Opinion: How crypto businesses should respond to regulations

Photo credit: Dzmitry Kliapitski / 123RF

Throughout 2017, the number of ICOs and the total value raised through them increased dramatically. But in truth, authorities and regulatory bodies are in an awkward position. Some tokens have certain utility to their owners and provide access to the functionality of the companies that issued them. Others resemble ownership rights to assets or a future stream of income. Still others are more akin to a crowdfunding campaign and a donation basket.

This led governments around the world to take regulatory actions. In September, China instituted heavy-handed regulations with an outright ban on ICOs. Other countries, including India and South Korea, are debating significant measures of their own.

Regulation is gaining momentum, and it’s time to take action. There are two ways companies can respond: ignore the impending regulations or prepare for a changing crypto investment space.

Learning old lessons again

Although cryptocurrencies and blockchain are so popular right now, it’s important to remember that they are relatively young technologies. And it’s possible to use the lessons of the past to inform the current crypto movement.

Just like how cryptocurrencies emerged in the aftermath of the 2008 crisis in the quest for disintermediation in the society, several peer-to-peer lending companies were founded in the US three years earlier. These companies operated in the fiat world and enabled investors to give loans directly to borrowers. Both were better off due to higher returns and lower rates.

Still, the companies ignored the obvious writing on the wall and continued unabashed. As a result, some platforms were ultimately forced to temporarily halt their operations. In 2008, Lending Club and Prosper, two large digital P2P lending platforms, were shut down by the US Securities and Exchange Commission (SEC) because their practices violated SEC’s securities distinctions. These companies, along with others, embraced compliance and flourished.

It’s not difficult to see the correlation between this scenario and the current crypto movement. SEC chairman Jay Clayton has made statements connecting some ICOs with securities, and it seems more likely than ever that some regulatory action is imminent.

This is a good thing in many ways. Better investor protection, increased investor confidence, and a more uniform approach can all be catalysts for a future prolific growth. Unfortunately, only those platforms that prepare themselves for this movement can take advantage of it.

Is there a new way forward?

In the midst of all the hype and regulatory uncertainties, allow me to share with you my vision.

While straddling the fiat and crypto markets, we at our company believe that tokenizing hedge and index funds is necessary because it enables the crypto community to get access to the performance of a wide variety of funds. However, this is a not a free-access-to-all area; the security and protection of investors are always paramount.

Let me take a contrarian position here. The cryptocurrency revolution only replicates at every single level the traditional economic architecture. Even though blockchain doesn’t require a trusted entity to authorize transactions, the crypto universe still maintains this feature as part of its fabric. It is nothing more than a mirroring of the securities markets and traditional banks. When we trade on crypto exchanges, it’s an IOU of the exchange that matches orders of different counterparts. The blockchain natives are simply cryptographic warehouses that store the value on digital shelves.

There is nothing bad about it. Humans traded, lent, and borrowed for centuries, and the technology simply makes this process more convenient, scalable, and transparent. Thus, just like in traditional finance, know-your-customer (KYC) and suitability questionnaires are inevitable parts of customer onboarding before the user gets access to any data.

The crypto community is already familiar with the standard KYC procedures, where they share their ID and a proof of residence. At our company, we have taken another step forward by implementing a suitability questionnaire to verify that the clients have sufficient experience in trading and investment as well as to understand the risk and return profile of our potential customers. Background checks are also important.