THE LEVIATHAN OF SECURITIES REGULATION IN CRYPTO-OFFERINGS: A COST-BENEFIT ANALYSIS
61 Pages Posted: 2 Oct 2020 Last revised: 18 Jan 2021
Date Written: December 21, 2020
The Securities and Exchange Commission (“SEC”) regulates the novel cryptoasset markets through enforcement of pre-crypto regulations. This Article argues that when enforcement reaches the level of a deliberate policy, it should be analyzed by using the analytical tools applicable in formal rulemaking. One of these tools is cost-benefit analysis.
This Article applies the cost-benefit framework to the SEC’s regulation via enforcement approach, analyzes empirical data on enforcement, and examines manually collected crypto-issuer filings. The main conclusion is that the SEC has achieved an inefficient equilibrium in the digital-asset 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 cryptoassets. Crypto-issuers, attempting to avoid enforcement actions, comply with federal securities law in the most rational way, by resorting to private placements. As a result, crypto-investors, particularly less sophisticated investors, are exposed to the information asymmetry and agency costs of private placements aggravated by the unique risks of crypto-offerings.
At bottom, enforcement of pre-crypto regulations has forced crypto-issuers to spend resources and comply with the legal framework that neither channels issuer behavior towards more transparent markets nor generates material benefits to investors. This suggests that the SEC’s enforcement strategy leads to a Kaldor-Hicks-inefficient outcome.
Keywords: digital assets, cryptoassets, blockchain, distributed ledger technology, securities regulation, securities enforcement, SEC, capital markets
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