Regulate Me Please! Blockchain And Cryptocurrency Execs Desire Regulatory Clarity

REGULATION GAP CREATING AN INNOVATION GAP AS COMPANIES INCREASINGLY MOVE OVERSEAS

Last week, we finally saw some significant movement on Capitol Hill around cryptocurrency1 regulation, with a hearing chaired by Rep. Warren Davidson. Even if it was only a big meeting, in a big room, with lots of important people, we shouldn’t look a gift horse in the mouth.

The U.S. desperately needs clarity from regulators. Why the need for urgency? Because this space moves in what’s affectionately called “Bitcoin time,” a reference to the blistering pace of innovation where game-changing developments are announced seemingly every month, week, or sometimes even every day. For innovators working in this space, waiting is not an option.

To find regulatory clarity, and have confidence in their own compliance, they are moving overseas to places like South Korea, Japan, and even Switzerland. A big reason why those markets are seeing rapid cryptocurrency adoption is that regulators have moved (often in fits and starts, but at least moved) to create clear, workable regulatory regimes—i.e., how cryptocurrencies may or may not be subject to securities regulation, fiduciary rules, and tax guidelines.

We have addressed this issue before on the BK2Cents blog, most recently back in July. We have also talked about it as the “East-West Divide” in our monthly webinars. The BKC ((BKC)) portfolio is weighted toward opportunities in Asia because that’s where the adoption is happening. Research and development may be happening in the U.S., but the companies actually rolling out the technology for broad use are almost all overseas where regulators are providing clear rules and direction.

In the U.S., by contrast, we have little guidance from regulators on what constitutes a “security” and what doesn’t. We have almost no guidance on whether cryptocurrencies will be regulated by the Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC). Congress is listening now to innovators in this space, but they have yet to even draft legislation.

In short, while the rest of the world is forging head and delivering ever more clarity on cryptocurrency issues. The U.S. is still having meetings.

Unlike a fiat currency, a cryptocurrency is by nature stateless. It has no official domicile. Likewise, it operates around the clock, around the globe, rendering time zones and physical locations irrelevant.

What U.S. regulators need to understand is this: Innovation won’t stop and wait for them to get their act together. It will just move. Already it is moving.

What that means for investors is that as long as the regulatory gap persists, so will the innovation gap… and so will the opportunity gap. Blockchain2 and cryptocurrency investment opportunities will continue to be weighted toward non-U.S. markets as long as that’s where these businesses find the most mature and reliable regulatory climate—because that’s where one will continue to find the leading edge of adoption.

It’s an open question how long such a trend might continue. But if U.S. regulators don’t act soon, and decisively, they risk driving an expansion in the U.S. innovation gap: from small to large, and from temporary to permanent.

Disclosure: I am/we are long BKC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This blog is intended for information purposes only and does not constitute investment advice. This blog contains the opinions of Brian Kelly. Blockchain technology and cryptocurrencies are subject to several risks which should be considered when evaluating an investment that provides exposure to this sector. The Rex BKCM ETF is not suitable for all investors. The Fund should only be utilized by investors who are willing to assume a high degree of risk and intend to actively monitor and manage their investments in the Fund. Please see important risk disclosures at the bottom of the page.

1A cryptocurrency (crypto) is a digital currency typically utilizing a Blockchain system for transaction records and cryptography for security. The major differentiator from physical currency is it isn’t issued by a central authority and thus theoretically acts independently of traditional banking and government influence. A crypto-asset would be holding a certain amount of cryptocurrency, or a derivative for which value is driven by the price of an underlying cryptocurrency.

2Blockchain is a decentralized, digitally disseminated ledger of data. The basis of a successful blockchain system is once a new group of information, or “block”, is added, the information automatically disseminates and is downloaded to each computer on the network. This assures that a single computer could not change information on a block: it would be overruled by a consensus of all the other computers on the network. This process renders all information on a completed block decentralized and theoretically permanent.

Carefully consider the Funds’ investment objectives, risk factors, charges and expenses before investing. This and additional information can be found in the Funds’ summary and full prospectuses, which may be obtained by calling 1-844-REX-1414. Read the prospectus carefully before investing.

Cryptocurrency Risk. By virtue of the Fund’s investment in stocks that derive revenue from cryptocurrency-related activities, shareholders may be exposed indirectly to the risks of cryptocurrencies. Cryptocurrencies are extremely new and nontraditional assets and a potential shareholder’s ability to evaluate the performance of cryptocurrencies be limited. Digital assets, represented on a decentralized public transaction ledger that is maintained by an open source protocol, are substantively different from traditional assets and investments. Because if the complex nature of cryptocurrency, an investor in the Fund may face numerous material risks that may not be present in other investments. Current IRS guidance indicates that digital assets such as cryptocurrencies should be treated and taxed as property, and that transactions involving the payment of cryptocurrency for goods and services should be treated as barter transactions. This treatment may create a potential tax reporting requirement in any circumstance where the ownership of a cryptocurrency passes from one person to another.

Blockchain Technology Risk. The stocks in which the Fund will invest will be subject to the risks associated with blockchain technology, which is a new and relatively untested technology. The risks associated with blockchain technology may not emerge until the technology is widely used. Blockchain systems could be vulnerable to fraud, particularly if a significant minority of participants colluded to defraud the rest. Access to a given blockchain requires an individualized key, which, if compromised, could result in loss due to theft, destruction or inaccessibility.

An investment in the Fund in is subject to risks including loss of principal. There can be no assurance the Fund will achieve it’s investment objectives. The Fund can be more volatile than broad market averages. Additional risks for the Fund include: emerging markets risk, foreign securities risk, geographic risk, geopolitical risk, liquidity risk, non-diversification risk, technology risk, and valuation risk. For a complete description of these risk please read the prospectus carefully.

Exchange Traded Concepts, LLC serves as the investment advisor and Vident Investment Advisory & BKCM Funds, LLC serve as sub advisors to the fund. The Funds are distributed by Foreside Fund Services, LLC., which is not affiliated with Exchange Traded Concepts, LLC or any of its affiliates.

Shares are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Brokerage commissions will reduce returns. REX NAVs are calculated using prices as of 4:00 PM Eastern Time. The closing price is the Mid-Point between the Bid and Ask price as of the close of exchange. In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. In emerging markets, these risks are heightened, and lower trading volumes may occur. Investments in smaller companies typically exhibit higher volatility.

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