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For crypto tokens, more certainty and more transparency
Blockchain and cryptocurrency industry participants often lament the lack of “regulatory certainty” in the United States; some companies quote as a reason to move the corporate headquarters elsewhere. A key component of certainty is coming to digital assets, but not from Congress or federal regulators. Still.
There has been notable activity around global token disclosure standards this year. While most of the actions have taken place overseas, the similarities between California’s and New York’s efforts suggest that other state and federal efforts next year will follow the same model.
Flurry of activity
Over the past few months we have seen new crypto token regulations issued around the world.
- That of the European Union Cryptocurrency Market Regulation (MiCA). came into force in June, with a final consultation on EU-wide regulations to be published in early 2024, and member state mandates coming into force in 2025.
- Hong Kong has released new guidelines for operators of virtual asset trading platforms in June.
- Namibia surpassed its Virtual Goods Law in July, with regulations pending.
- Last September, the New York Department of Financial Services (NYDFS) released a statement proposed updates to its regulatory framework for token exchange businesses to exchange ea tokens changed picture for how it will place the tokens on its “green list,” which allows them to be used by a licensed virtual currency company without token approval as a new line of business.
- Also in September, the Dubai Virtual Assets Regulatory Authority released a statement regulations on the activity of virtual assets.
- California Governor Gavin Newsom signed October’s Digital Financial Assets Act, which establishes a regulatory regime similar to New York’s for cryptocurrency-related businesses.
- Also in October, the Australian Treasury released a consultation requesting comments on digital asset platform regulation, including token listing standards.
New rules despite legal uncertainties
The question that often arises regarding U.S. regulatory certainty is whether a particular digital asset is a security that requires the full registration and reporting required for all securities. Legal classification as collateral has been the main point debated in U.S. lawsuits and private lawsuits XRP by Ripple Labs utility token, NFT NBA Top ShotOR DAO of the American CryptoFedgovernance and payment tokens of .
Other jurisdictions currently have more comprehensive guidelines on when tokens are not regulated by securities regulation. For example, MiCA provides guidance that tokens are subject to its requirements and not to European securities regulation.
Can we expect to achieve certainty in the United States about the status of securities through litigation? Probably not, as appellate decisions focusing on this issue are not expected until much later, in 2024 at the earliest. But even when there is certainty for some tokens, there will always be confusion about newer tokens, especially NFTswhich can be used for a wider variety of transactions.
This focus on security status masks one of the key issues underlying the fight over securities status: the fact that, as the North American Securities Administrators Association pointed out in a 2018 report bulletin, many tokens were issued with little information about the underlying fundamentals. In the US CryptoFed DAO controversy, the decentralized autonomous organization (DAO) argued that providing financial information on the underlying project was irrelevant and unnecessary.
Formal disclosures are the future
The debate over what is a security should not obscure the global consensus that is building that, even if a token is not a security, issuing a token will require securities-like disclosures (or “securities lite”).
Without exception, jurisdictions issuing crypto regulations or proposals this year require token creators to disclose information to an authority or exchanges that deliver digital assets to gather the same information that other jurisdictions would ask token creators.
Adopted Wyoming, which allows but does not require registration regulations in October by requiring Wyoming-registered digital assets to provide information about the asset’s underlying technology and transfer restrictions.
The effect across jurisdictions is that, when the token is created or listed on an exchange (which is the primary way most can purchase a new token), information about the rights, technology, risks and on the principles of the token must be disclosed. The effects of these disclosures are similar to forcing tokens into some form of federal securities exemption; MiCA is probably more like Regulation Aand the nearest California Regulation Din terms of volume of disclosure, but the new rules avoid having to force non-securities instruments into a securities format, but the substance will remain the same.
Even in the Ripple securities litigation, Ripple Labs Inc.The partial loss of , in which the judge found that the tech company needed to file a securities filing for its “institutional” token sales, reflects this consensus. In the wake of Ripple, lawyers did advised token issuers to submit Regulation D documentation or other exemptions on securities registered for the new tokens.
Even if legislation such as Lummis-Gillibrand’s Responsible Financial Innovation Act passes and places all non-securities tokens under the regulation of the Commodities Futures Trading Commission, it is likely that the CFTC regulations promulgated under Lummis-Gillibrand Section 403 will contain some measure of these disclosure requirements as an industry standard.
This is probably the death knell for (metaphorically) creating a crypto token in your garage. It could also strengthen existing market players, as there will be less regulatory friction to build blockchain services using NYDFS “greenlisted” tokens like Bitcoin and Ether versus something new.
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