Alexandra Damsker, author of Understanding DeFi, argues that the dynamic nature of tokens renders current US regulatory bodies like the SEC and CFTC ineffective at regulating crypto. Damsker, an attorney and strategic consultant with a background at the US Securities and Exchange Commission and Mayer Brown, believes that the core issue lies in the definition and mutable nature of tokens.

The Static Assumption in Regulation

Current regulatory frameworks assume that the regulated item remains static throughout its lifecycle. For instance, a stock remains a stock from its creation to its voidance, and fiat currency retains its status from minting to destruction. However, tokens defy this static categorization as they can serve multiple functions for different holders simultaneously.

The Multifaceted Nature of Tokens

Tokens can perform various functions, leading to different regulatory implications:

• Transaction facilitation: Unregulated functional use.
• Labor incentive: Unregulated exchange for effort.
• Value representation: Regulated if underlying value is regulated.
• Product representation: Unregulated, barring intellectual property rights.
• Payment for goods/services: Complex regulation, akin to currency.
• Transaction fees: Generally unregulated service fees.
• Partial value representation: Potentially a security if shared interest, commodity otherwise.
• Risk/reward representation: Regulated by securities and Treasury regulators.
• Voting rights: Regulated in public companies.
• Market value representation: Regulated as a security or commodity.

The Complexity of Token Transactions

The evolving functions of a token over time complicate its regulatory categorization. For instance, purchasing ether (ETH) and subsequently using it for different purposes such as staking, buying NFTs, and paying for gas fees can shift its regulatory oversight multiple times. The exact nature of each transaction and the applicable regulations can only be determined retrospectively, using accounting methods.

Challenges of Applying Current Regulations

The current regulatory structure is ill-suited for the dynamic nature of tokens. For example, using ETH for various purposes and interacting with different entities who then repurpose the ETH further complicates regulatory oversight. The static nature of existing regulations fails to address the fluidity of token functions, leading to marginally useful protections and stifling innovation.

The Need for a New Regulatory Framework

Damsker argues that trying to fit tokens into outdated regulatory frameworks is impractical and counterproductive. The evolving technology landscape, including the rise of quantum computing and other advancements, necessitates a new regulatory approach that can accommodate the dynamic nature of digital assets.

As technology continues to evolve rapidly, the need for an adaptive regulatory framework becomes increasingly urgent. The current US regulatory bodies are ill-equipped to handle the complexities of the crypto landscape. To foster innovation and provide effective protection, a new, flexible regulatory system is essential.