How worried should investors be about regulatory interest in cryptocurrency and tokens? It depends.

Representatives of U.S. enforcement agencies stressed at the Consensus 2018 conference in New York they want to support digital innovation and emerging markets. However, they still want to monitor it.

The Commodity Futures Trading Commission and the Securities and Exchange Commission recognize that cryptocurrencies can evolve and become something different than they are today,” said CFTC Commissioner Brian Quintenz.

“I’m encouraged that the concept of something evolving is being considered in this debate,” he said, arguing that “government regulatory policy should not hinder innovation [or] pick winners and losers [but] should be technology neutral.”

The SEC will place an emphasis on fraud cases involving retail investors, says the SEC’s Cohen, because they “handed over millions for digital assets, and that money’s at risk.”

Dan Morehead, the founder of San Francisco-based Pantera Capital, said worries over regulation are overstated. “Markets are vastly overhyping regulatory risk,” he said. “The SEC has been very moderate.”

An Uncertain Situation

This new regulatory territory extends beyond cryptocurrency investors. The uncertainty over whether utility tokens will ultimately be treated as securities, for example, is a concern for both developers and customers of a wide range of potential blockchain solutions and models.

Regulation remains the top organizational barrier for companies exploring the technology, cited as a key concern by 39 percent of organizations surveyed by Deloitte in its forthcoming 2018 Global Blockchain Survey.

Steve Bunnell, a former general counsel at the U.S. Department of Homeland Security, said real-world regulation is “not just mechanically applied rules.”

“Lots of discretion goes into enforcement,” said Bunnell, now a partner and chair of the data security and privacy practice at law firm O’Melveny.

Dual Roles

Robert A. Cohen, chief of the SEC’s newly created Cyber Unit, said his agency’s role is to facilitate and regulate new ways of raising capital. “We don’t regulate the technology, we regulate the financial industry,” he said. “Whenever a new technology or way to raise capital [emerges], a fundamental part of the mission is to facilitate that.”

At the same time, the creation of the SEC’s Cyber Unit reflects the idea that the sector “is a high priority for the commission” at a time of shrinking budgets, Cohen said. That’s in large part due to what he called “a significant risk of fraud… as in any area with new and exciting technology and the opportunity to invest.”

The SEC will place an emphasis on fraud cases involving retail investors, Cohen added: “They handed over millions for digital assets, and that money’s at risk.”

U.S. agencies have considerable overlap when it comes to securities and commodities as well as civil and criminal prosecution.

Sujit Raman, associate deputy attorney general in the Department of Justice, says his agency coordinates with the CFTC and the SEC on criminal investigations. “When that line is crossed, we have very strong partnerships,” he said.

James McDonald, the CFTC’s director of enforcement, added that all agencies are working to maintain a dialogue with the companies they regulate. “We are working hard to create that kind of conversation,” he said. “It is incumbent on us as regulators, and the public expects us to coordinate our efforts.”

While Cohen said the SEC is taking a “thoughtful and deliberate approach” to determining whether utility and security tokens should be regulated as securities, McDonald cautioned that if investors can profit from the efforts of others, “that’s probably a security.”

That’s the World We Live In’

Kiran Raj, chief strategy officer at Bittrex, offered his own advice to companies navigating the space: “Get a lawyer.” Other blockchain leaders agree. Polymath CEO Trevor Koverko argued that blockchain financial models ultimately must fit within existing regulatory frameworks. “That’s the world we live in,” he said.

However, Indiegogo founder Slava Rubin noted that much of the “attraction to utility tokens is just that. They just want to get around regulations,” he said. “Companies will need to get funding, and most will do security tokens.”

But the industry could help shape the landscape. Gary DeWaal, special counsel, Katten Muchin Rosenman, argued that self-regulatory organizations (SROs), which are used in other industries, could give cryptocurrencies and blockchain companies a voice and provide support for budget-strapped regulatory agencies. However, he cautioned SROs need to provide a high level of rigor and avoid collusion.

“They have to be fair, they have to have some kind of rules to govern conduct and they have to have teeth,” DeWaal said. “But there’s a real place for SROs to fill the vacuum today that could be leveraged later on when there is regulation.”

That regulation extends beyond the U.S. During the conference Bermuda’s premier, E. David Burt, discussed his nation’s comprehensive regulations while Gibraltar MP Albert Isola discussed the British territory’s “principle-based” regulatory framework for licensing companies involved in digital ledger transactions. About a dozen firms applied for licenses in the first wave last year, with a similar number currently under consideration, he said.

eToro founder and CEO Yoni Assia, whose social trading brokerage company’s network is used in 140 countries, used a colorful metaphor to describe the balancing act of working with multiple regulators around the world. It is like porcupines having sex, he said, “slowly and carefully.”