Regulation of Digital Assets: Rulemaking, Crypto-Enforcement, and Market Impact

Lecture Series HS21, UZH Blockchain Center - Lecture Series

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 lecture will address a situation where the means undermine the regulatory ends.

The focus of this lecture is the United States 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 lecture will examine 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 cryptoasset markets with more information have produced an environment with less information.

The lecture will discuss securities regulation in the United States, offerings of cryptoassets, and various exemptions such as private placements. Using two hand-collected datasets, the lecturer will show 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 do not rely on 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.