A Middle-Ground for Cryptocurrency Regulation: Using Delaware's Incentive-Driven Private-Ordering Model

By Davidson, Elizabeth | Journal of Corporation Law, Summer 2019 | Go to article overview

A Middle-Ground for Cryptocurrency Regulation: Using Delaware's Incentive-Driven Private-Ordering Model


Davidson, Elizabeth, Journal of Corporation Law


I. Introduction

Proposals for domestic regulation of cryptocurrency have been numerous.1 From these proposals questions emerge: should prudential agencies such as the Office of the Comptroller of the Currency (OCC) establish jurisdiction? Or should states adopt a uniform act, much like the Uniform Commercial Code (UCC)?2 Or else, have states' customized regulations that are already in effect, such as New York's BitLicenses, worked?3

Then what is the ideal silhouette for cryptocurrency regulation? Where "emerging technologies . . . place great strain on extant regulatory systems,"4 this Note outlines the current regulatory landscape for the cryptocurrency space and recommends, based on a preferred structure of private ordering, the necessity for incentive-driven regulation. In filling the gaps where legislation has not empowered regulators, insiders are partial to a low regulatory ceiling;5 yet, classically, regulators err on the side of more stringent standards.6 The cryptocurrency space is no exception to the unnecessary "assumption that the [regulatory] choice . . . is between bottom-up solutions and top-down prescriptions, regulation versus deregulation, the administrative state versus the private market actor."7 Technology law scholar Lawrence Lessig has instead taught a nuanced understanding of regulation, claiming that governments self-evidently possess the ability to prudently regulate through mechanisms beyond ex post legal enforcement measures.8 Reasonably presuming the ability for the government to be thoughtful, and not merely reactive, this Note discusses a framework just one conceptual step beyond Lessig's regulatory architecture insights.9

Therefore, a Delaware-inspired private ordering model would provide a sustainable and alternative system that incentivizes technologists to privately reinforce policy interests. Corporate law concepts applied to the cryptocurrency space could mitigate against the threat of insider positions to the detriment of the consumer. Private actors enforce policy goals, filling the regulatory gaps to aid in advancing innovation while also strengthening public confidence.10 This kind of "soft law"11 enables the government to facilitate correct incentives with a thoughtful regulatory architecture.12 Yet, the past is often a map to the future. Therefore, success in shaping an effective cryptocurrency regulation template depends on a clear perspective of the history of financial regulation.13

The 2008 crisis is a useful guide, and accordingly this Note will shed light on lessons to be learned from the obstructive incentive structures of the financial regulatory scheme pre-2008. The Financial Crisis Inquiry Commission has concluded that the "crisis was avoidable," because insiders "ignored warnings and failed to question, understand, and manage evolving risks."14 The traditional financial system maintained faulty mechanisms of insider control, for example, a trust in self-interested banks to dictate the London Interbank Offered Rate (LIBOR).15 Thus, as exhibited with the crisis, private actors unremittingly find ways through financial innovations, regulatory arbitrage, or otherwise, to circumvent rule-based regulation.16 Computer scientists are arguably even more astute at avoiding stifling regulation than the insiders of traditional high finance.17

It is generally not "a good idea to permit judges to have a material interest in the cases they hear, to let students grade their own exams, or to allow referees to place bets on the sporting events they officiate,"18 so how then is insider self-regulation in finance much different? Those involved with shaping the regulatory schema should not hide from, but rather magnify, potential conflicts of interests that occur with self-regulation.19 Private ordering is not self-regulation20 and, as seen in the Delaware corporate law courts, has the potential to provide robust private measures to achieve policy goals.21 Thus, this Note does not claim to "offer a fully elaborated and adoption-ready blueprint for regulatory action. …

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