The Regulation of Cryptocurrencies: Between a Currency and a Financial Product

Cryptocurrencies are electronically generated and stored currencies by which users can trade either real or virtual objects with one another. As these digital assets gain popularity, the issue of how to regulate them becomes more pressing. Cryptocurrencies are attractive due in part to their decentralized, peer-to-peer structure. This makes them an alternative to national currencies which are controlled by central banks. Given that these cryptocurrencies are already replacing some of the “regular” national currencies and financial products, the question then arises—should they be regulated? And if so, how? This paper draws the legal distinction between cryptocurrencies which are in fact currency and those which are securities disguised as currency. It further suggests that in cases where a token is indeed a security, regular securities regulation should apply. In all other cases, anti-fraud measures should be in place to protect investors. Further regulation should only be put in place if the cryptocurrency starts increasing systemic risk in the general financial system

NFT for Eternity

Non-fungible tokens (NFTs) are unique tokens stored on a digital ledger – the blockchain. They are meant to represent unique, non-interchangeable digital assets, as there is only one token with that exact data. Moreover, the information attached to the token cannot be altered as on a regular database. While copies of these digital items are available to all, NFTs are tracked on blockchains to provide the owner with proof of ownership. This possibility of buying and owning digital assets can be attractive to many individuals. NFTs are presently at the stage of early adoption and their uses are expanding. In the future, they could become a fundamental and integral component of tomorrow’s web. NFTs bear the potential to become the engine of speech: as tokenized expressions cannot be altered or deleted, they enable complete freedom of expression, which is not subject to censorship. However, tokenized speech can also bear significant costs and risks, which can threaten individual dignity and the public interest. Anyone can tokenize a defamatory tweet, a shaming tweet, or a tweet that includes personal identifying information and these tokenized expressions can never be deleted or removed from the blockchain, risking permanent damage to the reputations of those involved. Even worse, anyone can tokenize extremist political views, such as alt-right incitement, which could ultimately result in violence against minorities, and infringe on the public interest. To date, literature has focused on harmful speech that appears on dominant digital platforms, but has yet to explore and address the benefits, challenges and risks of tokenized speech. Such speech cannot be deleted from the web in the same way traditional internet intermediaries currently remove content. Thus, the potential influence of NFTs on freedom of expression remains unclear. This Article strives to fill the gap and contribute to literature in several ways. It introduces the idea of owning digital assets by using NFT technology, surveys the main uses of tokenizing digital assets and the benefits of such practices. It aims to raise awareness of the potential of tokenized speech to circumvent censorship and to act as the engine of freedom of expression. Yet it also addresses the challenges and risks posed by tokenized speech. Finally, it proposes various solutions and remedies for the abuse of NFT technology, which may have the potential to perpetuate harmful speech. As we are well aware of the challenges inherent in our proposals for mitigation, this Article also addresses First Amendment objections to the proposed solution

Speak Out: Verifying and Unmasking Cryptocurrency User Identity

Terror attacks pose a serious threat to public safety and national security. New technologies assist these attacks, magnify them, and render them deadlier. The more funding terrorist organizations manage to raise, the greater their capacity to recruit members, organize, and commit terror attacks. Since the September 11, 2001 terror attacks, law enforcement agencies have increased their efforts to develop more anti-terrorism and anti-money laundering regulations, which are designed to block the flow of financing of terrorism and cut off its oxygen. However, at present, most regulatory measures focus on traditional currencies. As these restrictions become more successful, the likelihood that cryptocurrencies will be used as an alternative to fund illicit behaviors grows. Furthermore, the COVID-19 virus and subsequent social distancing guidelines have increased the use of cryptocurrencies for money laundering, material support to terror, and other financial crimes. Cryptocurrencies are a game-changer, significantly affecting market functions like never before and making it easier to finance terrorism and other types of criminal activity. These decentralized and (usually) anonymous currencies facilitate a high volume of transactions, allowing terrorists to engage in extensive fundraising, management, transfer, and spending for illegal activities. As cryptocurrencies gain popularity, the issue of regulating them becomes more urgent. This Article proposes to reform cryptocurrency regulation. It advocates for mandatory obligations directed at cryptocurrency issuers, wallet providers, and exchanges to verify the identity of users on the blockchain. Thus, courts could grant warrants obligating cryptocurrency-issuing companies to unmask the identity of cryptocurrency users when there is probable cause that their activities support terrorism or other money laundering schemes. Such reforms would stifle terrorism and other types of criminal activity financed through cryptocurrencies, curbing harmful activities and promoting national security. In recognition of the legal challenges this solution poses, this Article also addresses substantial objections that might be raised regarding the proposed reforms, such as innovation concerns, First Amendment arguments, and Fourth Amendment protections. It concludes by addressing measures to efficiently promote application of the proposed reforms

