Professor Vikramaditya S. Khanna delivers EW Barker Centre for Law & Business Distinguished Visitor Lecture on Securities Regulation and Crypto Assets Markets

On 6 December 2023, the EW Barker Centre for Law & Business Distinguished Visitor Lecture titled ‘Securities Regulation and Crypto Assets Markets’ was presented by Professor Vikramaditya S. Khanna, William W. Cook Professor of Law at the University of Michigan and Visiting Research Professor at the EW Barker Centre for Law & Business. This lecture was moderated by Professor Hans Tjio.

Professor Khanna began his lecture by observing that crypto assets and the blockchain could be useful in reducing the costs of transacting by reducing verification costs. This was accomplished through providing speedy, accurate and often cheaper verification with less reliance on intermediaries, enabling the creation of newer categories of assets which the law did not recognize before.

However, the blockchain was not free as verification requires entities to expend resources and they need compensation for that and their efforts. In private blockchains, an entity controls verification and often pays the verifiers in cash, raising concerns about powerful intermediaries. By contrast, in public blockchains, there is usually no central party controlling verification and verifiers are usually paid in the digital assets whose transactions they are verifying. As the value of these digital assets (usually called crypto assets) depends on their use and trading in them, verifiers have an incentive to encourage these activities giving rise to concerns of conflicts of interest, manipulation, and fraud.

In view of the importance of trading to crypto assets markets, it is relevant to look at the areas of law regulating trading which includes securities regulation. Securities regulation is primarily concerned with policing issues relating to the issuance and trading of securities which include asymmetric information between issuers and investors, conflicts of interest, incentivizing gatekeepers (or certain intermediaries) to act as monitors, and the high costs of disclosure and policing. A threshold question is whether crypto assets are securities.

The recent Ripple case elided the traditional Howey test and focused on whether institutional or retail customers purchased crypto assets. In Terraform, the judge ignored this factor and considered that the crypto assets there were likely to be securities. The SEC treats many crypto assets as securities, except Bitcoin and Ethereum. However, some SEC commissioners have said that crypto assets could start out as a security and then transform into not being one, with the key feature being the extent of decentralization. The CFTC treats many crypto assets as commodities but thought that the DAOs creating them could be liable for certain defects or harms.

Professor Khanna argued that these approaches did not engage much with policy. While theoretically there should be less asymmetric information about a crypto asset on public blockchains compared to securities, a recent survey conducted by Professor Khanna and team found that the public was more interested in who used crypto assets and the identities of those designing the asset rather than regulation of crypto generally. As such, the asymmetric information issue is not the same as for more traditional securities. Reliance on gatekeepers was challenging in crypto markets as there were fewer intermediaries and they did not appear as well positioned to influence disclosure. As there were relatively low levels of participation in crypto asset markets and difficulties in identifying the transacting parties, the prospects for conflicts of interest were high, meriting regulation on this front.

Professor Khanna then discussed potential approaches to the regulation of trading in crypto assets. As global regulatory regimes are experimenting with different models, they are likely to benefit from a policy focus, as might other areas of law implicated by crypto assets. The lecture concluded with an engaging question and answer session.

EWBCLB Director, Professor Hans Tjio, delivering the welcome address

Professor Hans Tjio moderating an engaging Q&A session

(From left) Professor Umakanth Varottil (NUS Law), Professor Vikramaditya S. Khanna (University of Michigan Law School) and Professor Tjio Hans (NUS Law)