Regulatory Clarity Is Here. What’s Next for Crypto Exchanges?
Are most cryptocurrencies securities, or are they commodities? And what difference does it make for the custody and trading platforms that offer them?
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- Crypto companies that have not been proactively working with the SEC could face a series of challenges
- INX believes that in the coming years, securities of all types will begin migrating to the blockchain
Crypto securities regulation has been a matter of heated debate for a number of years now, but for the SEC, that debate is over.
SEC Chair Gary Gensler has gone on the record to say that under current SEC guidelines, most cryptocurrencies could qualify as securities. While his comments conflict with many lawmakers like Cynthia Lummis — who push for CFTC jurisdiction of tokens it believes are commodities — the SEC isn’t waiting for further clarity. It believes that existing securities laws fit crypto markets and is increasing enforcement.
In July, the regulator labeled nine cryptocurrencies as securities in an insider trading charge against former Coinbase executives Ishan Wahi, his brother Nikhil Wahi, and his friend Sameer Ramani. And most recently, they probed Yuga Labs, the creator of Bored Ape Yacht Club NFTs, over whether sales of its digital assets violate federal law.
These moves are considered by many as regulation by enforcement. But, such a claim assumes that the existing securities test framework is not robust enough for the emerging digital asset class. Gensler has reiterated in the past that the SEC can use tools such as the Howey Test to measure the securities status of any crypto currency.
So if it believes digital asset investors or platforms have violated a securities law, like insider trading, they will act accordingly. Crypto exchange platforms such as Coinbase need to consider further potential enforcement measures for listing and trading unregistered securities.
This can be a daunting task, but for some trading platforms, notably INX ONE, the compliance work is already complete. They foresaw these enforcement measures early on and have maintained close communication with the SEC for guidance. They believe that regulatory clarity will offer a healthy sign of maturity for crypto, exchanges and traders.
Expert insight into changes on the horizon
INX ONE is “the world’s first fully regulated platform, merging investing and trading in security tokens, cryptocurrencies and capital raise services all in one place.” In addition to providing a compliant crypto platform, INX works with companies including Barclays, JPMorgan Chase, and Morgan Stanley on foreign exchanges and interest rates through its interdealer broker ILS Brokers.
We sat down with the chief business officer at INX, Douglas Borthwick, to learn more about the changes on the horizon.
Douglas said of INX, “our view has always been to work with regulators in the passenger seat rather than the rear-view mirror. This proactive approach can be seen as unique in the crypto industry, where many companies appear to operate from a ‘wait and see’ position.”
“Financial regulations to us are not the Facebook model of break it and then fix it. Rather they are to be respected,” he added.
Companies that have not worked in this way could face a series of challenges if a regulatory authority decides to target it in security law enforcement.
Having this kind of foresight seems remarkable, but Douglas stated it simply when asked how INX anticipated these matters: “The SEC had already started to petition folks, asking, did you have US investors in this offering? Did you do KYC AML [know-your-customer, anti-money laundering checks]? It seemed to us that the writing was on the wall.”
INX also sees the writing on the wall when it comes to security tokens and companies raising capital on the blockchain. Their platform is a true Token-as-a-Service (TaaS) product. It streamlines the issuance process by providing everything needed to quickly and easily issue a digital security token to raise capital.
The impact of regulation and fundraising on-chain
With the ICO boom, companies discovered the efficiency of raising capital on-chain. The problem was, they may not have been doing so in a compliant manner.
With regulatory clarity on the horizon, INX sees positive implications for crypto. As Douglas put it, “I see it impacting very positively. I think that regulation does one thing, it shines a light on an industry. It forces out that 10% that are maybe bad actors, but it brings in the Fidelity’s of the world, the Goldman Sachs’s of the world and the real institutional players that do real absolute volume.”
INX also believes that in the coming years, securities of all types will begin migrating to the blockchain. This makes it natural for companies to turn to on-chain methods of raising capital. Douglas said: “If all equities are migrating on the blockchain, if you’re looking to raise capital today, you may as well do it directly in the blockchain, because you’re going to be moving there in the next few years.”
Some of the biggest banks like JPMorgan Chase, Citigroup and Credit Suisse started investing in blockchain early on. They saw it as a way to streamline their business and do more for less. Now that there is a compliant way to use this technology to raise capital, broader institutional adoption seems inevitable.
Douglas summarized the incentive for companies to move their financial operations on-chain as follows: “Using the blockchain and raising capital on the blockchain is pretty exciting because you can bring your capital raise directly to people all around the world. In INX’s case, it is available 24/7 365 days of the year. And it connects to people who believe in your vision, believe in your promises, believe in your company, and who can have a direct relationship with you.”
He also spoke about how security tokens can be used to carve out cash-flows from a company’s business, as opposed to issuing equity in the entire organization. This provides a revolutionary new way for investors to participate in profit sharing and for businesses to raise capital.
This content is sponsored by INX.
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