Best Practices Strategy for Digital Asset Product Design
Best Practices Strategy for Digital Asset Product Design
In 2008, with the launch of Bitcoin, Digital Asset technology escalated and demonstrated the ability to transcend, and thus challenge, traditional financial regulatory and governance structures. The process started rather slowly and obscurely. However, when American citizens caught the Bitcoin fervor in late 2017, Digital Asset activity came well into the sights of American regulators, escalating in 2019 with SEC actions against many projects which had conducted ICO (Initial Coin Offerings) without agency approval, or projects and principals that had committed fraud.
Some jurisdictions throughout the world exhibited a more relaxed and accepting approach to the new technologies, as projects domiciling in their jurisdictions brought innovation and commerce onto their shores, and their jurisdictions into the world’s technology ecosystem[1]. The disparity between rules across jurisdictions creates a monumental challenge for any Digital Asset product design to meet a broad standard for all jurisdictions.
In traditional asset classes and traditional markets, products are generally traded within sovereign jurisdictional borders, so meeting those regulatory structures are simplified. Markets are jurisdictional regulated and the players within the ecosystems know the rules. Foreign players can participate but enter through the channels within each jurisdiction. The process is tidy and largely understood.
PROBLEM
Digital Asset technologies and trading transcend borders and jurisdictions. The challenges continue and are now escalating as the jurisdictional disparities of rules and regulations widen. There are several worldwide organizations (examples: OICV-IOSCO, International Organization of Securities Commissions or the International Accounting Standards Board) are places where jurisdictions voluntarily come together to align in policy and rulemaking, but these organizations are slow to address Digital Asset guidance, which leaves the onus onto each individual jurisdiction to rulemaking and policy implementation. The result is a disjointed approach to worldwide Digital Asset regulation. Often, regulators even within the same jurisdiction have oversight overlap, creating confusion even within the same jurisdiction.[2]
BACKGROUND
The advent of the Digital Asset ICO, its new version the IEO (Initial Exchange Offering), other launch and funding mechanisms such as Crowd Funding and Private Offerings, challenge traditional methods of regulatory oversight as the technology leaps over sovereign ability to regulate and deliver effective oversight.
Jurisdictions are having a difficult time framing Digital Asset technologies, understanding the many nuances of function and use case at the most basic levels. This circumstance makes it extraordinarily challenging for individual jurisdictions to define, regulate, and provide oversight through predictable and structured regulation and rulemaking for their own jurisdictions; much less an ability to collaborate and create accords in alignment with other jurisdictions for international standards. To complicate matters even further, every jurisdiction brings its sovereign interests and ideals to any international collaboration.
Too broadly scoped regulation strangles innovation, and too narrowly scoped regulation doesn’t offer broad enough guidance.
This push-pull has left the international industry without answers or sufficiently buildable actionable guidance. The result is rogue operations launching outside of traditional boundaries or a stifling of innovation because of the risks.
This has kept key independent players on the sidelines waiting for a secure environment to launch. This in turn has stifled independent innovation in many large influential sovereigns, that will likely wind up launching their own Digital Asset projects instead of supporting independent innovation. From the outside it might seem like jurisdictions are deliberately quashing independent participants. I suggest it is because independents do not launch in concert with existing structures and work with regulators to plan road-map designs to build into the future. Many have the strategic mission to launch without regard to legal and regulatory standards and answer questions later, which for many, has resulted in the long arm of the law yanking potential success right out from under them.
PROPOSED SOLUTION
The only solution is for product designers to produce products at launch that operate within the existing structures of regulations, respecting traditional structures, while educating regulators on use case possibilities and promoting evolution. This strategic approach will support healthy relationships with regulators, and the ability to educate on broad possibilities for the technologies and use cases, supporting healthy evolution through respect and demonstration.
The alternative is to walk on the edge and take the risk that the product will not only be quashed, but the principals will face criminal and legal charges.
To effectively leverage Digital Asset technologies, Digital Assets should be designed, launched, and operate with transparency within proper regulatory and market infrastructures.
Doing this requires a keen awareness, shift, and pullback from historically broad Digital Asset launch strategic plans; deploying multi-attribute product designs outside of well understood traditional asset class attributes; while conducting fundraising activities without regard to approved regulatory channels.
Many Digital Asset designers, and their resulting products, are deliberately and fundamentally challenging traditional and existing infrastructures. Some designers operate with deliberate awareness, others operate without regard, to the potential fallout of their product design decisions.
There is a prevailing mantra in some parts of the ecosystem that aspires to “do it now the way we want and answer later to the authorities.” These assertions are quite often backed by citing the SEC’s cursory review on Ethereum’s ETH. ETH was very early to the ecosystem and benefitted from a complete lack of understanding and oversight. By the time authorities noticed, and reviewed the product design, the asset was insinuated to be “okay”. It appears this was a timing issue, as remarks by a past SEC Commissioner suggested in a speech in mid-2018. Perhaps early on it was a security, but by the time regulators looked at it, it was a currency and “decentralized”. This writer’s opinion is that ETH was likely too big to cause to fail, and any disruption to it would have devastating effects on the ecosystem and the technology. [3]
Those days are over. It is no longer early in the game when the first scaled projects benefited. Now everyone is watching, and now everyone else needs to play by the rules.
