A Tokenized Future: Regulatory Lessons from Crowdfunding and Standard Form Contracts

35 Pages Posted: 12 Mar 2022 Last revised: 7 Dec 2022

Date Written: March 9, 2022

Abstract

This Article examines the world of risk investing in the cryptoeconomy. The broader crypto market totals around a trillion dollars. People and institutions are investing in it. The question is now how to regulate it.

This Article first tackles the question of whether coins, tokens, and other investable crypto assets are securities. Second, for those that are not securities, this Article seeks to find a regulatory solution that balances promoting innovation with investor protection, just as the Securities and Exchange Commission (SEC) would do. To strike the right balance, this Article adopts a proposal by Ian Ayres and Alan Schwartz for policing standard form contracts that accompany consumer product purchases. That is, crypto issuers would be required to include a short, prominent “warning box” on their websites that includes only unexpected and harmful features of the crypto. Coupled with the whitepapers already being provided by crypto developers—a shining example of voluntary disclosure working—the warning box add-on completes the crypto regulation picture and properly balances innovation and investor protection.

For well-known cryptos like bitcoin, nothing would be required in the warning box. Risks from investing in bitcoin, from environmental impact to price volatility, are well-known. Tether developers, however, should have disclosed that its stablecoins were not fully backed by fiat currency reserves using a warning box, and Ethereum developers should still be disclosing that gas fees can be much higher than normal transaction fees investors may be accustomed to. This Article’s approach to crypto regulation favors market mechanisms over regulatory overreach in this emerging area.

Keywords: crypto, bitcoin, ethereum, SEC, disclosure, innovation, Howey test, ICO, crowdfunding, standard form contracts

Suggested Citation

Ibrahim, Darian M., A Tokenized Future: Regulatory Lessons from Crowdfunding and Standard Form Contracts (March 9, 2022). 74 Hastings L.J. 45, Available at SSRN: https://ssrn.com/abstract=4053968 or http://dx.doi.org/10.2139/ssrn.4053968

Darian M. Ibrahim (Contact Author)

affiliation not provided to SSRN

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