Decentralized Markets and Self-Regulation

Abstract

Distributed ledger technology, such as blockchains, is changing financial markets by creating a new foundation for transacting with digital assets. Simultaneously, major blockchain-enabled intermediaries—cryptoexchanges—have emerged to trade, broker, and settle transactions with digital assets. U.S. regulators seek to place cryptoexchanges within the ambit of existing regulation and registration requirements for legacy intermediaries. A critical underexplored corollary of this approach is converting cryptoexchanges into legacy self-regulatory organizations (“SROs”) or members of SROs. Put differently, U.S. agencies seek to bring not only conventional regulation but also self-regulation into blockchain-enabled markets. In imposing the traditional models without reform, however, policymakers simultaneously ignore the considerable economic potential of technology-enabled markets and intermediaries and fail to precisely target their risks and transaction costs.

To offer solutions, this Article examines the digital asset market’s structure and microstructure and associated risks. Comparing centralized cryptoexchanges, decentralized cryptoexchanges, and legacy trading venues, this Article agrees with the basic intuition to introduce formal self-regulation and refines possible self-regulatory models. The proposed frameworks aggregate the decentralized knowledge of individual participants in the global technology-enabled market to ensure better coordination and well-informed regulation. Building on market expertise, the proposed SROs would promote regulatory efficiency, improve digital asset trading, reduce the costs of coordination among heterogeneous and globally dispersed participants in blockchain-enabled markets, and nudge them toward comprehensive self-regulatory and technological solutions.

 

Keywords: financial markets, distributed ledger technology, blockchains, securities law, derivatives regulation, SEC, CFTC, self-regulation, SROs, innovation, financial regulation