College graduates are often advised that the best jobs for them may be ones which do not exist yet. One such job in the financial markets might be “cryptocurrency compliance officer”. A year or so ago, it looked as if no such thing was possible – ICOs and crypto tokens existed in a Wild West with no effective regulation. But at an accelerating rate, the major financial centres of the world are developing a regulatory structure that covers crypto, and it may be one with enough specific features to end up as a separate sphere of compliance expertise, rather than a branch of existing securities compliance.
Such as it is, the rudimentary version of crypto compliance which exists at present is either based on trying to avoid regulation entirely, or to integrate crypto into an existing framework. Startups like he UK’s Equi attempt to navigate through the rules on “transferable securities” so as to avoid having to comply with prospectus and financial promotion regulations, for example. Conversely, some of the major crypto exchanges are hiring banking regulators, as they hope to gain authorisation along the same lines as other central counterparties, albeit in a different currency.
But this state of affairs may not last long. Aiming to cement its position as the world’s most advanced “crypto-nation”, Switzerland’s FINMA has now outlined a specialised regulatory regime for Initial Coin Offerings (ICOs), so that they neither slip through the crack, nor need to be fit into unsuitable categories.
The Swiss system divides cryptocurrencies into three categories. If it looks like a payments mechanism, it will be regulated as a “payments token”, with a focus on anti-money laundering concerns. If, on the other hand, the main purpose of the ICO is to facilitate shared ownership of a business or project, it will be regulated as an “asset token”, with a regime much more similar to securities regulation including prospectuses and trading regulations. Finally, the lightest touch of regulation is reserved for “utility tokens” which chiefly function to confer access rights to a software application or service. The dividing line between utility and asset tokens looks fine, however, and any element of an economic investment role could see a utility token being reclassified.
This distinction is currently only made in Switzerland, but the Swiss regulators have often led the way in the past. In the USA, the SEC has increasingly taken an aggressive stance, that ICOs are generally securities offerings, and moved to regulate them accordingly – comparatively few new ICOs are marketed to US citizens for this reason. The EU authorities have not yet taken much action beyond warning consumers that they may be vulnerable to unregulated investments and warning ICO issuers that they might fall under prospectus requirements. We might quite possibly see a Basel Crypto Accord, however; the BIS has had a long standing interest in “electronic money” going back to the 1990s and recently announced an intention to begin a workstream on harmonising global regulation.
All of which suggests that, while crypto is a niche area in compliance departments and law firms at present, it is quickly developing its own unique regulatory structure. And with that regulatory structure comes a need for professional advice in interpreting the rules. This could be the growth career of ten years’ time.
Dan Davies, is a senior research advisor at Frontline Analysts and a former banking analyst at Cazenove, Credit Suisse and BNP Paribas.