Decentralized Markets and Self-Regulation

Distributed ledger technology, such as blockchains, is changing fi nancial markets by creating a new foundation for transacting with digital assets. Simultaneously, major blockchain-enabled intermediaries- crypto-exchanges-have emerged to trade, broker, and settle transactions with digital assets. U.S. regulators seek to place crypto-exchanges within the ambit of existing regulation and registration requirements for legacy intermediaries. A critical underexplored corollary of this approach is converting cryptoexchanges into legacy self-regulatory organizations ("SROs") or members of SROs. Put differently, U.S. agencies seek to bring not only conventional regulation but also self-regulation into blockchain-enabled markets. In imposing the traditional models without reform, however, policymakers simultaneously ignore the considerable economic potential of technology-enabled markets and intermediaries and fail to precisely target their risks and transaction costs. To offersolutions, thisArticle examines the digital assetmarket's structure and microstructure and associated risks. Comparing centralized crypto-exchanges, decentralized crypto-exchanges, and legacy trading venues, this Article agrees with the basic intuition to introduce formal self-regulation and refines possible self-regulatory models. The proposed frameworks aggregate the decentralized knowledge of individual participants in the global technology-enabled market to ensure better coordination and well-informed regulation. Building on market expertise, the proposed SROs would promote regulatory efficiency, improve digital asset trading, reduce the costs of coordination among heterogeneous and globally dispersed participants in blockchain-enabled markets, and nudge them toward comprehensive self-regulatory and technological solutions.