As policymakers worldwide grapple with the complexities of cryptocurrency regulation, one fundamental question has dominated discussions: How should regulators distinguish between securities and cryptoassets? This query has been approached through the lens of “decentralization,” a concept that has taken root within the halls of Congress and the Securities and Exchange Commission (SEC).
The prevailing argument posits that once a crypto network is sufficiently decentralized—meaning no person or group exerts control over a substantial portion of its consensus mechanism—the cryptoasset transitions from securities regulation to crypto regulation. This viewpoint gained traction during Gary Gensler’s tenure as SEC chair, relying heavily on the U.S. Supreme Court’s decision in SEC v. W.J. Howey Co, which set out the “investment contract” test for securities.
Despite decentralization’s prominence as a dividing line, it poses several challenges. Determining whether a network qualifies as decentralized is mired in a facts-and-circumstances analysis that often results in reasonable arguments on both sides. This complexity mirrors the debates securities lawyers face when evaluating whether a seller’s affiliation with an issuer imposes certain liabilities and restrictions.
Joseph Hall, a partner at Davis Polk, argues that anchoring crypto regulation to decentralization is fraught with pitfalls. For instance, decentralization can be transient—a network might achieve such a status only to lose it under new influences. Furthermore, decentralization as a framework excludes centralized network designs that may fulfill their purposes by other means, such as security and resilience.
Hall advocates for a paradigm shift that focuses on the inherent nature of the asset itself. Unlike equities or debt securities, which represent concrete legal and contractual claims on a business’s resources, most cryptoassets, including Bitcoin and Ethereum, create no such claims. This distinction underscores why the extensive disclosure requirements of the SEC are largely irrelevant to cryptocurrencies.
By anchoring regulation to the asset’s characteristics rather than the network’s structural attributes, regulatory efforts could achieve greater predictability and clarity. This approach would simplify the critical determination of whether an instrument represents a claim on a business’s assets, revenues, or profits.
For further insights into the ongoing discussions surrounding crypto regulation, you can read the full article by Joseph Hall on Bloomberg Law.