Morning Consult: Billions of Dollars Have Migrated to the Blockchain. Now What?


During the past 18 months, digital assets and the blockchain industry have come into their own, moving from a curiosity or even a source of foreboding to becoming accepted components of the future of financial innovation. Two of the world’s largest market exchanges introduced bitcoin futures contracts, more than a dozen central banks started to explore blockchain-based digital currencies, and most of the world’s largest financial institutions have developed robust blockchain strategies.

The blockchain sector’s continued innovation will be fueled through the distribution and use of digital tokens – essentially, electronic encrypted contracts that entitle the holder to specific rights. Like any other contract, a token is subject to various regulatory requirements depending on its form, attributes, uses, and how it is marketed. Digital tokens can be treated as securities, currencies, or commodities, or provide access to a network through which they offer specific utility to their users. A digital token can also be a hybrid that includes several of these characteristics or can initially represent one characteristic and then through use take on characteristics of another.

However, this versatility and continued innovation have resulted in much regulatory ambiguity for this developing industry because regulatory treatment follows from the application of general principles to specific situations. The private sector drives innovation; it is one of the best characteristics of the American economy. In contrast, the government operates deliberately and carefully.

That is why we worked with Token Alliance, an initiative of the Chamber of Digital Commerce representing more than 350 blockchain and token experts from around the globe, to develop a comprehensive set of guidelines now to help shape the responsible growth of the token marketplace. The collaborative report is designed to be used as a resource among industry innovators, consumers, and policymakers to address so-called “utility tokens,” an aspect of the token economy fighting to be recognized.

Over the past year, many projects purported to create and distribute “utility” tokens – or tokens that are designed to be consumed within a blockchain network. They are the fuel or gas to a digital ecosystem. For example, a token that is used to pay for access to an electronic storage network – some like to think of it as a ticket – serves a purpose. These “utility” tokens do not represent ownership in the network or other indications of a security interest – they simply provide access to use it. Permission to use a platform is not a security, nor should it be treated like one. Doing so would thwart the network and its extraordinary potential. Could you imagine if every time a sporting event were to occur, the teams had to register their tickets with the Securities and Exchange Commission before they were offered for purchase?

These are the issues regulators and the industry are grappling with. Unfortunately, there is no cookie-cutter solution to determine when a token is a security, commodity or neither of those things. The report instead outlines the characteristics that are likely to make something deemed a security and the characteristics likely to fall outside securities laws.

The regulators in the digital asset space – the SEC and the Commodity Futures Trading Commission – are closely looking at these issues to stop fraudulent conduct. As regulatory enforcement actions and inevitable court cases begin to shape the landscape, market participants understandably seek comfort against regulatory risk. Without it, they will move elsewhere to find a surer environment. For the blockchain to achieve its true potential, it is important to have regulatory clarity.

Just as the private sector has a long history of innovating, it also has a long history of working with government to apply legal principles to fact patterns that do not fit neatly into laws and regulations written decades ago. Rules regarding cross-border issuance of securities by American firms and development of many investment products are but two examples in the securities industry. Eventually, regulators often piggyback on these private efforts to adopt rules, a paradigm that we think likely to happen in this case.

We trust that the report will help to create a strong step towards an industry-led governance model, and a powerful tool to help innovators and consumers create a responsible and successful token industry.

Paul S. Atkins is the CEO of Patomak Global Partners who served as an SEC commissioner from 2002-2008. James E. Newsome is a founding partner of the Delta Strategy Group who served as commissioner of the Commodity Futures Trading Commission from 1998-2001, chairman of the CFTC from 2001-2004, and president and CEO of the New York Mercantile Exchange from 2004-2008.