Cinderella's Slipper: A Better Approach to Regulating Cryptoassets as Securities

Abstract

The Securities and Exchange Commission (SEC) seeks both to protect investors and to promote efficient capital formation, but in the context of cryptoassets these goals sometimes collide. The SEC vigorously reacts to fraudulent offerings of cryptoassets but has had to do so by forcing crypto into an antiquated framework designed with very different interests in mind. Even worse than the convoluted and complex arguments needed to force crypto into the existing category of “investment contracts,” once crypto is treated as a security, a host of onerous and inapt disclosure requirements and regulations follow. Developers, promoters, exchanges, and others who might assist in the sale of such assets are all forced into a regime that was never intended to cover this new class of assets.

This Article therefore suggests changes to the existing regulatory regime to more fairly apportion duties and responsibilities between regulators, issuers, promoters, and purchasers. This Article suggests that the SEC is the appropriate agency to oversee transactions in cryptoassets, but the underlying legislation should be amended to create a new category of securities, with different disclosure requirements and exemptions tailored to the informational needs of potential crypto purchasers. Maintaining the current anti-fraud rules will protect the public while allowing for innovation in this rapidly moving space. It will avoid wasting assets of both regulators and the regulated by eliminating the debate over whether crypto is or is not a security and will avoid duplication of efforts between the SEC and other federal regulators. It will also improve the relevance of available information for potential purchasers. This approach has the dual advantage of facilitating both parts of the SEC’s mission: protection of investors while supporting innovative capital formation for legitimate crypto enterprises.