Georgia Quinn, general counsel of CoinList. Courtesy photo

It's not every day that an industry begs the federal government for better regulation, but that increasingly is the case with the emerging blockchain/cryptocurrency industry.

“Because we have this lack of clarity right now it is creating uncertainty that is completely paralyzing,” said Georgia Quinn, general counsel of CoinList, a company that vets and lists cryptocurrency token sales or initial coin offerings, in a recent interview.

While federal regulators such as the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission have been actively taking enforcement actions against cryptocurrency operations and fraudulent schemes, they haven't been all that helpful in clarifying the rules of the road so that the industry can legitimately develop and thrive, she said.

Companies such as CoinList Capital LLC, which was founded in 2017, are joining trade and lobbying groups such as the Blockchain Association, hoping to persuade Congress to enact legislation that would spell out which agencies can regulate and enforce which aspects of blockchain and its offspring, cryptocurrency, before the lead in innovation moves elsewhere. “We are already seeing people moving offshore and incorporating in Switzerland or Malta,” she said. 

In particular, they are advocating for a bill called the Token Taxonomy Act of 2019, which was reintroduced by U.S. Rep. Warren Davidson, R-Ohio, 8th District, and would amend the Securities Act of 1933 and the Securities Exchange Act of 1934 to exclude digital assets from the definition of a security and define their tax treatment. Some regulatory experts such as former CFTC chairman Timothy G. Massad disagree with that approach, however. The Token Taxonomy Act originally was introduced last year but didn't make it out of committee before the session ended.

While the SEC has been cracking down on alleged bad actors, “enforcement doesn't allow nuance,” said Quinn, who has an office in New York and is also co-founder of iDisclose, a legal technology company assisting small and startup businesses in raising capital. Earlier, she advised on crowdfunding and marketplace lending matters and was once a corporate attorney at Seyfarth Shaw.

Quinn said blockchain and cryptocurrency companies are facing mounting frustration in trying to operate on the right side of U.S. law with relatively little guidance from the regulators and delays for those seeking SEC registration.

Meanwhile, she pointed out, SEC Commissioner Hester Peirce has acknowledged that there's a problem. While clarifying that her statement represented only Peirce's own views and not necessarily those of the chairman or her fellow commissioners, Peirce said the SEC has stifled the industry's growth in remarks delivered remotely to the Securities Enforcement Forum earlier this month, and published on the SEC's website. “It is not the SEC's overzealous action that has stifled the crypto industry, but its unwillingness to take meaningful action at all,” Peirce said May 9.

In April, the SEC issued some guidance for companies that want to sell digital tokens on whether the commission would view the token as a utility token or a security.

Quinn is among the voices asking Congress to classify digital assets into three major groups and regulate them accordingly:

• Cryptocurrencies such as Bitcoin, Bitcoin Cash or Ether that are substitutes for fiat currencies could be overseen by the CFTC.
• Tokenized securities, such as digital stock or membership interests in LLCs and high-yield bonds with covenants issued on blockchains, could be regulated by the SEC.
• Utility tokens or functional tokens with some characteristics of a security, whose primary purpose is to be used within a protocol, such as storage or transfer of data or logistics, such as Filecoin or NuCypher, or enterprise uses like Walmart's recent implementation of blockchain to track lettuce to improve food safety, could potentially be regulated by states or the Federal Trade Commission, Quinn said.

Other groups calling for more coordinated regulatory response from the federal government with respect to cryptocurrency and blockchain include the Chamber of Digital Commerce, a trade group based in Washington, D.C. Earlier this year, the organization issued a white paper calling for a national action plan for blockchain.

Not everyone agrees that the legislation proposed by Davidson is the right way to go on regulating cryptocurrencies, though. For instance, Massad, a former chair of the CFTC under President Barack Obama and currently a senior fellow at Harvard Kennedy School of Government and an adjunct professor at Georgetown Law School, concurs that Congress needs to fix regulation of digital assets, but he disagrees with the Davidson proposal.

Massad said in an email last week, “While I agree with the desire to have a regulatory framework that supports innovation, I think the current draft of the Token Taxonomy Act would change the definition of what is a security in ways that are counterproductive.”

In a brief interview, he added: “There is a lack of clarity in the regulation of digital assets, but the way to fix it is not to change the definition of what is a security. Instead, I think we need more clarity on the post-offering consequences of a digital asset being a security, such as how exactly do we regulate trading and custody, for example? And I think we need to strengthen the regulatory framework with respect to cryptocurrencies such as Bitcoin that are not securities. That's where there is a serious lack of transparency and investor protection.”

Total cryptocurrency market capitalization currently exceeds $250 billion dollars, according to information provided by the Chamber of Digital Commerce.