Regulatory Challenges and Qualitative Controversies of Blockchain Digital Assets

The influence of blockchain digital assets in mainstream financial markets is increasingly growing, and its decentralized characteristics have also brought new challenges to the financial regulatory systems of various countries. How to adapt the traditional financial regulatory framework to the uniqueness of blockchain digital assets, as well as how to effectively reduce related risks, has become the focus of attention for all parties.

According to statistics, among 130 jurisdictions worldwide, 88 allow virtual asset service providers, while 20 explicitly prohibit them. The United States, as one of the jurisdictions that permits virtual asset services, has adopted a joint regulatory model, where different businesses may be subject to the jurisdiction of different regulatory agencies.

In the United States, the blockchain digital asset industry encompasses diverse businesses such as wallet services, exchanges, ICOs, mining, smart contracts, staking services, and NFTs. However, there remains controversy over the regulatory classification of certain blockchain digital assets that offer staking services, represented by ETH. The core of the dispute is whether these digital assets should be considered commodities or securities?

U.S. regulatory agencies have been actively evaluating the applicability of existing regulations to digital assets. For example, the Howey Test is applied to determine whether a digital asset qualifies as an "investment contract," thereby deciding whether it should fall under securities regulation. The Howey Test originates from a legal case in 1946 and provides a clear framework for determining whether an investment contract should be regulated as a security.

Taking ETH as an example, the key points of the Howe test include: whether there is an investment of funds, whether users have profit expectations, whether there is a form of common investment entities, and whether there is an expectation of profit solely from the efforts of the promoters or third parties.

If digital assets are determined to be securities, they will be subject to stricter regulation. Regulatory agencies may take enforcement actions such as civil lawsuits or administrative penalties against violations. This could result in legal risks for the relevant companies and individuals.

Conversely, if digital assets are regarded as commodities, they are primarily regulated by commodity futures trading authorities, focusing on ensuring market stability and preventing fraud. Although blockchain digital assets have not yet been clearly defined as legally recognized commodities in the United States, regulators have classified various digital assets as commodities, considering their characteristics such as fungibility, market tradability, and a certain degree of scarcity.

Recently, the "21st Century Technology Financial Innovation Act" (FIT21 Act) passed by the U.S. House of Representatives attempts to provide a clearer framework for the regulation of digital assets. The Act classifies digital assets into "restricted digital assets" and "digital commodities," which are overseen by different regulatory agencies. Factors determining the type of digital asset include whether the underlying Blockchain is certified as a decentralized system, the method of asset acquisition, and the relationship between the asset holder and the issuer.

The qualitative classification of digital assets will have a significant impact on the market. Taking ETH as an example, if it is classified as a security, it will face stricter regulatory requirements, which may increase compliance costs, affect retail investment opportunities, and suppress market sentiment. Conversely, if it is classified as a commodity, although it may not significantly increase compliance costs and could promote the development of the derivatives market, it may not fully reflect the uniqueness of decentralized digital assets.

In addition, jurisdictional disputes between different regulatory agencies may lead to regulatory arbitrage, making market participants such as Ethereum face a more complex regulatory environment. Therefore, finding a balance between protecting investor interests and promoting innovation has become an important issue in the current regulation of digital assets.