The Leviathan of Securities Regulation in Cryptoasset Markets

Abstract

Machiavelli famously said that actions of all men, particularly of regulators, should be judged by the results. Paraphrasing Machiavelli, the end justifies the means. This Article addresses a situation where the means undermine the regulatory ends. The focus of this Article is the Securities and Exchange Commission (“SEC”), the major capital-market watchdog. Created in the wake of the Great Depression, the SEC pursues a ternary set of objectives, including protecting investors, maintaining efficient markets, and facilitating capital formation. This Article examines a fundamental disconnect between the objectives of the SEC and the actual outcome of its policies in digital-asset markets – the agency’s enforcement efforts under the mantra of protecting investors and providing digital-asset markets with more information have produced an environment with less information. Using two hand-collected datasets, the Article shows that following an increase in enforcement cryptoasset issuers have attempted to comply with securities law by resorting to private placements. This compliance option reduces market transparency and is harmful to the less sophisticated crypto-investors. In contrast, the more sophisticated crypto-investors rely on what the Article calls “the pure-information model” that exists independently of the SEC-enforced regulations. To conclude, in actively enforcing pre-digital-asset law, the SEC has funneled crypto-issuers into inadequate and lackadaisical compliance with exemptions and created a status quo that is antithetical to the SEC’s core mission of protecting investors. This status quo is also harmful to crypto-issuers, who face higher capital costs. As no one wins in this scenario, a reform revising crypto-issuer disclosure is needed.