William & Mary Law Review


Cryptocurrency had its most turbulent year in 2022. The collapse of TerraUSD ushered in a broad market decline, and the FTX debacle brought new publicity and scrutiny to crypto’s woes. Both events will likely spark new regulation and legislation.

Policymakers and regulators should regulate market structures like exchanges. While many cryptocurrencies are extremely transparent and require little if any additional disclosures, others are plagued by serious informational asymmetries. An exchange might allow participants to trade Bitcoin, and regulators need to protect investors who rely on such exchanges. Investors may face informational asymmetries regarding the operation and safety of the exchange. Nevertheless, the exchange is unrelated to traded assets like Bitcoin and Ether. Thus, we could consider securities and exchange regulation to be ancillary to crypto itself.

Regulators should focus on such ancillary regulation of market structures and resist calls to impose minimum-product standards on crypto. The FTX debacle involved the soundness of the exchange and not the soundness of mainstream cryptocurrencies like Bitcoin. Even before the collapse of TerraUSD, prominent voices called for stablecoins to be brought within the tightly regulated world of banks and other insured depository institutions. Even if such moves could have protected investors in TerraUSD, protection is not necessarily sound policy. At the present time, stablecoins do not function as methods of payments. Moreover, extending banking regulation to stablecoins almost certainly would mean governmental support if not outright deposit insurance. Such a move would also make many stablecoins impractical if not illegal. For now, regulators should let developers and investors continue to take risks in the design of stablecoins and other crypto rather than imposing direct regulation.