Governments across the world have struggled to regulate the ICO industry. While the technology holds huge promise across multiple sectors, the presence of bad actors has made authorities and investors wary of the crypto space. Then there are those who are offering tokens that are actually securities in disguise.

Even then, all these concerns cannot negate the fact that ICOs are a path-breaking concept, helping fuel brilliant innovations and aspirations. This is what US Republican representative Warren Davidson meant when he stated in an interview on CNBC that the ICO market needs a “light touch” when it comes to regulation. We have to protect investor interests, but not at the cost of completely suffocating progress.

The CNBC Squawk Box Interview

Warren Davidson is a member of the United States House of Representatives. He and his team are working with people across the crypto industry, including regulators, to come up with a regulatory draft. This draft will aim to provide regulatory certainty for a strong capital market; one that will be watchful of bad actors but that also encourages good projects.

So far, the US has been pretty tight and suspicious of crypto launches, obviously for good reason. But, Davidson has shown a fair amount of positivity towards this digital asset class.

When quizzed on the role of cryptocurrencies in illicit activities, he maintained that the decentralised nature of the asset makes it prone to such uses. But, he also mentioned that cryptocurrencies are more traceable than cash, and much more open than any other money transfer system. Although there have been fraud and scam incidents like Mt. Gox, these have also been resolved pretty quickly. So, there is no reason to keep people away from the benefits of distributed ledger technology.

Regulatory Arbitrage Still a Concern

It isn’t all sunshine in the industry right now. Davidson expressed concerns regarding the issue of rampant “Regulatory Arbitrage” in the sector.

What’s happening is that businesses are launching whitepapers initially in the ICO process. Everybody can see a great technology at hand, which can solve some real-world issues. But no one knows whether the tokens will be security offerings in the future. This makes frauds and scams pretty easy. The US regulatory authorities are concerned about this aspect. Should ICOs be regulated like securities or as commodities?

In June 2018, the US SEC finally passed its verdict on Ether and Bitcoin not being securities but actually commodities. They didn’t find any reason to regulate these alt coins. Davidson quoted this ruling in an interview in which he stressed that coins launched in ICOs could appear as securities at first, but down the road, they could become commodities. It all depends on the network structure and the tokenisation model. After all, the reverse could also be true. What if coins launched as commodities turn out to be securities in the future?

A Global Change in Outlook

Davidson was impressed by the Swiss regulatory framework, stating that the laws were less burdensome for companies and still effective. In July, we saw Thailand releasing a comprehensive regulatory framework through new laws concerning trading and licensing fees.

Kenya’s Capital Markets Authority plans to form a separate government division that will look into ICO affairs and crypto trading practices. Singapore too has taken a positive stance on ICOs, stating that only those ICOs that are securities offerings in digital form will be subject to regulation.

But the legality of ICOs still remains a tricky subject in many countries. It is good news that the US is making efforts to promote blockchain’s mainstream adoption, but there are others, like China, that have banned cryptocurrencies altogether. According to Davidson, since cryptocurrencies offer more benefits than traditional securities, law makers will have to come up with ideas to leverage this aspect fully.