Designing Effective Regulation for Blockchain-based Markets

Abstract

Effective regulation of blockchain-based markets calls for coordination among lawyers, coders, businesses, and lawmakers. How might we achieve adequate coordination and why is it important? This article takes up these questions, using the example of one, increasingly popular blockchain-based transaction: the issuance of tokens backed by off-chain assets. The objective here is not to advocate for a particular regulatory treatment for asset tokenization, but rather to use this deal type as a springboard to discuss what “effective regulation” means in the context of blockchain-enabled markets. The topic of regulation often conjures a public/private dynamic in which private actors generate and trade financial claims and public agencies control for excessive risks. Focusing on a public/private dynamic can obscure the regulatory role of complex private-law doctrines (contract and property) that enable enforceable deals in the first place. Effective regulation of blockchain-based markets should harmonize on-chain asset partitioning and off-chain expectations. Perhaps lawmakers should develop code-friendly rules that can supplant messy common-law doctrines that govern market-dominant transactions that are migrating to decentralized platforms. How do we craft rules that preserve existing private-law policy choices yet also comport with automated transactions? The decentralized issuance of tokenized assets provides a rich example with which to consider this question. We must think critically about what we regulate, who the regulators are, and how regulation supports markets. Failure to do so could squander the potential of emerging platforms.

Keywords: blockchain, financial regulation, asset tokenization, smart contracts, contract, property