It seems that the institutionalization of the digital economy is an irreversible process. Even the most ardent opponents will not be able to intervene in it. However, there is no hope that it will run smoothly either. Recently, several events have occurred in the United States, showing the internal contradiction put into the government policy regarding virtual assets.
The Securities and Exchange Commission (SEC) presented its new creation - the Strategic Center for Innovation and Financial Technologies (FinHub). It is supposed that the center will become a platform for the dialogue between representatives of the new economic reality and officials of various departments. The goal is to achieve mutual understanding and reciprocal beneficial cooperation.
“We aim at working with market participants on new approaches to the capital formation, the market structure, and the financial services, without reducing investors’ protection,” said the head of SEC Jay CLAYTON. “FinHub will become the leading structure for monitoring and introducing innovations in the securities markets, which promise much, but also require flexible, rapid regulation.”
Valerie A. SZCZEPANIK, Senior Advisor on Digital Assets and Innovations became the head of the center. This is one of the few examples where the head of such a significant unit is not an official, but an expert. This is a clear sign that the Commission no longer intends to follow the way of total prohibition of the digital companies participation in securities trading.
“SEC employees have been working for some time to understand new technologies, to inform the market participants about the position of the agency, and to promote beneficial innovations in the securities industry,” the head of the Center said. “By launching FinHub, we hope to provide a direct way for entrepreneurs, developers, and their advisors to interact with the regulator.”
The tasks of the new department of the regulator will also include the organization and holding of the first blockchain forum scheduled for the next year.
As if having guessed the moment, the New York Stock Exchange (NYSE) submitted an application to register five funds that are going to trade futures based on digital currencies. Moreover, the financial platform followed the way of maximizing the distribution of risks. Three of them, Direxion Daily Bitcoin 1.25X Bull Shares, Direxion Daily Bitcoin 1.5X Bull Shares, and Direxion Daily Bitcoin 2X Bull Shares will focus on the rise in the value of virtual assets. Two others, Direxion Daily Bitcoin Bear 1X Shares and Direxion Daily Bitcoin 2X Bear Shares, will work at the bear market.
In light of all this, the likelihood that SEC will approve the application is very high. However, another hidden danger has emerged in the way of digital companies to the economic mainstream. This time it is represented by the judicial system.
The federal Judge Rey ZOBEL rejected the petition of My Big Coin Pay Company and its chief manager Randall CARTER against the United States Commodity Futures Trading Commission (CFTC). According to the lawyers of CARTER, the accusation of My Big Coin of fraud amounting to $6 million is illegal, since the regulation of the virtual assets turnover is beyond the competence of the CFTC because digital coins cannot be a commodity. But the court decided in a different way.
“As both My Big Coin and Bitcoin can be generally classified as virtual currencies, Bitcoin futures are currently traded on US exchanges,” Rey ZOBEL emphasized. “Therefore, My Big Coin coins can be considered a commodity asset.”
Let’s recall, this is important: the company attracted investors' money for the release of a digital currency supposedly backed by gold. At the same time, about two months ago, the District Court of Brooklyn, New York, made a completely different decision in a similar case. We are talking about the project of Maxim Zaslavsky, during which Recoin and Diamond tokens supported by the diamond business and real estate were also promised. SEC filed a fraud case for $300 thousand.
“The question is whether the prosecution’s claims that the organization has “elements of a commercial enterprise seeking to make a profit” are sufficiently substantiated”, Judge Raymond DAIRY wrote in his statement. “If this is proven, the jury may conclude that “investors provide capital and a share of the profits.” Therefore, Zaslavsky’s ICO project can be called nothing more than a joint-stock company, and digital coins - securities. Consequently, it falls under the control of the Securities and Exchange Commission.
Both cases will be considered by the courts on points of fact. This means that the processes will last for months, if not years. And the result is unpredictable.
”The court resolution that it will consider the case is not a final decision and cannot be a precedent yet,“ comments our expert, the lawyer at L&T International, Alexander SHUSHIN. - Therefore, it is at least too soon to say that they somehow affect the development of the crypto-branch in the United States. However, even if Judge Rey ZOBEL, for example, took the part of the applicants and the case was dismissed, this would not be the final solution to the issue.
American courts are always guided by the main principle of the case law “Stare decisis [et non queta movere]”, from the Latin: “Stand on the decided [and adhere to the established]”. It obliges judges to consider past decisions as a guide for resolving such cases in the future, depending on the similarity of cases. A classic example of how precedents work: “a son killed a father to inherit” and “a son killed a father to protect himself” - in both cases, the motivations are similar, but the circumstances are different.
It seems to me that all cases related to virtual assets will be considered on the same principle: the predominance of the essence over the form. If a token is similar to a commodity and starts being traded on commodity exchanges, it will fall under CFTC regulation, if it is a security, then it will be managed by the SEC.”
At the same time, the market always needs certainty. Businessmen’s thrashing between two regulators will not lead to anything good. “Of course, there is a conflict of regulators' jurisdictions here,” Alexander SHUSHIN states. “However, at the same time, it is necessary to report that the courts in the United States are independent and can make opposite decisions with a safe conscience. And even the US Supreme Court will not be the final authority that will take the issue of the control over the digital economy off the table. There were such cases when the highest court took one verdict, and after a few months - another. In my opinion, the unified legal regulation of the crypto-industry is possible only at the level of statutes. That is, using written rights."
As a result, uncertainty will remain on the US virtual currency market, even if SEC allows all digital ETFs, and the CFTC comes up with some kind of a platform for integrating new technologies into its practice. The market will hit a hitch of the judicial system, and again, of the absence of legal regulation.
But the present contradiction seems to lie deeper. It can be noted that the cost of the most popular virtual currency is no longer so sensitive to the positive and negative news of the classical business environment. The digital economy is learning to live without the participation of regulatory institutions, justice, and classical instruments of financial control. Goods, stocks - what's the difference?It develops its own methods of attracting investors and its own unwritten rules, which often differ from the laws of many countries, including the United States. And when the appropriate legal documents finally appear, the dilemma will be to bring it back into the sphere of the classical legal regulation. And the longer the lawmakers stretch the time, the wider the gap between the two economic realities becomes.