Syren Johnstone on Secondary Markets in Digital Assets: Rethinking Regulatory Policy in Centralized and Decentralized Environments (Stanford J of Blockchain Law & Policy)

"Secondary Markets in Digital Assets: Rethinking Regulatory Policy in Centralized and Decentralized Environments"

Syren Johnstone

Stanford Journal of Blockchain Law & Policy,  
June 2020, Vol. 3 No. 2, pp. 146-188

Abstract: This paper considers the pathway options for the development of a regulated secondary market in digital assets. It explores the conditions necessary to develop a regulatory framework that serves to facilitate the possibilities offered by cryptographic consensus technologies such as blockchain and distributed ledger technology. While centrality has been a useful and hitherto inevitable nexus point for regulatory agencies, the prospect of alternative decentralized environments signals a need to reconsider how regulatory oversight can work to service its intended functions. Existing market integrity controls are also presented with novel challenges in the context of multiple market places for the same digital asset.

     The structural forms of centralized and decentralized cryptoexchange models and the functions served are considered in the context of historical development of exchanges in traditional markets. The different operational concerns, and how regulatory accountability can be established in decentralized contexts, are explored. The non-exchange-like activities that may be undertaken by exchange operators and the challenges arising in relation to intermediary services are reviewed.

     The analysis suggests the development of regulatory policy should be model-neutral, form-independent and focused on functions and outcomes. It should not be imposed in a manner that may inhibit the ability of private markets to develop effective outcomes that align with public policy concerns, or which may cause industry development to cycle back toward extant models rather than evolving more optimal models of commercial and financial activity. Addressing intermediary services, whether provided by a cryptoexchange, intermediaries from traditional markets, or specialized cryptointermediaries, will be part and parcel of effective secondary market regulation. While the different nature of digital assets compared to traditional securities presents difficulties in applying existing regulations, it may also present opportunities for regulatory approaches that utilize their unique digital characteristics. Regulatory agencies must engage the concept of attraction regulation by playing a formative role in directing the industry toward shared goals.