The SES, Digital Assets, and Game Theory: When Strategic Goals and Tactics Don’t Meet

Cryptoassets have taken off with the advent of distributed ledger technology (“DLT”). Many of these innovative assets fall under the jurisdiction of the Securities and Exchange Commission (“SEC”). Applying a game-theoretic approach, this Article demonstrates that although the SEC has exhibited profound enforcement acumen in regulating the evolving digital-asset market, its overall policy is inefficient. The SEC has avoided making a costly investment in drafting an omnibus rule on cryptoassets. Instead, it has enveloped these innovations within the circumference of the preexisting, pre-crypto regulatory regime. This result has been achieved primarily through enforcement. The enforcement data examined in the paper suggest a trend toward issuer compliance with the securities regulation. Alas, the regulations per se do not address the risks that investors encounter in the digital-asset market. The rules fail to adequately mitigate agency costs and information asymmetry and to ensure that investors receive information material to their purchase decisions. The SEC’s approach demanding costly compliance with the pre-crypto regulations reduces the payoffs of digital-asset issuers without providing clear economic benefits to investors. This outcome is inconsistent either with Pareto-efficiency or with Kaldor-Hicks efficiency criteria. Put differently, cui bono? The Article also demonstrates that market self-regulation and self-correction are unrealistic because crypto-market gatekeepers and reputational intermediaries are underdeveloped and exhibit fundamental capacity and reputational constraints. The Article is the first research project applying cost-benefit analysis (“CBA”) to the federal securities law in light of the respective payoffs of cryptoasset issuers and investors. The Article contributes to the following three strands of literature: the doctrinal and empirical research on DLT; the scholarship on the application of game theory and CBA in securities law; and the long-standing policy debate about the best regulatory media, including formal rules, informal pronouncements, and enforcement.