Abstract

Crypto is at a crossroads. After trillions in value destruction, a cascade of bankruptcies and millions of defrauded believers, many are wondering whether the sector has a future. Regulators, meanwhile, are not taking chances, “carpet bombing” crypto with legal actions. Notwithstanding the stakes, consensus remains elusive regarding first-order questions—including, what is crypto?

Part of the problem, this Article posits, is that we have largely been thinking about crypto incorrectly. Rather than a simple, uniform asset, crypto represents a highly heterogenous ten-thousand-instrument universe. One size cannot possibly fit all.

This Article introduces a novel unifying taxonomy for the sector based on asset-specific economic substance and legal attributes, providing a powerful tool for understanding market structure, illuminating abusive practices, and identifying areas for reform.

Applying that framework, the Article shines a light on crypto’s murkiest corner: so-called “utility tokens,” which it finds most economically analogous to loyalty programs, such as airline miles. Unfortunately, there is a night-and-day mismatch between regulatory guidance and market practice around these instruments—the “Broken Token Problem,” as this Article terms it. Broken Tokens are legally problematic instruments (i) labeled as “utility tokens,” (ii) marketed like stocks, but (iii) offering minimal legal rights—most akin to digital trinkets. The prevalence of these “assets” creates multi-level incongruences that harm all stakeholders.

Fortunately, many challenges of the status quo can be alleviated by enforcing asset-level delineations, emphasizing consumer protection, remedying accounting mismatches for company-created tokens, and maintaining appropriate skepticism regarding calls for relaxing crypto regulatory standards.

Document Type

Article

Publication Date

2024

Publication Information

55 Seton Hall Law Review 67-126 (2024)

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