Regulating the Crypto Economy

Business Transformations and Financialisation

Iris H-Y Chiu

• Publisher: Hart Publishing
• Year: 2021
• ISBN:
  9781509935765
• Edition: 1
• Topic: Law
• Subtopic: Financial Law
• Index: Law

This book focuses on the building of a crypto economy as an alternative economic space and discusses how the crypto economy should be governed. The crypto economy is examined in its productive and financialised aspects, in order to distil the need for governance in this economic space. The author argues that it is imperative for regulatory policy to develop the economic governance of the blockchain-based business model, in order to facilitate economic mobilisation and wealth creation. The regulatory framework should cater for a new and unique enterprise organisational law and the fund-raising and financing of blockchain-based development projects. Such a regulatory framework is crucially enabling in nature and consistent with the tenets of regulatory capitalism. Further, the book acknowledges the rising importance of private monetary orders in the crypto economy and native payment systems that do not rely on conventional institutions for value transfer. A regulatory blueprint is proposed for governing such monetary orders as 'commons' governance. The rise of Decentralised Finance and other financial innovations in the crypto economy are also discussed, and the book suggests a framework for regulatory consideration in this dynamic landscape in order to meet a balance of public interest objectives and private interests. By setting out a reform agenda in relation to economic and financial governance in the crypto economy, this forward-looking work argues for the extension of 'regulatory capitalism' to this perceived 'wild west' of an alternative economic space. It advances the message that an innovative regulatory agenda is needed to account for the economically disruptive and technologically transformative developments brought about by the crypto economy.

1

A Legal Mapping of the Crypto Economy and the Drivers for Institutional Change

I.Introduction to the Book

Since the introduction of blockchain-enabled transfers of private digital currency in the form of Bitcoin,¹ the imaginations of business, policy-makers and academics have been captured by this innovation. Permissionless blockchains that enable operations more complex than transfer of value have been developing in this new economic space.² The development of automated protocols that offer more functionalities than the script that executes currency transfer in Bitcoin and their equivalents (known as alt coins),³ called smart contracts,⁴ offers new opportunities for organising business and commerce.⁵ Commentators now opine that tokenomics or the crypto economy may be regarded as a new economic paradigm,⁶ as the advent of smart contracts and tokens⁷ on a blockchain-based infrastructure brings about change of an institutional significance.⁸

Herian⁹ warns against the fetishisation of blockchains as an ideological revolution, as there are crucially neoliberal aspects of this innovation, although the economic, social and political visions of this innovation have often been hyped to be revolutionary and liberating. This book takes a narrower scope, ie focusing on the economic space fostered by blockchains, and argues that the crypto economy presents novel and interesting aspects that can benefit from more development, and such development is crucially not disengaged from wider institutional implications and a regulatory agenda. For the purposes of this book, the crypto economy refers to economic activities that are carried out over permissionless, publicly accessible blockchains. These create a new architecture and space for the innovation of economic activities. We focus on this phenomenon as distinguished from the adoption of blockchain technology by corporations in the mainstream economy, mostly in the form of permissioned blockchains.¹⁰ There is also significant development in the adoption of blockchain technology by the mainstream economy, but that topic requires a different form of treatment to that taken in this book. This book focuses only on the new economic activities and developments that are taking place on permissionless, publicly accessible blockchains. The book argues that regulatory capitalism can be developed for this new economic space, as the governance of capitalist orders by appropriately designed regulation is important to support such a new capitalist order, and underpin its legitimacy and integration into the social fabric.

Institutions can be thought of as formal and informal rules, norms, patterns, forms, systems, ceremonies or even rituals through which human interactions or relations are stabilised in terms of expectations and conduct.¹¹ When we consider the import of technological change, what we are concerned with is how far technological change may affect ways of life, perhaps for good, and how such change destabilises and then re-establishes patterns, norms, systems, artefacts, etc (ie new institutions) that govern social relations and interaction. Law and regulation are key institutions through which technological innovations navigate, and against which they pose challenges.

This book starts by providing an account of the development of the crypto economy in relation to the cumulative challenges that are posed to law and regulation. This account is first descriptive,¹² and takes stock of the key debates in relation to the crypto economy’s fit with existing categories in law and regulation. For this purpose chapter one covers substantial ground, as it depicts not only the crypto economy developments from the innovation of Bitcoin, but also takes stock of the legal commentary and landscape of unresolved issues in terms of legal characterisation. The unresolved nature of the debates relating to how existing law and regulation fit with crypto economy developments compels us to consider whether endeavours should be employed in updating legal interpretation and/or legal and regulatory reform. The latter is underlined by choices in policy that are not merely questions of law, but the former is not necessarily immune from policy choices and neither conducted in an autopoietic paradigm.¹³ Brownsword describes two legal responses to technological disruption as ‘coherentism’ or ‘regulatory instrumentalism’.¹⁴ This chapter argues that an account of crypto economy developments through the lens of existing law and regulation shows the limitations of coherentism; that is, an approach excessively focused on fitting new technological artefacts within existing legal concepts. Such an approach may be well-intentioned and geared towards achieving legal certainty.¹⁵ However, legal interpretation can lead to patchworks of uneasy and temporary coherence within certain bodies of law that may not reconcile across different bodies of law.

