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What Effect Might SEC’s “Safe Harbor” Proposal Have on Cryptocurrencies?

With cryptocurrencies still very much in their growth phase, one thing has become abundantly clear: those localities that want to take the lead in the cryptocurrency sphere are those that most loosely regulate cryptocurrencies. Countries like China, which once dominated the cryptocurrency world, will fall behind as they attempt to crack down on private cryptocurrencies. And even US states aren’t immune to that, as New York is famous for its incredibly stringent BitLicense that has all but snuffed out cryptocurrency business within the state.

As governments become more familiar with cryptocurrencies and how they operate, their natural urge is to try to regulate them, to make some sense of them and fit them in to everything else that is already regulated. The risk, obviously, is that in attempting to regulate them, they may regulate cryptocurrencies or cryptocurrency firms out of existence. There must be a balancing act between regulating cryptocurrency firms so that regulators are happy that those firms aren’t doing anything illegal, but still setting barriers low enough that there is still viable competition within the industry.

Commission Hester Peirce of the US Securities and Exchange Commission (SEC) has a proposal that would do just that. Peirce, known as “Crypto Mom” for her unabashed enthusiasm for cryptocurrencies, is taking on the issue of initial coin offerings (ICOs), which have become highly popular in recent years. ICOs have served as a major source of funding for many growing cryptocurrency projects, but they have also been a major vehicle for fraud. And because of the way they are created and marketed, most ICOs fall under the SEC’s definition of securities, subjecting them to far more regulation and government oversight than normal cryptocurrencies such as Bitcoin.

Peirce’s proposal would be to give ICO tokens a safe harbor period of three years in which to operate before subjecting them to securities regulation. That would give companies a good period of time to establish themselves and get up and running, rather than keep them from getting off the ground by subjecting them to numerous regulations right off the bat.

That proposal makes a lot of sense, which is probably why it won’t ever see the light of day. Entrenched incumbents don’t want competition, so expect them to do everything within their power to stifle competition. But Peirce is correct in pointing out that if the US wants to take the lead in cryptocurrency, it can’t subject cryptocurrencies to heavy-handed regulations. Hopefully some within the government will heed her warning and, even if her proposal fails, take her advice to heart when crafting regulations that will affect the cryptocurrency industry.