The following article originally appeared in CoinDesk Weekly, a custom-curated newsletter delivered every Sunday exclusively to our subscribers.
The token industry must get older .
I’m not talking about financial growth, a minimum of not for now. With $20 billion raised in “initial coin offerings” and an overall token market valuation of $300 billion, early participants in crypto finance have done a spectacular job of “growing” their price as measured by the very fiat currencies many claim are being disrupted.
But if digital tokens are to matter and if they’re to enable networks of distributed trust, the industry must advance to adulthood.
Only with a self-regulating system, during which broadly accepted norms of behavior, modes of communication and business practices are encouraged, can the industry shake off a Wild West image of Lambo-loving scammers and move from the perimeter into the mainstream.
This, by the way, is additionally the sole thanks to experience true and meaningful financial growth by which opportunities are distributed beyond alittle set of early adopters to a wider array of participants within the $100 trillion world economy.
As such, it’s encouraging to ascertain proactive efforts to market best practices. the newest such effort comes from the Token Alliance, an industry initiative of the Digital Chamber of Commerce that comprises 350 global industry participants, including blockchain and token experts, technologists, economists, former regulators, and practitioners from over 20 law firms.
On Monday, the Alliance will release its first white book , one that aims to bring two important constituencies – industry leaders and regulators – into alignment round the appropriate business and legal treatment of digital token issuances.
In particular, it seeks clarity for tokens that aren’t intended to be investment contracts – typically people who have a “utility” value in driving a decentralized network of users – and for that reason, need to be excluded from existing securities laws.
According to a foreword from Token Alliance co-chairs Jim Newsome, a former chairman of the Commodity Futures Trading Commission, and Paul Atkins, a former commissioner of the Securities and Exchange Commission, the principles outlined within the report “are designed to assist market participants understand the parameters around their activity and to act during a fair and responsible manner toward potential purchasers.”
At an equivalent time, Newsom and Atkins add that these guidelines can help policymakers understand the technology better so on avoid drafting draconian rules potentially creating “an environment of regulatory arbitrage, or maybe worse, unintentionally decrease the attractiveness of a jurisdiction regarding innovation and jobs creation.”
It takes two…
The key point here is that this is often street .
On the one hand, policymakers clearly need educating – as highlighted by California Democrat Rep. Brad Sherman’s ludicrous suggestion to ban bitcoin during Congressional hearings every week and a half ago.
But on the opposite , regulators are getting to be far more willing to offer the industry the regulatory space it must flourish if there isn’t widespread public anger over unsavory and exploitative behavior within the crypto community.
After all, as smugly satisfying because it was to read all the “Old Man Yells at Cloud” memes that mocked Sherman, his and other lawmakers’ misplaced proposals were prompted by some pretty shoddy industry behavior, especially within the initial coin offerings (ICOs) market.
Assessments of ICOs have concluded that as many as two-thirds of these in 2017 were scams. Notably, the lament heard most generally and vociferously about this problem is from within the crypto community itself, with serious developers complaining constantly about “shitcoins” and “vaporware” projects raising eight-, nine-, even ten-figure amounts without building one thing.
Some within the community would much prefer that the entire “ICO” thing would get away . (In all fairness, “ICO” really may be a terrible term, one that immediately labels tokens as purely a money-raising enterprise, substitutable for an IPO.) they need the planet to acknowledge the relative purity of bitcoin and maybe a smattering of other fully mined altcoins. (Ether is typically excluded from this list.) They view bitcoin and its ilk because the only true censorship-resistant systems, neither reliant on third parties to work nor in danger of being pack up by regulators.
But token issuance can’t be wished away. It’s here to remain .
Irrespective of the debated legal distinctions between “securities” and “utility tokens,” sales of those digital assets have already proven to be an efficient thanks to bootstrap the event of decentralized networks and therefore the decentralized applications (dapps) that thrive within them. It’s not clear whether pure cryptocurrencies like bitcoin bogged with scaling challenges will ever have the potential to support the smart contract functionality that dapps require.
The case for self-regulation
Once you accept the premise that ICOs are here to remain , it should even be apparent that so as to flourish they need to operate within a constructive legal framework.
This is to not say that token projects shouldn’t be disruptive, but it’s an acknowledgment of the necessity for pragmatism. It should be possible for crypto developers and entrepreneurs to carry faithful their decentralizing and anti-corporate principles yet also foster a less cynical, more realistic relationship with government.
The best route to a constructive legal framework is to foster a reliable, structured system of self-regulation, which may be designed to melt the compliance blow for startups. Most of the responsibility for enhancing public confidence within the technology should rest with industry participants instead of enforcement , but fall within a predictable legal framework.
We must develop standards of accountability, attestation, reputation and certification (decentralized or otherwise) that comb out bad actors from the market and do so during a way that provides regulators confidence that the social objectives that outline their mission are being upheld.
This is the essential principle behind self-regulatory organizations (SROs) at regulated exchanges and traditional certifying bodies in finance like the Financial Industry regulatory agency (FINRA). this is often to not say the crypto industry should follow these heavy-handed approaches, which are rightly criticized for overly protecting incumbents. Rather, it’s to mention that with the assistance of the type of transparency and accountability offered by blockchain technology and crypto innovations like multi-sig custody, a chance exists to create institutions that foster both public confidence and startup-led innovation.
For this self-regulatory approach to succeed, the authors of the Token Alliance paper argue, it’s vital for governments to supply a supportive legal framework. Here, in their bid to teach regulators, they favorably describe the approach applied within the U.K. territory of Gibraltar, which needs “adequate, accurate, and balanced disclosure of data to enable anyone considering purchasing digital tokens to form an informed decision.”
The section on Gibraltar’s forward-looking framework for token regulation stands in stark contrast to preceding sections, which cover evolving legal approaches in Australia, Canada, the U.K. and the U.S. Put these together, and an image emerges of continued uncertainty and contradictory perspectives.
On the industry education side, the Token Alliance paper takes an honest stab at laying down principles for a way development teams that combat the role of “token sponsor” should bring their tokens into the planet if they’re to avoid having to suits law .
Some of these proposed principles are going to be unwelcome to groups who’ve viewed ICOs as get-rich-quick opportunities. The authors argue, for instance , that sponsors’ white papers “should avoid discussion of any allocation of tokens for investors, developers, founders, or employees,” since these facts would be more relevant to an investor than a token user – highlighting the token’s vulnerability to being regulated as a security.
This, however, is that the price of growing up, and it’s a price worth paying.