What is the future of digital currency as regulation continues to increase?

Digital currency is ushering in the long-awaited regulation of the US government. This was the news that many digital currency investors had been looking forward to for a long time.

Less than 24 hours after the U.S. Commodity Futures Trading Commission (CFTC) announced on Monday night that it had issued a bitcoin derivatives trading license to bitcoin options exchange LedgerX, the U.S. Securities and Exchange Commission (SEC) told the outside world that ICOs need to comply with federal securities laws and be subject to SEC supervision.

Regardless of whether people regard digital currencies as promising emerging assets or unsustainable monster bubbles, the US government has decided to gradually regulate such assets, which means that the government is gradually recognizing and accepting digital currencies.

According to people in the digital currency circle, government regulation will curb investors' doubts about the investment value of digital currencies, thereby attracting more investors to enter the market. Previously, after Bitcoin soared to $3,000, Morgan Stanley issued a research report stating that accepting government regulation is one of the necessary conditions for digital currencies to expand their investment audience and be bullish in the long term.

Good for digital currency in two ways

First, it reduces the investment risk of digital currency.

The CFTC has issued a license to the Bitcoin options exchange LedgerX, allowing the exchange to trade and settle Bitcoin derivatives contracts. From now on, institutional investors will be able to purchase derivatives on the exchange to hedge against the volatility of digital currencies.

Since the price of digital currency usually rises and falls sharply and is extremely unstable, many institutional investors who covet the high yield of digital currency can only stay away from it. Analysts predict that the birth of on-site Bitcoin derivatives will help institutional investors reduce trading risks and bring a wave of wealthy new players into the digital currency circle.

In addition, according to Wall Street News, many Wall Street investors have shown great interest in Bitcoin and other digital currencies due to their skyrocketing prices since today. Since digital currencies have the property of skyrocketing and plummeting, Bitcoin derivatives themselves have huge room for operation and may become the next favorite of Wall Street futures traders.

Second, it marks the gradual formalization of the digital currency industry and will expand its audience.

The ICO that is about to be regulated by the U.S. Securities and Exchange Commission is one of the main channels and methods for issuing digital currencies.

The so-called ICO refers to a financing method in which some blockchain companies issue tokens in exchange for market-recognized digital currencies such as Ethereum and Bitcoin to raise funds. Since the manufacture of some tokens only requires copying the open source code of Bitcoin and making slight changes, the manufacturing cost is quite low, but the Bitcoin and Ethereum raised are valuable. Making money through ICO has become the natural motivation for some blockchain companies to issue digital currencies. Historically, many digital currencies since the advent of Bitcoin have been created in the form of ICO.

However, due to the lack of regulation, ICO has fallen into a legal gray area. Many companies that cannot guarantee profitability have raised funds and defrauded investors, causing them to suffer huge losses.

By bringing ICOs under the purview of the SEC, investors will be able to determine which projects are fair value and which investments are risky.

As the ICO market gradually becomes more formalized, investors will be able to trade on the platform with confidence, and the audience for digital currency investment will slowly spread outward from a niche geek circle.

Foreseeable future: Some newly-emerged digital currencies may be considered securities

A more likely and imminent regulatory solution for digital currencies is to treat them as securities. Of course, this refers to the tokens that will be issued through ICOs.

Obie, the former top enforcement attorney at the U.S. Commodity Futures Trading Commission, said in an interview with the media: "In yesterday's statement, the SEC stated that it must conduct an independent Howey test on every ICO in the future to determine whether they are securities."

The so-called Howey test refers to: in a contract, transaction or plan, whether a person uses money to invest; whether the investment is in a common enterprise; whether it is solely due to the efforts of the promoter or a third party; and whether the person expects to make a profit.

If an ICO passes the Howey test and is judged to be a security, the project will need to disclose more company information. In addition, ICO investors may also need to undergo qualification verification. Like stocks, Americans will not be able to directly purchase ICOs issued overseas.

Previously, there was a crowdfunding case called "DAO" on the Ethereum system. In this case, hackers stole the assets that belonged to investors, causing investors to suffer huge losses. The US Securities and Exchange Commission investigated and concluded that "DAO" could not be considered a crowdfunding contract because it did not have the qualifications of a stock broker and had not been reported to the financial regulatory authorities.

The ICO wave may not stop due to regulation

Another question worth pondering is whether the recently booming ICO will shrink in the U.S. market due to regulation.

It is foreseeable that many blockchain companies will strive to issue ICOs outside the United States and attract investors outside the United States due to regulatory arbitrage. However, the loss of the US market will not necessarily stop the recent ICO financing trend. Data shows that there are far more ICO financing cases in countries outside the United States than in the United States, such as China, where the concept of digital currency is popular.

Obie also said that not all blockchain companies will stay away from the US market. High-quality companies want to be separated from those that do not meet the standards. As a new type of asset, if American investors want to buy digital currencies that are not regulated by the SEC, they can of course buy them, but it will expose investors to risks. All the SEC does is to help investors make selections and provide more information worth referring to. As for the decision-making power and market trends, it is still in the hands of investors.