Amid mixed signals from Washington, executives and investors in the cryptocurrency industry are seeking greater regulatory certainty, according to a new survey conducted by law firm Foley & Lardner LLP.
Foley’s 2018 Cryptocurrency Survey found that the vast majority of respondents believe their industry should be regulated in the United States at the federal level and that there is a lack of understanding regarding how existing regulation of financial markets or services might apply. But despite regulatory uncertainty – and other top-of-mind risks – most respondents are still willing to invest in or develop cryptocurrency businesses.
Despite the strong libertarian views that permeate the cryptocurrency industry, most survey respondents see the value of thoughtful regulation.
A strong majority (84%) believe that initial offerings of cryptocurrencies should be regulated. More than two-thirds (68%) want regulations for ongoing purchases and sales of cryptocurrencies, and 55% say it’s needed when it comes to paying for goods and services.
Respondents also favor self-policing, with 86% saying the cryptocurrency industry should develop common voluntary standards. Additionally, 89% believe the industry should explore implementation of standards through formalized self-regulation, with most respondents indicating that the model should be subject to regulatory oversight.
This was all cast against a backdrop of uncertainty, as 72% said that the industry does not have a well-grounded understanding of whether or how existing federal and state regulations of financial markets or financial services apply to cryptocurrencies.
“Uncertainty about regulatory standards and duties is an obstacle to salutary product development in this field,” said Patrick Daugherty, a partner and member of Foley’s Blockchain Task Force. “But a recent speech by SEC Division of Corporation Finance Director William Hinman enlightened the issues and paved the way toward wholesome engagement by the SEC with lawyers for the cryptocurrency industry.”
Beyond legal and regulatory issues, other risks – many involving security – weigh heavily on respondents’ minds. Hackers and security breaches are seen as the most pressing threats to the viability and growth of the cryptocurrency industry, with 71% indicating that the theft of cryptocurrency tokens is a strong or very strong risk and 61% saying the same of the theft or “ransom” of data. Fraudulent offerings and manipulative trading of cryptocurrencies were also areas of concern for respondents with 62% and 61%, respectively, saying they pose a strong or very strong risk.
In addition, volatility in the market is a key concern, with 41% anticipating a “crash” or “bubble burst” in the next 12 months and another 29% predicting this within two to five years. Still, 58% of respondents are willing to take on the legal risk in order to pursue investment in cryptocurrency as volatility also provides the potential for big returns.
Relatedly, a strong majority of respondents (72%) support the opportunity to invest in exchange-traded funds (ETFs) holding cryptocurrencies. Major players on the financial scene also favor a retail investment product, but regulators have sent mixed messages, with concerns cited relating to valuation, liquidity, custody, arbitrage and potential manipulation.
“From an investor protection standpoint, regulators are particularly concerned about offerings of cryptocurrency assets directed to retail investors,” said Kathryn Trkla, a partner and member of Foley’s Blockchain Task Force. “ETFs are a vehicle for selling pooled assets to the public. The SEC has made clear that before this will be permitted, the volatility and liquidity of these assets, among other concerns, need to be addressed.”
In a sign that survey respondents – despite an overall desire for regulation – still appreciate measured and thoughtful government action, only 19% said they want regulators to move quickly to adopt regulation. More than half of respondents (57%) support the creation of a commission or task force to better understand the technology and the market before enacting regulations. When asked what areas need oversight, 75% said regulators should continue to bring fraud cases (a major focus of the SEC), believing that doing so will help stop bad actors.
“The U.S. has long-standing anti-fraud laws that apply to cryptocurrencies, but there are potential gaps and shortcomings in this developing area,” said Allison Charney, a partner and member of Foley’s Blockchain Task Force. “While worries about fraud aren’t necessarily surprising, they do provide another sign that industry insiders view regulation on the whole as a good thing.”
More than 60 professionals, a majority of whom were investors or business executives, completed the 2018 Cryptocurrency Survey. For more information and to download the complete report, please click here.
Foley’s Blockchain Task Force is comprised of practitioners of multiple legal disciplines in money centers and innovation hubs across the U.S. With a deep understanding of the regulatory landscape and extensive experience bringing novel products to market, Foley advises established and startup businesses on the full range of issues arising this space, including initial coin offerings and blockchain fund formation; investing in cryptocurrency; use of distributed ledger platforms for trading of cryptocurrencies and other instruments; and the proper regulatory classification of these transactions. The task force brings comprehensive experience in the regulation of securities and derivatives markets and trading; securities offerings, venture capital and hedge fund formation and financing; securities and derivatives exchange formation; bank regulation; technology and intellectual property licensing; and taxation. Enforcement and litigation lawyers also represent clients in government investigations or civil disputes and privacy lawyers advise on cybersecurity and data privacy related issues.
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