How Classifying Cryptocurrencies as Securities Too Early Will Hinder Innovation

Just like bitcoin, the internet faced headway when it moved for mass adoption in the 1990s. However, unlike the internet, which has faced a positive pathway, cryptocurrency is going through an uphill battle, especially due to pushback by regulators. Blockchain technology is receiving like-treatment as well.

The Securities and Exchange Commission (SEC) recently held a hearing on Ether to determine whether the technology’s underlying cryptocurrency should be treated as a security. At this point, the cryptocurrency market is valued at trillions of dollars, which equates to about 10 percent of the $5 trillion in global circulation.

As for Initial Coin Offerings (ICOs), despite being unregulated as of now, they are quickly coming under the purview of the SEC. the SEC recently issued a DAO report that concluded that digital tokens are investment contracts and accordingly, they are regulated under securities laws. Thereafter, there have been several actions targeting ICOs, especially because they are starting to be seen as the sale and purchase of unregistered securities. Unfortunately, very few seem to understand the magnitude of their decisions upon cryptocurrencies.

To begin, designating cryptocurrencies as securities may prevent market growth. Tokens that have already been subject to such designations experience a drop in their value and their liquidity has been eliminated as well. If the SEC treats the majority of tokens as securities, it is likely that exchanges and wallet providers will need to be regulated as well.

As for investors, entry into investments may become more infrequent, which may have a dire effect upon startups. Currently, over 90 percent of startups fail, and without investment in their ICOs, it is likely that the failure rate will grow much higher.

One of the best approaches to take toward cryptocurrencies is a free market. Those involved are able to capitalize on the network effects – that is, products and services increase in value and become more stable when there is a lot of participation. Further, they feature a distributed nature, which means that no one can dominate completely over the market. When a token is issued on the blockchain, it is freely floated and for it to be otherwise may prevent the development of additional projects.

These days, it would be beneficial for regulators to recognize two things – one, that they should not primarily focus on regulating cryptocurrencies and two, that the technology should not be regulated as well. Those who want to use blockchain to transfer their shares or data, the focus should be on the transaction itself. Regulation should ensure smooth function of the system, as well as growth and innovation. Unfortunately, now it seems to be having the opposite effect, which is to stifle industry growth.

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