Crypto-Enforcement Around the World
Douglas S. Eakeley - Rutgers Law School;
Yuliya Guseva - Rutgers Center for Corporate Law and Governance
-- The market for cryptoassets is burgeoning as distributed ledger technology transforms capital and financial markets. With the extraordinary growth in the crypto-markets comes the need for regulation to promote efficiency, capital formation, and innovation while protecting investors. With the need for regulation comes enforcement.
In a new article, Crypto-Enforcement Around the World, we elaborate on these issues and report on the results of an international enforcement survey conducted by our Blockchain and Fintech Research Program. Our analysis also builds on the results of the research by one of the co-authors, Prof. Guseva, in her articles (The Leviathan of Securities Regulation in Crypto-Offerings and The SEC, Cryptoassets, and Game Theory).
We researched some 23 financial market jurisdictions, only 14 of which had either commenced enforcement actions or issued official warnings. We find that the United States Securities and Exchange Commission (“SEC” or “Commission”) brings more enforcement actions against digital-asset issuers, broker-dealers, exchanges, and other crypto-market participants than do regulators in most other major jurisdictions combined. SEC enforcement also entails more serious penalties.
In addition to our review of the international data, we provide detailed comparisons of the United States Commodity Futures Trading Commission (“CFTC”) and SEC actions. Whereas SEC enforcement has been relatively stable, the CFTC cases have been trending upwards. By contrast, enforcement in foreign jurisdictions seems to be subsiding.
Table 1 demonstrates that, with the exception of the United States and only a few other countries, most jurisdictions have pursued a lenient enforcement approach in crypto despite the media attention and press releases stating their intentions to harshly pursue any violations of law. The cases in the United States predominantly involved administrative and court proceedings.
Table 1.1 – Type of Action per Jurisdiction (By Defendants/Respondents)*
* This Table provides data on multi-defendant actions.
Our data raise theoretical questions on regulation via enforcement, its effect on financial innovation, and regulatory competition. For one, the United States does not have a regulatory framework designed for crypto-markets, which effectively creates a pure regulation via enforcement environment. Regulation by enforcement, rather than substantive rulemaking in accordance with the Administrative Procedures Act, assumes that the pre-crypto rules are appropriate for complex technological innovations and that it is unnecessary to engage in a notice of rulemaking, comments, and a cost/benefit analysis to determine their suitability – or the need for a different regulatory regime.
Moreover, to the extent that the Commission pursues actions not only against domestic companies but also foreign issuers that raise only part of their capital from United States investors, its actions affect global crypto-markets and raise regulatory competition concerns. National enforcers, such as the SEC and the CFTC, could refer cases to their foreign counterparts. U.S. regulators, for instance, rely on international soft law and the expanding framework of Memoranda of Understanding (“MOUs”), the Multilateral MOU among securities regulators, the International Organization of Securities Commissions (“IOSCO”), and various cooperative arrangements. This, however, does not seem to be the case in crypto.
On the one hand, it is important to acknowledge that investors need to be protected from infinitely ingenious financial entrepreneurs, including crypto-firms. On the other hand, regulation of emerging, technologically innovative capital markets through enforcement risks stifling innovation and driving capital and investors to other jurisdictions, particularly if the methods employed were developed for significantly different investment products at a much earlier time. Our data call for more research on the effect of regulation and enforcement on the global cryptoasset markets.