Regulatory concepts also do not map well onto the crypto economy as regulatory concepts are based on identifying regulated subjects from the existing industrialised and corporatised economy. This is illustrated shortly in sections II and III. Developments in the crypto economy potentially disrupt the way business, people and activities are organised in the industrialised and corporatised economy, whether locally or globally. Private law concepts may be extended to fit with crypto economy developments, but it is queried whether these would become too remedy-driven, and whether ideological coherence would really be preserved.

The radical nature of crypto economy developments compels us to consider if institutional change would be brought about, and what drivers would contribute to such a trajectory. This chapter examines the contesting factors for legal and regulatory reform and argues that it is possible to chart a reform path. Such a reform path should be based on regulatory capitalism for the productive crypto economy.

Chapter two explains the theoretical construct of regulatory capitalism and its fit for liberal market economies like the UK, as well as the book’s vision of the productive crypto economy. It discusses novel economic activities made possible in the crypto economy, and argues that the conduct of these activities benefit from regulatory capitalism in the crypto economy. The chapter explains that such a reform path is enabling and governing at the same time, reflecting the full ethos of regulatory capitalism.

The crypto economy, in its productive development, is also entangled with rapid financialisation. Chapter three warns against focusing excessively on the financialised aspects of the crypto economy, as many jurisdictions seem to be pursuing, due to developments in initial coin offerings by blockchain business developers. Concerns for regulatory arbitrage in relation to many jurisdictions’ regimes for securities and investment regulation have drawn policy-makers’ attention almost exclusively to this financialised phenomenon. The chapter argues against relying only on financial regulation for the crypto economy and surveys a range of different jurisdictions’ approaches in order to explore their shortfalls.

Chapter four then embarks on offering the blueprint for a regulatory agenda for the productive crypto economy, by focusing on an enabling legal framework for the business organisation and governance of blockchain-based businesses. This framework arguably allows their innovative difference to be commercially operationalised but appropriately governed. We argue that such a regulatory agenda is necessary for legitimising and mainstreaming blockchain-based businesses while addressing its unique and radical aspects.

Chapter five takes on the fundraising needs of blockchain-based businesses and argues that such fundraising, which is predevelopment fundraising, is in nature different from securities offers or equity crowdfunding. As such, a new regulatory agenda should be built upon the principles of investor protection and the objectives for which investment is made. By unpacking the essentials of the relational paradigms in initial coin offerings, we propose a new regulatory agenda for the relational paradigm of the developer–investor relationship. This provides a foundation for the book’s proposals for financial regulation that is needed for addressing the financialised phenomena in the crypto economy, discussed in chapter seven.

Chapter six then turns to the monetary order of the crypto economy. The crypto economy is built upon private currency forming an essential protocol layer for business and commercial applications and achieves certain efficiencies. However, with the commoditisation of private currency, private currency has exhibited less stable and robust characteristics than fiat currencies to support the crypto economy. This chapter turns to various options in the monetary order of the crypto economy, such as private stablecoins, central bank digital currencies and competition in the monetary order, and argues that the monetary order of the crypto economy should be subject to a regulatory order that protects users. It may also be inevitable that central banks and regulators would have to be prepared for private currency competition.

Chapter seven turns to the financialised aspects of the crypto economy. It argues that a form of hyper-financialisation is developing in order to meet both business and speculative needs in an unregulated sphere. In this respect regulatory agendas are being developed to combat regulatory arbitrage, such as by the EU, but the chapter argues that there is a need to develop a financial regulatory agenda in a holistic manner integrated with enterprise considerations. Financial regulation in its substantive and architectural aspects would necessarily be interrogated by the enterprisal and technological architecture of the crypto economy. The chapter provides a high-level framework for regulatory policy in the financialised aspects of the crypto economy and offers concluding remarks for the book.

II.Bitcoin and the Beginnings of a Blockchain-based Economy

The Bitcoin blockchain was introduced in 2008 by a pseudonymous Satoshi Nakamoto¹⁶ in order to allow ...