Taking a Look at Filecoin and Potential Regulations
Regulation
The blockchain economy (and crypto market) has ultimately been subject to volatile, unpredictable regulatory policy. This is especially true in the United States. In the case of any cryptoasset, including Filecoin, it's necessary to gain a broad perspective of the regulatory space surrounding crypto assets in the US.
Overview
The SEC announced in Q2 2022 that they're doubling the personnel within their Crypto Assets and Cyber unit in a move intending to fortify their position as a crypto regulator. Talks of regulation have increased dramatically following the 2022 collapse of the Terra Luna ecosystem.
The SEC's laws on the marketing and sale of securities are intended to prevent particular mischief: insiders and promoters of a business will have more information than investors (information asymmetry). This is remedied by the SEC requiring truthful and comprehensive disclosure in a regulated format.
The Howey Test
The Howey Test, the primary case law on the features of a security, remains the best measuring stick despite its many shortcomings when applied to cryptoassets. For this analysis, understand that the degree of decentralization of a protocol is a significant factor in determining which, if any, United States securities regulations apply.
“When a promoter, sponsor, or another third party (or affiliated group of third parties) (each, an “Active Participant” or “A.P.”) provides essential managerial efforts that affect the success of the enterprise, and investors reasonably expect to derive profit from those efforts, then this prong of the [Howey] test is met.
There are essential tasks or responsibilities performed and expected to be performed by an A.P., rather than an unaffiliated, dispersed community of network users(commonly known as a “decentralized” network).”
-SEC guidance “Framework for ‘Investment Contract’ Analysis of Digital Assets
Increased speculation of crypto assets is leading to an attempt by agencies like the SEC to separate what’s considered a currency and what’s considered a security. Cryptocurrencies can be deemed a security if it satisfies specific properties based on the standard definition and interpretation of the Howey Test, the standard legal test applied to assets to determine if they're securities. The four-component questions of the test are:
- Is there an investment of money?
- Is there an expectation of future profits?
- Is the investment of money in a common enterprise?
- Do any profits come from the efforts of a promoter or third party?
In October 2021, the Commodity Futures Trading Commission (CFTC) chairman stated “nearly 60% of cryptocurrencies are commodities” and that his team is positioned to lead regulations over the market. Meanwhile, SEC chairman Gary Gensler has continually commented that many cryptocurrencies, including stablecoins, are no different than securities and, as such, should fall under his sphere of influence in the name of “consumer protection.”
Regulatory Rulings
Other tokens created by large centralized companies have recently run into opposition from the US regulators, such as Telegram abandoning its project entirely after a multi-year battle with the SEC. Several landmark cases by the SEC set a precedent for them to evaluate initial coin offerings (ICOs) as securities retroactively, while a recent ruling in November 2022 against LBRY tokens further strengthens the SEC’s case against many altcoins.
In 2022, SEC Chairman Gary Gensler made comments on CNBC’s Squawk Box about being prepared to label only Bitcoin a commodity, meaning the Commodities Futures Trading Commission (CFTC) would be able to regulate it. However, Gensler also said that many other tokens on the market have ‘’key attributes’’ of securities. Gensler has called for full and fair disclosure in the crypto market while stating ‘’the U.S. is open to having hundreds, if not thousands of tokens on its market if they complied with SEC laws.’’
February 2023 Crackdown on Centralized Staking in the U.S.
In February 2023, as part of a settlement with the Securities and Exchange Commission, the centralized crypto exchange, Kraken, was forced to discontinue its crypto staking program in the United States and pay a $30 million penalty. The SEC accused the company of selling unregistered securities through its "crypto asset staking-as-a-service" program.
It’s been evident that the SEC was planning to enforce regulations on crypto yield programs for some time now. In 2021, the SEC had a disagreement with Coinbase regarding the exchange's intention to introduce a lending feature in the U.S. Also, in the previous year, the SEC, along with several states, reached a settlement with BlockFi for $100 million over the company's interest-bearing accounts.
Filecoin and Regulation
The FIL token has been established in a way that offers strong arguments against it being a security. Overall, the FIL token serves as the currency powering Filecoin’s data storage marketplace, fulfilling the role as the marketplace’s unit of account and store of value. In terms of project oversight, Protocol Labs operated as an open source company with considerable development support from the Filecoin and IPFS communities.
IPFS itself is one of the most decentralized protocols in Web3, with Filecoin also boasting over 2 million holders of the FIL token and thousands of active marketplace participants.
