come before them and that crypto tokens need new regulatory structures.”

The US stock market regulator has been cautious about deeming crypto tokens as securities, but chairman Jay Clayton has observed that they are often structured like investments.”You can call it a coin, but if it functions as a security, it is a security,” he told the Senate Banking Committee last year. (Interestingly, bitcoin itself is not a security. It’s been treated as a commodity by the Commodity Futures Trading Commission and taxed as property by the IRS. However, bitcoin can be packaged in a financial instrument as a security.)

The battle over definitions isn’t unique to the cryptocurrency universe. For instance, in its bid to expand globally, Uber tried to position itself as a communications platform as opposed to a taxi service. To the casual observer, the distinction may seem pointless, but Uber’s strategy was designed to avoid inconvenient regulation. Likewise, as Google faces an antitrust probe, it’ll be worth watching how the company defines itself—as a search engine, as an online advertising business, or something else. Whether you see a monopoly probably depends on what glasses you’re wearing.

In Uber’s case, the business grew without respect for the law, and customer demand—the widespread usage of ride-sharing apps—seemingly justified the aggressive strategy. Facing the reality of millions of users who de facto “voted” for Uber, regulators in many jurisdictions surrendered to the ride-hailing leviathan. To date though, mass consumer adoption of crypto tokens—well, beyond speculation—just hasn’t happened. Blockchain-based platforms are slower and less user-friendly than existing digital services like Amazon Web Services and Venmo, and blockchain projects have repeatedly proven vulnerable to hacking and theft.

For now, securities laws are appropriate for the regulation of most crypto tokens—despite the protestations of venture capitalists. Until these virtual assets are used for something other than speculative trading, they likely deserve the same regulatory standards as the stock market.



A crypto entrepreneur bought a $4.5 million lunch with Warren Buffett.

Justin Sun, the founder of Tron—a $2.5 billion crypto project beset by allegations of plagiarism—claims to have purchased a record-setting lunch with Warren Buffett. Sun says he will invite other blockchain industry leaders to join him at the meal with Berkshire’s boss. (Sun couldn’t be reached for comment.)

Takeaway: Can you imagine Buffett’s eyes when he realizes what he’s gotten himself into? We’re talking about a man who has called bitcoin “rat poison squared.” The meal is scheduled to take place at Smith & Wollensky, a New York City steakhouse. I’d like to imagine though that once Buffett is notified of his predicament, he’ll rearrange it as a quick trip to McDonald’s. The market for Tron’s cryptocurrency (TRX) did not move noticeably after Sun’s announcement.

Please send news, tips, and disgruntled venture capitalists to Today’s Private Key was written by Matthew De Silva, and edited by Oliver Staley. There are two times in a man’s life when he should not speculate: when he can’t afford it and when he can.