Requisites for Development of a Regulated Secondary Market in Digital Assets
AIIFL Working Paper No. 33, April 2019
41 Pages Posted: 17 May 2019 Last revised: 17 Sep 2019
Date Written: April 26, 2019
The component parts of a more complete market system in digital assets are steadily being assembled. The initial focus on the primary market has increasingly expanded to the secondary market. Cryptoexchanges are a particular subject of interest given their growing predominance and the exchange-like or intermediary-like roles they may undertake at various times.
This paper considers the pathway issues for the development of a regulated secondary market in digital assets. It explores the conditions necessary to develop a regulatory framework that does not also serve to reshape and confine the possibilities offered by cryptographic consensus technology.
To achieve core regulatory objectives, what regulation attaches to will need to be sensitive to the characteristics of different centralized and decentralized cryptoexchange models as well as the digital assets traded on them. The problem of establishing accountability and anchoring locus in relation to decentralized cryptoexchanges is considered. How the common characteristics of digital assets impact on the ability to develop secondary market regulation that meaningfully meets policy objectives is reviewed.
The potentially discriminating effect of imposing regulatory oversight on an industry in which different models of operation are still emerging must be carefully weighed. It is suggested that development of the regulatory framework should be model-neutral, form-independent and remain focused on the oversight of functions and establishing accountability for wrongdoing. Regulation should not be prematurely imposed in a manner that may inhibit the ability of private market regulation to develop effective outcomes that align with public policy concerns. Any development of regulatory oversight must also contemplate the involvement of intermediaries providing services specific to digital assets as well as intermediaries already involved in traditional markets.
It is proposed that it is necessary to cease looking at the regulation of exchange systems and intermediary conduct in isolation from the characteristics of digital assets. There is a clear prospect for a more fundamental interaction between secondary market activity and the asset design process that could better facilitate the formation of regulatory building blocks. This depends on the development of an effective public-private partnership.
Keywords: crypto, cryptocurrency, cryptoexchange, SEC, SFC, FCA, digital asset, virtual asset, exchange regulation, securities regulation, ICO, STO, initial coin offering, securities token offering
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