RISE HK: Regulation Needed to Clean Up Crypto Sector

At the RISE conference in Hong Kong this week, industry participants called for regulation in the crypto sector “earlier rather than later”, to avoid backlash which could set the industry back. 

Regulation is needed to clean up the cryptocurrency industry to avoid potential backlash from governments, said panelists at the RISE conference in Hong Kong on Tuesday discussing the outlook for the sector.

Joseph Lubin, best known for co-founding Ethereum, compared blockchain technology with the early development of the Internet, noting that as the Internet became more secure and scalable, many companies grew comfortable using it for their systems. According to Lubin, blockchain technology will similarly see the thousands of projects currently in development start to mature and become increasingly useable, and this year will mark a move to phase two of blockchain where “we will see real scalability”.

Erik Torenberg, Co-founder and Partner at early stage venture capital firm Village Global, said that the crypto sector is still in its nascience, citing custody, scalability, and the lack of a stable coin as some of the challenges that still need to be addressed. Torenberg believes too many companies are applying blockchain where it is not really needed, in an attempt to capitalise on the hype.

Melissa Guzy, Co-founder and Managing Partner of venture capital firm Arbor Ventures, agreed, saying that many existing blockchain projects are better off using an existing database structure. “We’ve got to get rid of the hype, we’ve got to get rid of the pretenders,” she said. “We are definitely in a hype cycle on some of this.”

Lubin emphasised the usefulness of blockchain technology, particularly when there is a need to interact with unknown entities in a trustful context that is guaranteed to execute, but made a key distinction between the areas where regulation is needed.

“There are two major categories in which regulation applies. One is with respect to cryptocurrencies. The other is with respect to securities law,” he said. “Cryptocurrecy regulation is going to be more complicated although I’m confident that there will be important use cases for cryptocurrencies that are acceptable in many nations and that we will continue to be able to use cryptocurrencies.”

With respect to digital tokens and their classification as securities, Lubin said help is needed from regulators to clean up the industry. He noted the progress being made in many countries, such as in recent comments from the US SEC (Securities and Exchange Commission) indicating that properly constructed and marketed ‘utility tokens’ would not be classified as securities. This, he said, “recognised that there may be a whole new model for delivering services and products to consumers, a networked business model that’s held together by these [digital] tokens.”

Guzy argued that ICOs (initial coin offerings) as utility tokens do not pose a threat, but if they are used purely to raise funding, effectively making them securities, “regulation is needed early”. She expressed concerns that ICOs have been used as a way for early stage companies to get around corporate governance when they are unable to raise venture capital, particularly in Asia, warning that at some point, issuers that don’t deliver after raising large amounts of capital will see “huge backlash” from governments as investors lose money.

“If you’re going to do an ICO, and it’s not to avoid having a board member or reporting or corporate governance, and you’re doing it as a utility token, that’s fine,” Guzy said. “But if you’re raising money and it’s truly a security, we’ve got to see some regulation around that earlier rather than later, otherwise we’re going to have a backlash from the government.”

“We’d like to see regulation sooner, because I think the fallout will just make it more difficult and tainted later on, when maybe it didn’t have to.”

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