How Crisis Affects Crypto: Coronavirus as a Test Case

Everybody is talking about cryptocurrencies. These digital tokens, which started in a one-asset market, have swiftly ballooned into a massive and diverse “cryptomarket.” The cryptomarket is still mostly unregulated, but this is about to change. With President Biden’s adoption of the Executive Order on Ensuring Responsible Development of Digital Assets, regulatory initiatives are being adopted abroad, and global regulation looms ahead. In light of the expected regulatory changes, two important questions emerge: is there a clear rationale for legal intervention in the cryptomarket? And if so, what type of regulation is optimal? This Article is the first to consider how to regulate the cryptomarket through an empirical analysis of how the COVID-19 crisis affected the cryptomarket. We take a two-step approach to answer these pivotal questions. First, we analyze empirical evidence from the early days of the COVID-19 pandemic to better understand the risks posed by the cryptomarket when a crisis emerges. Second, we apply a law-and-economics approach to identify which market failures are consistent with the data and derive novel regulatory lessons. Our empirical analysis reveals an interesting pattern: investors initially shifted funds to the cryptomarket when the pandemic erupted, but then made a U-turn and diverted funds out of cryptocurrencies, leading to a plunge in the market. We maintain that such investor behavior can have both rational and behavioral explanations, which in turn affects the optimal choice of regulation. Accordingly, we map each rational and behavioral explanation onto potential market failures by surveying different possible interpretations of our findings, such as substitution effects between traditional markets and the cryptomarket, exploitation of investors in the form of pumpand- dump schemes, and other criminal activities. We then discuss how each type of failure can serve as justification for regulation and derive regulatory lessons on how to best intervene in the cryptomarket depending on the source of the market failure

Globalize Me: Regulating Distributed Ledger Technology

Distributed Ledger Technology (DLT)—the technology underlying cryptocurrencies—has been identified by many as a game-changer for data storage. Although DLT can solve acute problems of trust and coor- dination whenever entities (e.g., firms, traders, or even countries) rely on a shared database, it has mostly failed to reach mass adoption out- side the context of cryptocurrencies. A prime reason for this failure is the extreme state of regulation, which was largely absent for many years but is now pouring down via uncoordinated regulatory initiatives by different countries. Both of these extremes—under-regulation and over-regulation—are consistent with traditional concepts from law and economics. Specifically, when- ever DLT implements a “public blockchain”—where there is no screening of who joins the network—both the technology and its regula- tion constitute what economists call “non-excludable goods.” For these types of goods, two classical incentive problems emerge: (i) over- regulation, due to the “tragedy of the commons,” and (ii) under- regulation, due to the “free-rider problem.” We argue that these problems are best solved using some form of global regulation. Comparing alternative paths to such regulation, including (i) centralized regulation, (ii) decentralized regulation, and (iii) international standards, we analyze how global regulation of DLT could be implemented using a mixture of “on-chain” (embedded in the technology itself) and “off-chain” measures. Our Article is the first to analyze why global regulation of DLT makes sense from a law and economics perspective and is also the first to provide concrete suggestions on how to implement such regulation

