Chris Brummer at a recent roundtable discussion about the implications of cryptocurrencies at the Mercatus Center.
That’s me in the middle

One of the popular refrains in policy circles I’ve been hearing lately is that in the future, regulatory approaches for cryptocurrencies ought to focus on the “use case” of the cryptocurrency when developing (and imposing) rules.  Interestingly, in often the same breath, some of the same advocates then bemoan the absence of “regulatory certainty” in many jurisdictions, especially the United States.

I’m not against the principle, but the fact is that the Howey test–the framework devised by the Supreme Court for applying U.S. securities laws to novel or unusual financial products–is already, in many ways, an exemplification of the use case approach.  Howey’s analysis doesn’t just start and end with what an product is called, and say that depending on a product’s name (say “utility token” vs “coin” vs “securities token”) it must or must not be a security.  Instead, it relies on an ad hoc analysis of the facts and circumstances of discrete transactions, followed by a determination as to whether or not they meet certain criteria, and by extension, can be considered an “investment contract” (a catch all category for securities).

With this in mind, I’m not sure a ‘use case approach’ gets you much more determinacy. Although identifying varying and evolving use cases for a new technology may have the enormous benefit of (re)thinking the pros and cons of specific cryptographic assets or transactions, stylized examples still have to be applied to practice.  It’s possible you can certainly end up with better or more socially optimal standards.  But you still ultimately end up with an ad hoc application of use scenarios (remember prop trading definitions in Dodd Frank!)—unless, of course, lawmakers delineate with great specificity the rules (not just uses) a transaction must comply with in order to enjoy certain regulatory treatment.  Then, however, more than a couple of people would complain about accompanying constraints on market experimentation and innovation.

Ultimately, these kinds of tradeoffs reflect what I describe as the “trilemma” haunting the supervision of fintech more generally:  that if you want a system able to provide clear rules, maintain market integrity, and encourage financial innovation, you can usually only have two of the three goals.  So, in the end, be careful what you ask for.

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