By Amy Leisinger, J.D.
According to panelists at Northwestern’s Securities Regulation Institute, blockchain and cryptocurrency and the potential regulatory issues raised in connection with technology remain a hot topic in the securities industry. The disintermediation of a blockchain system offers a great deal of promise, particularly in terms tracking assets over a distance and stabilizing transactions, but it also comes with a great deal of risk, they explained. Regulators need to exercise caution in determining whether a particular cryptocurrency is, or should be, subject to regulatory oversight, the panelists found.
Robert Rosenblum of Wilson Sonsini Goodrich & Rosati noted that the SEC is working with people now other than investment banks and big companies and that the individuals implementing blockchain technology and developing and marketing cryptocurrencies have a different level of understanding of what the SEC does. As the Commission works on how to provide proper oversight in this evolving field, it is important to think about unintended consequences, he noted. Davis Polk’s Linda Thompson agreed, opining that it is not always easy to quickly develop appropriate regulations but that enforcement actions can be easier, particularly in terms of potential fraud. In fact, even if a cryptocurrency does not fall under SEC or CFTC jurisdiction, state statutes and common law fraud can capture misconduct she explained.
Lee Schneider, general counsel for Block.one, contended that regulators may need to temper views on regulation with regard to progress and developments in technology and around the world. In fact, he opined, blockchain could potentially reduce existing regulation given its immutable nature. Removing intermediaries from transactions can also be useful, he said; “when you get down to two parties, they are each responsible,” he noted. The focus should be on the distinction between raising capital and earning revenue, and the features and functionality of a product are critical when applying the Howey test to determine whether a cryptocurrency is an investment contract and, thus, a security, Schneider said.
Rebecca Simmons of Sullivan & Cromwell noted that utility tokens, securities tokens, and consumer tokens are all very different and that, as such, coming to an affirmative conclusion on the status of a cryptocurrency is difficult at this point. In some circumstances, it is clear that a transaction involves a security, she stated, but this is not always the case. Simmons questioned whether a token really involves deriving profits predominately from the efforts of others; the issue may be more in how a token is marketed, she said. Pertinent factors that tend to lead to a conclusion that a token is a security often include the sale of a token in place of something that would be a security or trading in a market that looks like securities market, she explained.
Some investors lack the sophistication to protect themselves from the pitfalls of cryptocurrencies, and regulators do need to have some authority in this space, the panelists concluded.