Globalize Me: Regulating Distributed Ledger Technology

Distributed Ledger Technology (DLT)—the technology underlying cryptocurrencies—has been identified by many as a game-changer for data storage. Although DLT can solve acute problems of trust and coor- dination whenever entities (e.g., firms, traders, or even countries) rely on a shared database, it has mostly failed to reach mass adoption outside the context of cryptocurrencies. A prime reason for this failure is the extreme state of regulation, which was largely absent for many years but is now pouring down via uncoordinated regulatory initiatives by different countries. Both of these extremes-—under-regulation and over-regulation—-are consistent with traditional concepts from law and economics. Specifically, when- ever DLT implements a “public blockchain”-—where there is no screening of who joins the network-—both the technology and its regulation constitute what economists call “non-excludable goods.” For these types of goods, two classical incentive problems emerge: (i) over-regulation, due to the “tragedy of the commons,” and (ii) under-regulation, due to the “free-rider problem.” We argue that these problems are best solved using some form of global regulation. Comparing alternative paths to such regulation, including (i) centralized regulation, (ii) decentralized regulation, and (iii) international standards, we analyze how global regulation of DLT could be implemented using a mixture of “on-chain” (embedded in the technology itself) and “off-chain” measures. Our Article is the first to analyze why global regulation of DLT makes sense from a law and economics perspective and is also the first to provide concrete suggestions on how to implement such regulation

The Regulation of Cryptocurrencies: Between a Currency and a Financial Product

Cryptocurrencies are electronically generated and stored currencies by which users can trade either real or virtual objects with one another. As these digital assets gain popularity, the issue of how to regulate them becomes more pressing. Cryptocurrencies are attractive due in part to their decentralized, peer-to-peer structure. This makes them an alternative to national currencies which are controlled by central banks. Given that these cryptocurrencies are already replacing some of the “regular” national currencies and financial products, the question then arises—should they be regulated? And if so, how? This paper draws the legal distinction between cryptocurrencies which are in fact currency and those which are securities disguised as currency. It further suggests that in cases where a token is indeed a security, regular securities regulation should apply. In all other cases, anti-fraud measures should be in place to protect investors. Further regulation should only be put in place if the cryptocurrency starts increasing systemic risk in the general financial system

Speak Out: Verifying and Unmasking Cryptocurrency User Identity

Terror attacks pose a serious threat to public safety and national security. New technologies assist these attacks, magnify them, and render them deadlier. The more funding terrorist organizations manage to raise, the greater their capacity to recruit members, organize, and commit terror attacks. Since the September 11, 2001 terror attacks, law enforcement agencies have increased their efforts to develop more anti-terrorism and anti-money laundering regulations, which are designed to block the flow of financing of terrorism and cut off its oxygen. However, at present, most regulatory measures focus on traditional currencies. As these restrictions become more successful, the likelihood that cryptocurrencies will be used as an alternative to fund illicit behaviors grows. Furthermore, the COVID-19 virus and subsequent social distancing guidelines have increased the use of cryptocurrencies for money laundering, material support to terror, and other financial crimes. Cryptocurrencies are a game-changer, significantly affecting market functions like never before and making it easier to finance terrorism and other types of criminal activity. These decentralized and (usually) anonymous currencies facilitate a high volume of transactions, allowing terrorists to engage in extensive fundraising, management, transfer, and spending for illegal activities. As cryptocurrencies gain popularity, the issue of regulating them becomes more urgent. This Article proposes to reform cryptocurrency regulation. It advocates for mandatory obligations directed at cryptocurrency issuers, wallet providers, and exchanges to verify the identity of users on the blockchain. Thus, courts could grant warrants obligating cryptocurrency-issuing companies to unmask the identity of cryptocurrency users when there is probable cause that their activities support terrorism or other money laundering schemes. Such reforms would stifle terrorism and other types of criminal activity financed through cryptocurrencies, curbing harmful activities and promoting national security. In recognition of the legal challenges this solution poses, this Article also addresses substantial objections that might be raised regarding the proposed reforms, such as innovation concerns, First Amendment arguments, and Fourth Amendment protections. It concludes by addressing measures to efficiently promote application of the proposed reforms