Digital assets are a unique asset class, and leaders in this growing industry should understand how government regulations that treat “digital assets” as such could foster wider adoption and long-term health.
To be sure, it’s time for the United States Congress to weigh in on the level of oversight the Commodities Futures Trading Commission (CFTC) and/or Securities and Exchange Commission (SEC) have over the digital asset industry. The current bipartisan legislation under review in the U.S. Senate favors digital asset governance by the CFTC, which would result in a lighter touch compared to the typically more heavy-handed SEC.
Politicians have tremendous upside in supporting rational regulation. To be clear, there will be a delicate balance between providing guardrails and safety valves to support wider adoption without impeding innovation. Guidelines that ensure digital asset business’ transparency could be a large factor in the industry’s quest of adding the next billion adopters.
Additionally, the consumer data and identity aspects within smart contracts, including NFTs, are factors to consider as digital asset regulation accelerates. Consumer data privacy is an ongoing hot button issue that intersects with the industry.
A measured approach could bring clarity and capital to the industry
Blockchain-based solutions and digital assets are the future. They provide technological innovation and new business opportunities across finance, advertising, enterprise IT and other data-driven industries. Technology, in and of itself, is not a good or bad thing. Until recently, the trillion-dollar digital commodities market has largely been operating like the Wild West — anything goes.
Regulation can lead to shortages. By applying more onerous rules, the government can also stifle innovation and participation. A measured approach is the logical path forward and has been successful in the past. For example, during a span of nearly two decades, the U.S. became a global leader in internet technology and e-commerce. This can largely be attributed to a “hands-off” approach by the government, highlighted by the fact there were no sales taxes applied to e-commerce transactions until 2018.
Regulations focused on transparency
As we approach a crossroads for digital asset regulation, rules should almost exclusively be focused on transparency. Full and complete transparency that is easy to obtain would go a long way toward setting the example for all securities and banking regulations that allow companies in legacy industries to obfuscate earnings and liabilities.
Business transparency can pave the way for greater participation by institutions, public companies and the general public. Aside from a handful of forward-thinking companies with an eye on innovation and mavericks with an appetite for adventure, we have seen limited investment from financial institutions and public companies — they simply do not currently have the safe green light to participate in this new class of digital assets.
Per the CFTC website, the agency’s mission is to “…promote the integrity, resilience, and vibrancy of the U.S. derivatives markets through sound regulation.” The CFTC “regulates the U.S. derivatives markets, including futures, options and swaps.”
Meanwhile, the SEC’s function, according to Investopedia, is “to oversee organizations and individuals in the securities markets, including securities exchanges, brokerage firms, dealers, investment advisors, and investment funds. Through established securities rules and regulations, the SEC promotes disclosure and sharing of market-related information, fair dealing, and protection against fraud.”
The SEC has already said that Bitcoin and Ethereum, the two largest digital assets by market size, would not be classified as securities. And, a recent bipartisan senate bill aims to officially classify these top two digital assets as commodities. This could be good news for the wave of blockchain-based startups and growth stage companies blazing trails for the consumer-led Internet known as Web3, and those leading these projects and initiatives should pay close attention.
The long-term view on regulation
Blockchain and blockchain-based tech are, in my opinion, here to stay. Government regulations will happen — it’s just a matter of time. The additional checks and balances may not be welcome by all, but much like death and taxes, they will be part of the program.
Based on the aforementioned legislation under review, the CFTC appears to be taking the lead as the government body that oversees the industry for the long haul has yet to be finalized. Given the unique properties and use cases of digital assets, it is logical to deduce that the CFTC could become the agency of record.
Proper oversight could bring in institutional money in a huge way. Pension funds, endowments, government agencies, state and municipal treasuries will not take a regulatory risk. There are trillions of dollars of capital on the sidelines, potentially ready to participate in digital assets/commodities when regulation comes.
Early moving investors may balk at government intervention but any short-term regulatory pain could be offset by a wave of investment from new market participants, and those in the industry should consider the upsides carefully. As the saying goes, a rising tide lifts all ships.
Charlie Silver is the founder and executive chairman of Permission.io.
This article was published through Cointelegraph Innovation Circle, a vetted organization of senior executives and experts in the blockchain technology industry who are building the future through the power of connections, collaboration and thought leadership. Opinions expressed do not necessarily reflect those of Cointelegraph.
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