Avoiding Digital-Asset Reforms Through Market Analysis: Nfts and Economics

Abstract

Fifteen years after major blockchains launched, we are still mired in debates over digital assets and the agencies that should take the lead in regulating them. Multiple regulators bring cases involving the same firms and digital assets, and Congress continues introducing one digital-asset bill after another. One asset perfectly captures the inefficiencies of this regulatory race and ongoing uncertainties – non-fungible tokens (“NFTs”). This article proposes a market-based approach to provide clarity and equip policymakers with the tools to avoid superfluous and wasteful reforms.

Relying on insights from economics, property law, and securities law, the article classifies NFTs as complementary assets accompanying various anchor assets across markets. Under this framework, if the anchor asset is digital baseball cards, the laws applied to transactions in collectibles should be relevant; if the anchor is securities (and securities markets), the NFTs should fall under securities regulation. As each of the underlying anchor markets would have a different regulatory regime, a quest to regulate NFTs should be a search for these anchor markets and laws.

The article explains that the groundwork for this regulatory approach has already been laid in property law reforms. Next, the article shows how a market-focused approach applies to securities law, helping to determine when NFTs are securities. The article concludes that there is no need to spend regulatory resources on designing unnecessary (ergo, wasteful) reforms. Instead, an economic, market-focused analysis should enable policymakers and courts to rely on existing laws and resolve regulatory ambiguities.

Keywords: financial markets, economic analysis, market analysis, distributed ledger technology, blockchains, securities law, derivatives regulation, SEC, CFTC, innovation, property law

JEL Classification: K00, K2, K20, K22, K29, K12, K11