In a speech delivered this week at the Eurofi Summit, Commissioner Brian Quintenz, of the Commodity Futures Trading Commission (CFTC), addressed the topic of cryptocurrencies and digital tokens. Specifically, Quintez posed the question as to what should the proper role of a regulator be in the midst of a “technological renaissance.” This renaissance, the Commissioner is referencing, is the advent of blockchain technology and the rapid rise of digital currencies.
“I think it is incumbent upon regulators to create a workable and appropriate regulatory framework that facilitates market-enhancing innovation. This means adopting regulation that is fair, technology-neutral, and does not stifle positive innovations,” said Quintez. “It means actively engaging with the financial technology (Fintech) community and other regulators to provide the regulatory certainty necessary to support innovation that promotes competition, vibrancy, and growth in our financial markets. It also means developing thoughtful, balanced regulation that allows nascent markets to develop while also protecting investors and preserving market integrity.”
Quintez discussed the importance of the CFTCLab in collaborating with stakeholders while advising on possible rules. Qunitez noted that most tokens are not really cryptocurrencies and he appears to embrace the concept of a utility token that may not really need a security type regulatory approach;
“… if an innovation achieves the desired outcome of a regulation, but does not fit within the letter of the rule, LabCFTC advises on whether regulatory relief should be provided or if it may be appropriate to consider rule revisions. LabCFTC’s knowledge and expertise also promote technology-neutral regulations—ones which mandate a particular result but not the means by which the result is achieved.”
“One novel aspect of CFTC Commissioner Quintenz’s remarks is his discussion of the phenomenon of blockchain-based “tokenization” of all kinds of underlying assets and his articulation of a conceptual framework for how to think about, and categorize, the resulting digital tokens,” says Overall. “Commissioner Quintenz observed that if, for instance, Disney World were to tokenize admission tickets to its theme parks, the resulting digital tokens would have the same character as the underlying paper tickets they replaced. In Commissioner Quintenz’s view, the digital tokens representing tickets apparently would not take on the character of securities, nor would they become a (crypto)currency, despite the change of form; instead the tokens would retain the nature of tickets.”
So is this the bright line that the cryptocurrency is looking for in defining utility tokens? While some industry commentators believe tradability is the red line a token may not cross, perhaps it is more a question of characteristics.
“This could provide a rationale for extending the same regulatory treatment to utility tokens as whatever underlying asset they derive from or represent, e.g., as commodities or real estate, instead of treating utility tokens – as a class – as securities,” explains Overall. “Intriguingly, Commissioner Quintenz noted that Disney World might be motivated to engage in tokenization in the first place “purely as a marketing ploy”, in order “to take advantage of the popular and speculative mania surrounding all things ‘token'” – yet this did not appear to affect his conclusion that digital tokens representing tickets would still be tickets.”
Sure. There is more than enough hype in the ICO space but eventually this hype will cool down.
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Quintez pointed to the “intense, ongoing debate about cryptocurrency’s intrinsic value [that] has caused regulators around the globe to grapple with how best to respond.” In the US, Quintez stated, the regulatory ecosystem is an evolving one seeking “to develop effective regulatory approaches for this new asset class.” The CFTC has frequently advocated on behalf of self-regulation. Quintez’s speech addressed this topic once again;
“I think an independent, self-regulating body for spot platforms in the United States could significantly contribute to ongoing efforts to rationalize and formalize cryptocurrency regulation,” stated Quintez.
Yet, uncertainties persist as to how to best manage the broader world of digital tokens and the of the definition of a utility tokens. Overall explains;
“This raises the question – would Commissioner Quintenz’s view that tokens retain the same legal character as the underlying assets they represent be affected by how the tokens are marketed?” Overall asks. “In other words, if the tokens are marketed as investments, should the law still treat them the same as it would treat actual tickets – or does the way they are marketed change their legal character? Commissioner Quintenz did not elaborate on this, but it’s safe to say that that the SEC – as demonstrated by, for instance, the Munchee enforcement action – believes that how the tokens are marketed can contribute to a determination that the tokens are securities, even if the underlying assets that were tokenized are not themselves securities.”