The securities have not been and will not be registered under the U.S. Securities Act of 1933, as amended or with any other regulatory authority of any State or other jurisdiction of the United States or Canada and (i) may not be offered, sold or delivered within the United States or Canada, or to, or for the account or benefit of any U.S. Person or Canadian, and (ii) may be offered, sold or otherwise delivered at any time only to transferees that are Non-United States Persons and Non-Canadians.

February 27, 2023

NFTs; global regulation; tokenization

Welcome to Swarm Markets’ media memo. This weekly update provides comments from Swarm Markets’ co-founders, Philipp Pieper and Timo Lehes, on key industry news that has caught our eye, plus our own developments.  

Comments available on the following news items:

  • Now NFTs could be securities
  • A global crypto regulation framework is coming
  • Tokenization as a force multiplier

 

Now NFTs could go with crypto on the US securities list 

 

Regulatory noises are getting louder, and broader, in the US as the country looks to step up crypto-related enforcements. 

 

One of the interesting aspects of countries with common law (such as the US or UK) is a lot of what is legal or not legal ends up being hashed out in law courts rather than via regulator or parliament. This is because common law, unlike civil law (which pervades in mainland Europe) tends to only expressly say what is illegal rather than what is legal. This leaves a lot to interpretation.

 

And so we’re seeing two really interesting outcomes of this in regulatory terms. Firstly, it leaves regulators such as the SEC under Gary Gensler an opening to declare almost all cryptoassets as securities as the SEC defines them, with the notable exception of bitcoin which has no functional organization attached to it. This interpretation from the SEC is open to challenge in a court of law but as of yet no one has tried their luck. And they’d probably need a lot of that. 

 

But interestingly the definition is now broadening beyond cryptoassets into other digital assets such as NFTs, courtesy of a potential court ruling. The judge recently dismissed attempts to halt the suit and it is set to proceed to court. Dapper Labs has essentially been accused of selling unregistered securities. If the court deems that NFTs are securities then the ramifications will change the face of the sector at a stroke in the US. 

 

Of course, the solution to this is a proper crypto framework in the US that defines these assets properly, instead of leaving it to regulators and the courts to decide. Janet Yellen has intimated that regulation could be forthcoming, but until then the sector could find itself in total havoc as regulators pursue anything it deems an unregistered security. 

 

A global framework for crypto regulation is coming

 

A group declaration from the recent G20 summit has made some specific references to crypto and DeFi. 

 

Major international institutions are beginning to sing from the same hymn sheet on crypto, and that is no bad thing. In the G20 declaration the group of major economies has welcomed efforts from the FSB, IMF and BIS, and said these organizations would soon be publishing recommendations for a global framework for crypto regulations.

 

Harmonization of regulations is no bad thing as this will make it easier for firms to operate internationally as standards are applied in a unified way. In the past we’ve highlighted the so-called Brussels Effect where many jurisdictions follow where the EU tends to lead. 

 

A higher level blueprint from regulations is welcome though as this will encourage more countries to move forward with national legislation that formalizes regulation of the sector at a crucial time for its development. 

 

The IMF for its part has sent a more mixed message, with the words of managing director Kristalina Georgieva widely reported on. Georgieva said the IMF preferred to regulate rather than ban crypto, but clearly this was not off the table for the organization. This would be a mistake, particularly because what is defined as ‘crypto’ is in fact a hugely diverse set of different kinds of digital asset projects and ideas. 

 

From Swarm’s standpoint, crypto doesn’t necessarily fit as a moniker because what we’re doing is not ‘crypto’ – it is digitalization of real world assets (RWAs) using blockchain technology. It is a far cry from some of the wilder tokens out there that exist without any practical collateral to define their value. 

 

Tokenization is the force multiplier DeFi needs 

 

Last week Swarm launched its world-first digital blockchain stocks offering including Apple, Tesla and bond ETFs. 

 

Both Timo and Philipp caught up with Aleksandar Gilbert at The Defiant on the launch. Here’s what they told him:

 

Timo Lehes: “Part of the issue that we saw [in 2022] was that most of the crypto assets were super highly correlated, except for stablecoins. 

 

“You have this whole ecosystem…where everything seems to be more or less connected, and by bringing outside, non-crypto assets on-chain, it kind of creates a different asset universe. That basically offsets some of those behaviors in the market.”

 

“The cool thing about Apple is that its market cap is bigger than crypto’s market cap,” Lehes said. “That’s going to actually overshadow everything else, including Bitcoin, that’s already on-chain.”

 

Philipp Pieper: “It took a lot of work on our side to build technology that manages to develop toward the expectation of the regulators, of what’s needed to actually make [the product] compatible with how they think.

 

“America has had a very difficult situation coming up with holistic guidance and stipulations — so what regulators, you know, expect from certain aspects of a system like this.” In Europe, regulators have made clear they think digital assets “are financial instruments, and [digital assets] are treated as financial instruments.

 

“You’re basically mobilizing an asset by making it more flexible, more agile, more fractionalize-able, more price discovery. You’re democratizing the way that people can build markets around that in different shapes and forms. And that is going to be the exciting piece, which is left to discovery.”

Philipp also had an OpEd on the gold standard for tokenization in the same publication.

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