The Regulatory System(S) And Cryptocurrencies
Edmund Mokhtarian and Alexander Lindgren have written a fascinating discussion of “operational issues and best practices” for cryptocurrency traders. As part of this broader discussion, they have provocative things to say about the regulatory system in the U.S. and about where, if anywhere, bitcoins and other cryptocurrencies fit into it.
The regulatory system in the United States is both fragmented and functional. There is no single administrative body whose job it is to oversee the capital markets as a whole, working toward efficiency on the one hand and working against fraud on the other. Instead, there are several agencies involved in this task or these tasks, the most important of which (the Commodity Futures Trading Commission and the Securities and Exchange Commission) are distinguished from each other by the sort of investment vehicle they oversee. As the names suggest, the CFTC oversees commodities trading, the SEC securities trading.
The fragmentation is “functional” in character in that the distinction is defined by the function the two types of instrument perform. Commodities and securities have much in common. They are both traded on markets, they are both quite liquid, and they both serve both profit seekers and risk hedgers. But what distinguishes them? Seventy years ago the Supreme Court gave the following ffunction definition if a security: it is an instrument by which “a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”
The Function of a Security
By design, that definition is very broad, in order to make it difficult for security fraudsters to escape responsibility by saying that they aren’t really securities fraudsters. The function of a security, whether called a stock or bond or something else, is to allow an investor to gain exposure to the gains of an enterprise (commonly a listed corporation) without making any further ‘effort’ other than the infusion of the money itself.