Are Cryptoexchanges the Exchange Act’s Trojan Horse?

Abstract

The U.S. Securities & Exchange Commission’s sudden and vigorous exercise of enforcement and interpretive authority in Spring 2023—in the face of legislative and industry efforts to curtail its jurisdiction—bared an unmistakable aim to regulate cryptoasset platforms and public trading in cryptoassets to the fullest extent permitted by federal securities law.

In this manuscript, I offer two arguments: first, that the Securities Exchange Act of 1934 (the “Exchange Act”) is ideally suited to regulating cryptoasset trading—whether as or in addition to traditional “securities”—because its market regulatory framework is at heart a system of multimodal regulation. The Commission has amassed hard-earned experience in building an information production chain, balancing competition and coordination in trading securities, and facilitating complex financial services while protecting customer entitlements to property. If the future of decentralized finance (DeFi) is a system of interoperable services spanning spot, funding and derivative markets, federal securities law is better suited as a template within which to design an appropriately tailored regulatory framework than any other existing or potential regime.

Second, the Commission’s rush to regulate secondary cryptoasset trading may well undermine what is left of the Exchange Act’s regulation of exchanges. For decades, the SEC has struggled to adapt the Exchange Act to changes in market infrastructure, the nature of self-regulation and the dispersion of price discovery. Financial innovators have also developed and admitted to trading new products that straddle the lines between securities and non-securities in ways that may frustrate the tenability of listing and investor protection regimes. In folding cryptoassets into this traditional scheme too quickly, the SEC may find itself accelerating these adaptations in ways that compromise its core responsibilities. Cryptoasset trading platforms may well turn out to be the Exchange Act’s Trojan horse.

Keywords: crypto, crypto assets, crypto exchanges, centralized exchanges, decentralized finance, DeFi, Exchange Act, market structure, national market system, price discovery, investor protection, Financial Innovation and Technology for the 21st Century Act