The SEC, Digital Assets and Game Theory

Abstract

The Securities and Exchange Commission (SEC) has not provided a clear rule to digital-asset market participants concerning the nature of cryptoassets, namely, how to determine whether an asset is a security subject to the federal securities laws or something else, like a commodity
regulated outside of the purview of the securities statutes. Instead of a formal rule, the SEC has chosen a more flexible modus operandi of enforcement actions in reliance on the functional definition embedded in the Supreme Court Howey decision interpreting the term “investment
contract.”
This Article examines empirical data and develops a model suggesting that, despite the underlying indeterminacy associated with functional definitions and regulation by enforcement, the SEC attempted to reduce information losses and improved regulatory clarity by following a set of well-defined strategies during the first years of its crypto-enforcement efforts. Unfortunately, recent enforcement actions may upend these initially successful game strategies and undermine the efficacy of the techniques the SEC used to minimize the downsides of functional definitions and the regulation via enforcement tactics. As a result, the fabric of cooperation between the innovators and the SEC may be broken, leading to a suboptimal outcome for all market participants and the Commission itself. These problems are particularly important in the rapidly evolving world of crypto, DeFi, and fintech.

Keywords: digital assets, cryptoassets, blockchain, distributed ledger technology, securities regulation, securities enforcement, SEC, regulation by enforcement, regulatory clarity, game theory