Developing a comprehensively regulated secondary market in digital assets presents policy challenges for regulatory agencies. There is a need to examine the industry’s evolution in relation to existing regulatory silos, and to understand the role that regulation can play in the industry’s development. While regulators may seek to impose their policy objectives, this could inhibit innovation, and in turn, the market integrity of the secondary market. For example, excessive oversight can delay the development of optimal models, and in turn, can have a counterproductive impact.
The nature of the secondary digital asset presents novel market integrity considerations, particularly with respect to the intermediary services that must be addressed. For instance, the digital asset may be offered to potential purchasers at a discount to the value of the good, or in quantities so small that the practical use of the asset is impractical. This is a new problem for regulatory agencies, and it needs to be addressed to facilitate the creation of a regulated secondary market.
Existing regulatory approaches can be selectively adapted to address the unique characteristics of the digital asset. However, regulation can also be applied prematurely, resulting in a cycle of reversion to existing models. Excessive oversight can impede the development of an optimal model, and may prevent industry development from progressing to a more comprehensively regulated secondary market.
In the current regulatory environment, digital asset holders seek protections like those that are available to traditional securities investors. They want to avoid the loss of value or exposure to risk that can occur when dealing with digital assets in a speculative market. Although many of these concerns are legitimate, they are not addressed by existing legislation. Consequently, regulatory agencies need to explore alternatives that will promote the growth of the industry while providing adequate protections.
Regulatory agencies have to balance the need to protect investors against the need to facilitate the development of a regulated market. Regulation of digital assets can be achieved through a variety of methods, such as by selectively adapting existing approaches to digital assets, or by implementing more granular and form-independent measures. Both options will require adequate financial resources and adequate oversight.
Rather than simply adapting existing approaches to digital assets, the focus should be on outcomes and functions. A thorough examination of the factors that determine the economic reality of the transaction and the manner in which it is made will be necessary to develop effective regulations. Additionally, the interaction of the secondary market and the asset design process will help to better service regulatory objectives.
An AP is a party that owns or controls the intellectual property rights to a digital asset. It may also provide services to users on the network. In exchange, it receives a distribution of the digital asset as compensation for the management efforts. This process is important to the value of the asset. Moreover, the AP determines compensation for the entity charged with the oversight of the network.