Regulating Cryptocurrency Secondary Market Trading Platforms
University of Chicago Law Review Online (Jan. 2020)
19 Pages Posted: 10 Jan 2020 Last revised: 25 Jan 2022
Date Written: January 1, 2020
Over the last few years, debates regarding the application of federal securities laws to primary cryptocurrency offerings and secondary market trading have taken a sharp turn. At the heart of this discussion, regulators, developers, and market participants began to recognize the diversity of protocols supporting the distribution of digital assets and resales on secondary market trading platforms.
This Essay proposes modifying an exemption from registration for exchanges under the regulations governing alternative trading systems (“ATS”). Promulgated in 1998, Regulation ATS offers a set of rules governing emerging alternative trading platforms. The exemption enables the Commission to monitor and supervise newly developing trading venues. In recent years, for example, the Commission has amended Regulation ATS to permit private exchange operators to service secondary trading markets; this approach enables private exchange operators to avoid the onerous registration requirements under Section 5 of the Exchange Act yet facilitates the Commission’s oversight of a critical and increasingly sizeable volume of secondary market trading activity. Anticipating the need to register with the Commission, a number of cryptocurrency trading platforms have already submitted or announced their intention to submit applications to register as alternative trading venues under Regulation ATS.
In Part I, this Essay briefly explores the existing legal framework applied to exchanges and examines the settlement agreement between the SEC and Coburn in the Commission’s first prosecution of a platform accused of violating Section 5 of the Exchange Act. Part II offers a brief analysis of the unique attributes of decentralized exchanges and concludes with questions regarding the existing regulatory framework for secondary market trading. Part III of this Essay proposes that the Commission adopt an exemption from registration under Section 5 of the Exchange Act for secondary market trading platforms facilitating cryptocurrency transactions under Regulation ATS. By taking affirmative action and engaging in formal rule-making procedures, the SEC will enhance liquidity, price accuracy, and price discovery and reduce regulatory uncertainty in secondary cryptocurrency trading markets.
Keywords: Fintech, financial regulation, algorithms, intermediaries, securities, exchanges, Bitcoin, digital intermediaries, platforms, P2P Lending, investor protection, innovation, market integrity, blockchain, governance, corporate governance, contracts, private ordering, gatekeepers
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