Last week the Apollo Capital team dialled into a webinar focused on crypto regulation. The webinar was jointly held by CoinDesk and DLA Piper. A panel of experts reported on the recent gathering of the Organisation for Economic Co-Operation and Development (OECD) on crypto regulation. The session was one of the most comprehensive meetings of senior regulators, bringing together central bankers, the Financial Conduct Authority (UK), the European Securities and Markets Authority (ESMA) and the Financial Stability Board.
Here is a summary of key points from the webinar:
There are two broad competing tensions facing regulators: promoting growth while protecting consumers. On one hand, crypto is viewed as a huge opportunity to drive forward growth on a global scale. On the other hand, regulators are wary of protecting consumers and investors from unscrupulous operators, ICOs trying to circumvent existing regulation, and ensuring financial stability.
Regulators are taking different approaches. China has banned ICOs, India has expressed concerns. Gibraltar and Switzerland have proactively encouraged development of token products. Approaches differ despite the umbrella regulator for the regulators, the International Organization of Securities Commission (IOSCO), issuing principles and guidance. Christine Lagarde, the Managing Director of the International Monetary Fund (IMF), recently stated that “because crypto-assets know no boundaries, international cooperation will be essential.” It’s heartening to see global regulators promoting intergovernmental cooperation. Apollo Capital supports this but is also aware of the difficulties in establishing regulatory frameworks at a global level.
Forum shopping is a concern. Regulators are concerned about ICO issuers ‘shopping around’ for the most favourable jurisdictions. In an increasingly globalised society, jurisdiction shopping is becoming prevalent. Countries that take an anti-crypto stance risk losing innovative projects to more friendly jurisdictions.
This is a different type of technology may not fit the paradigm that applied when laws were set out in 1930s and 1940s.
In the US, Federal laws are the biggest obstacles pushing ICO issuers outside of the US. Despite progress from States like Wyoming, Federal securities laws trump State laws. While State laws have frequently been test grounds for new Federal regulations, the US risks losing the battle of crypto innovation. In terms of enforcement, the SEC hasn’t yet reprimanded anything that hasn’t been outright fraud. For example, the SEC highlighted the DAO as a security that contravened securities laws. However, the SEC hasn’t taken any enforcement action.
We are seeing signs of progress. Earlier this year in February, the US State of Wyoming unanimously passed two pro-crypto Bills. HB 70 defines utility tokens as neither traditional money nor securities. HB 19 exempts cryptocurrency from money transmission laws. Combined, the bills recognise utility tokens under law as a new class of property.
From an investor’s perspective, Apollo Capital’s approach to regulation is clear - buyer beware. As managers of an actively traded portfolio, we remain careful not to invest in crypto assets that likely contravenine current securities legislation. It’s not worth the risk.
Apollo Capital will continue to watch the global regulatory framework evolve. We look forward to keeping you updated.