This may seem obvious on its face and elementary to some. The launch of a Digital Asset into a public marketplace of unaccredited investors that benefits a founder, maker, developers, inventor, or investor group is just like an IPO (Initial Public Offering) that would fund and reimburse a company and its investors launching offerings shares onto a public marketplace.
CONSIDERATIONS
A traditional company launching an IPO onto a public marketplace is issuing an equity share of the profits or loss in an entity. Often, the entity asserts statements and promises about its future financial position which investors consider in making their investment. However, while the share of the company represents an ownership of the company, the share is not the company. The share of a traditional entity is the equitable representation of the ownership share of a portion of the firm which offers a limited participation in the profit or loss of the operations, limited management of the company, and any representative equity position which may or may not have value if the company ownership is transferred. The investment is the operational profit or loss or interest from any equity represented by the share in a transfer of the asset.
In traditional markets Equities are launched and traded on only one exchange. That is, native Apple Computer stock is primarily traded on one exchange: NASDAQ (not withstanding afterhours trading on OTC); not traded on both NASDAQ and the New York Stock Exchange. This versus Currency markets, where those assets are traded on many different and unrelated exchanges throughout the world.
Forex traded Fiat Currencies [4]are the native tenders of sovereign nations. These assets are not investment contracts, and the sovereigns generally do not make promises to investors about its future value. Rather they are (speculative) investments based on the value of one currency against the other. The value of anything is its value against something else. There is no reference world currency to value something else against Currencies on Forex (although some say it the closest could be the U.S. dollar at this time). Considerations to a currency’s future value is the policy or economy of the sovereign. There are many markets where currencies are traded around the world. Even at the local airport where currency exchanges trade foreign for domestic currency. While those exchanges are completed, there is no promise of investment profit, or valuation speculations of those currencies into the future. Within economies, products are valued against each other using the reference native tender currency of that economy. For Example: a bottle of soda against a vehicle.
Some Digital Assets can be compared to an investment in a Currency asset class traded on Forex (Foreign Exchange Market) in international markets, where the value of the Currency is representative of its market value which may or may not be representative of the underlying economy which issues, supports, or controls it. It is not an equity share in that sovereign economy, or its operations, and is not like the Equity asset class traded on the New York Stock Exchange.
However, some Digital Assets can be compared to an Equity in traditional markets.
Quite often, the Digital Asset is the investment asset. That is, sometimes the Digital Asset itself is the asset that the individual invests in, which may or may not represent a share in an underlying entity or its operation. The Digital Asset could be supported through its adoption, through an underlying technology, platform, or payment system that provides value through a secondary usage utility apart from its financial value on external markets or provide a bundle of rights as identified in the asset’s governance.
Currently, Digital Assets are traded on many different exchanges around the world. The assets traded within the same exchange may represent different attributes of Commodities, Currencies, or Equities[5]. Since Digital Assets are often traded on multiple exchanges and within different trading pair markets, prices can vary based on volume and liquidity across different exchanges. Investors often have no idea about the underlying value or future value proposition of the assets, what they represent, or their attributes apart from the technical trading data.
CIRCLING BACK
Opinion:
Digital Assets mirror traditional asset classes. However, many regulators and traditional investors do not yet understand this, and have a difficult time framing how it all works. This is one reason why the industry is having such a difficult time educating the stakeholders.
Digital Asset product designers would best serve their stakeholders by understanding the fundamental attributes, use case, and features of their products. This would allow a fully transparent presentation of the value proposition of the product offering.
For example. In my book, Defining the Digital Economy: The Structure of the Digital Economy in Focus, I discuss a proposed best practice approach until the regulatory landscape is finally determined worldwide. I quote: “Best Practices Opinion: The evolution and integration of this construct would suggest, as best practice, for entities to issue both Digital Currencies and Digital Equities in the future; thereby, delineating one function as a fungible currency operable within its underlying Digital Economy, and one function as a non-fungible equity share in the entity. Therefore, each would be regulated by the appropriate authority.”[6]
INTERIM SOLUTION
Until the landscape is clearly defined, best practices for Digital Asset product design would suggest issuing different Digital Assets for each use case; for example, Digital Currency for transacting in the underlying economy it represents, or Digital Equities for ownership interests in the underlying entity or project it represents with a bundle of rights. Issuing Digital Units[7]which are not traded on external financial markets, but utilized internally for processes that delineates functional utility from Digital Assets with financial value.
Operating under this strategy will assist regulators in understanding the distinct value propositions of Digital Assets and their supporting technologies. The possibilities will then support the development of these amazing technologies, collaborating and evolving as partners together into the future.
To learn more about this topic: Please visit LJU and Associates Consulting website for more articles and information.
A useful guide to understanding the differences between Digital Asset classes is offered by the Digital Asset Sector Hierarchy — DASH construct which delineates four Digital Asset Classes with financial value and one Digital Unit with functional value, but no external financial value.
Welcome to the Next Gen of Money and Assets in the landscape of the Digital Economy.
Published at Tue, 01 Oct 2019 22:24:02 +0000
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