The Sec, Cryptoasset Markets, and Game Theory: When Strategic Goals and Tactics Don’t Meet

Abstract

This article contributes to the academic discourse on the regulation of cryptoassets in capital markets. The current cryptoasset policy of the Securities and Exchange Commission (“SEC”) is built on enforcement of the pre-crypto regulations without reform. This article analyzes the data on SEC enforcement, applies cost-benefit analysis to the regulation via enforcement approach, and examines manually collected issuer filings. The main conclusion is that the SEC has spent considerable resources on achieving an inefficient equilibrium in the crypto-market. The current status quo is characterized by the following antipodean trends: The SEC regulates via enforcement and ignores the significant “pure-information” component of the crypto-markets. The issuers, attempting to avoid enforcement actions, comply with the federal securities law in the most rational way by resorting to private placements. In the end, the crypto-investors, particularly the less sophisticated cohorts of investors, are exposed to the information asymmetry and agency costs of private placements aggravated by the unique risks of crypto-offerings. At bottom, the SEC has forced crypto-issuers to spend resources and comply with the laws that do not generate material benefits to investors, which suggests that the strategy of active enforcement is Kaldor-Hicks inefficient.