Op Ed: Beware the Perils of Over-Regulation for ICOs

Last week, the U.S. Food and Drug Administration (FDA) approved the gene drug Kymriah for certain types of cancer. However, Kymriah costs $475,000 for one single treatment, Bloomberg reports, which is well beyond being affordable for average patients.

In the U.S., the FDA approval process itself adds billions of dollars to drug development costs, which pharmaceutical companies must then recover, and also adds years to the drug availability timeline. The impression that suffering U.S. patients are required to pay exorbitant drug prices to support over-regulation is difficult to escape.

To operate beyond the reach of FDA regulations, Peter Thiel and other libertarian investors are funding an offshore human clinical trial of a herpes vaccine, TechCrunch reports. Thiel’s move has caused a stormy debate with clashes between opposite positions. See, for example, the opposite takes of DailyBeast and Reason.

There are many other examples of the harmful effects of over-regulation in the health sector, but these matters of life and death are too serious to be used for a political point. However, other sectors can illustrate the ethical and economical problems of over-regulation.

Take, for example, internet gambling, which is illegal in many jurisdictions including the U.S.

It’s worth noting that internet gambling is hugely popular, and the sector moves a lot of money. The ethical objection to making internet gambling illegal is easy to formulate: The adult citizens who want to gamble their own money online should be free to do so.

The economical objection is also easy to formulate: Adult citizens who want to gamble their own money online will find ways to do so, by using offshore service providers if there’s none at home or by going through Tor or a VPN if needed. But, if online gambling providers are forced to move offshore, they’ll take a lot of jobs and a lot of money with them.

This is exactly what has happened in the online gambling sector, with many U.S. providers migrating to more gambling-friendly jurisdictions such as the U.K. Similarly, the Isle of Man government recognized internet gambling as a potential strategic growth sector and established a suitable legal and fiscal framework to attract online gambling and sports betting businesses. As a result, leading operators flocked to the island.

Since those U.S. residents who want to gamble online will do so anyway, the only effect of over-regulating the industry is to take money, jobs and technology offshore.

Actually, this is not entirely correct: Besides moving offshore, the less scrupulous operators also have the option of moving underground. In that case, it would force those who want to engage in totally harmless gambling to deal with a shady or even criminal underworld, which can be dangerous. This same point, which seems perfectly logical, is often made in support of drug liberalization.
Crypto Innovation Takes the Path of Least Resistance

After having introduced light and relatively permissive regulations to attract internet gambling operators, the Isle of Man adopted the same strategy for cryptocurrencies and digital fintech. Switzerland is following on the same path, with the “Crypto Valley” near Zug attracting more and more crypto-fintech operators.

Initial Coin Offerings (ICOs) and token sales are a relatively new crypto-fintech phenomenon that is attracting lots of attention from the press, from old and new businesses, and now from the regulators.

In July, the U.S. Securities and Exchange Commission (SEC) issued a first ruling which outlined that some tokens are to be considered as securities and subjected to rather strict SEC regulations. Other regulatory authorities, such as the Canadian Securities Administrators, are considering plans to follow suit.

On Monday, the People’s Bank of China (PBoC) and Chinese regulatory bodies banned and deemed illegal the practice of raising funds through crypto-token ICOs, as reported by Reuters. This seems to conflict with recent, much more reasonable statements from the Director of PBoC’s Digital Currency Research Institute, which could indicate internal disagreement.

The regulators are mainly concerned with protecting gullible citizens from scams, which are inevitably common in the ICO scene. Perhaps the Chinese regulators are just temporarily freezing ICOs until they have a chance to put a sound regulatory framework in place. But it can be argued that, if their intention truly is to ban ICOs outright, then regulators are overreacting in ways that deny useful options to businesses and citizens alike.

According to the SEC and the CSA, only tokens with an underlying utility rather than a speculative investment value alone can escape being considered as securities. But, as always, the devil is in the details. If a token is really useful, its market value will go up, and speculative investors will profit. The question that comes to mind is, at which point does a useful token become a speculative investment? According to specialized lawyers, “the SEC has not provided a clear answer.”

“Obviously not everything that appreciates in value is a security,” notes crypto investor and CEO of 21.co, Balaji Srinivasan, in an insightful CNBC interview. “For example, a house can appreciate in value, but you can (and many people do) buy it for the use value.” But regulators could be tempted to follow China’s lead and consider all useful tokens as securities, which seems to be dangerous overkill.

The SEC regulations restrict investing in privately offered securities to “accredited investors.” But less than 10 percent of households in the U.S. are wealthy enough to qualify as such, and there are other strict requirements as well.

Therefore, if all useful tokens are considered as securities, the ability for creators of value to raise funds is significantly hampered, and average citizens are denied the opportunity to bet on innovative projects that could offer significant returns.

It’s now to be expected that Chinese crypto-token initiatives, including those that are not scams but are really innovative and promising projects, will move offshore and take jobs and money with them. Similarly, should U.S. crypto regulations become more restrictive, many U.S. companies could be tempted to follow the example of Xapo and relocate to Switzerland. Last week, blockchain company ShapeShift announced its decision to leave the State of Washington due to local over-regulation.

Srinivasan’s well-argued thesis is that crypto-tokens will democratize investment, open new fundraising options to businesses and new investment options to the public — including small businesses and average citizens — and turn the internet into the world’s largest “stock” market.

“The regulatory framework will likely eventually accommodate this,” concludes Srinivasan. “Only a few countries need to allow it, and the consequent creation of wealth will be so large that it’ll push many of the rest to have a liberal tokenization regime as well.”

The regulators should take this wise advice into account in formulating reasonable policies for the crypto-token sector, as well as the other sectors mentioned above.