Donald Trump Won. Here's What Comes Next.
Donald Trump Won. Here's What Comes Next.
After four years in the regulatory wilderness, the cryptocurrency industry may have fresh life. What should our normative priorities be moving forward?
I started Brogan Law to provide top quality legal services to individuals and entities with legal questions related to cryptocurrency. Cryptocurrency law is still new, and our clients recognize the value of a nimble and energetic law firm that shares their startup mentality. To help my clients maintain a strong strategic posture, this newsletter discusses topics in law that are relevant to the cryptocurrency industry. While this letter touches on legal issues, nothing here is legal advice. For any inquiries email aaron@broganlaw.xyz.
We Had a Party
Obviously, this week featured some of the most consequential possible news and we will cover that shortly. First, though, Brogan Law, along with the elite crypto investigations firm NAXO and VC fund Department of XYZ, hosted the first “Crypto Colloquy” this week and I want to brag a little. We had such a great turnout that my old boss pulled me aside and said “you have some real people here.” Of course we did — all of you! So to everyone who came, especially those who are new to the Newsletter this week, a massive thank you. I hope you learned a little bit more about our firms and enjoyed the evening with us. BFA covered the event, and you can find the photos here. If you couldn’t make it, we’ll see you next time!
Donald Trump Won
I know many of you followers and, to my knowledge, none of you live under rocks, so by now you know that Donald Trump won the 2024 United State’s Presidential Election and will take office (again) on January 20, 2025.
I felt that this race was a toss up going into election day, while prediction markets felt that Trump was favored (you can see my comments to CoinDesk on the role of prediction markets in this election here, here, and here). While it’s hard to assess whether prediction markets are actually accurate from a single event, this is a watershed moment for the entire crypto/prediction ecosystem of novel financial products.
These tools were at the center of the public’s understanding of the election, and their predictions had greater fidelity to ground truth than did traditional methods. Boom.
Nobody knows exactly what will happen next, but on some level, prediction markets won, and my belief is that people respond to demonstrable merit. The success of Polymarket in predicting this election will likely pay unpredictable dividends to the entire industry over the next four years, and members of the industry I have spoken to are rightly excited.
But of course, many of you are very much not excited for Donald Trump to regain power, for some very good reasons.1 As I’ve said before, Brogan Law and this newsletter are non-partisan. We take a legal realist perspective to help our clients understand regulation and minimize their exposure to risk. I’ve written here at length about the implications of this election at the SEC and CFTC, and all that still stands.
This week is going to be a little different, though. Here, in order to fully consider the consequences of the election on the future of cryptocurrency regulation, I want to zoom out and consider the cryptocurrency industry’s normative posture. What should we do?
Ultimately it is our understanding of what we are doing here as an industry that will guide our activities over the next four years, and those four years are the crucial moment—our one opportunity to obtain affirmative legality once and for all.
Systems
One way to think about a system is that is the sum of the incentives of the actors that comprise it. If you evaluate clubs, corporations, or even industries this way, you can probably come to a reasonable understanding of their function with moderate fidelity. Bradley Tusk’s recent book “Vote with your Phone” takes this perspective:
“I know from my experience that the only good politician is a scared one. The best way to bring our democracy back from the brink is to make it as accessible as possible to the American people through systems like mobile voting and automatic voter registration so the only special interest politicians care about is the people's interest.”
This reductionist perspective is useful, but it is also limited. It offers clarity as to why some actor might have done some-thing in particular, and can be predictive of what they might do in the future, but it lacks explanatory power of gestalt—the system as a whole. After all, everyone has broadly similar incentives and we end up doing very different things, so what gives?
This permits a second way of thinking about systems, that they are a product of ideas. Ideas can be anything, really, but they form one unifying purpose to guide a system that otherwise would be the simple sum of its parts. This isn’t a revolutionary idea, this is why the United States has the Declaration of Independence and why organizations have mission statements. This mode of understanding systems is sometimes described as collective intentionality.
The collective intention is the necessary quantum to distinguish meaningless churn from a system that is actually doing something. When systems that were once driven by unifying purpose lapse into unorganized constellations of incentives, they may retain their basic shapes for a while, but will ultimately lose their ability to act towards any particular goal.
This community—cryptocurrency, web3, the blockchain business community or whatever you want to call it—was once built on an idea. It had its own charter documents which unified disparate actors:
Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust based model. Completely non-reversible transactions are not really possible, since financial institutions cannot avoid mediating disputes. The cost of mediation increases transaction costs, limiting the minimum practical transaction size and cutting off the possibility for small casual transactions, and there is a broader cost in the loss of ability to make non-reversible payments for nonreversible services. With the possibility of reversal, the need for trust spreads. Merchants must be wary of their customers, hassling them for more information than they would otherwise need. A certain percentage of fraud is accepted as unavoidable. These costs and payment uncertainties can be avoided in person by using physical currency, but no mechanism exists to make payments over a communications channel without a trusted party.
What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.
Over the years, though, the explosion of cryptocurrency economies have left these ideas somewhat outmoded. There are already many digital tokens for internet payment, and that is largely not what contemporary builders are concerned with making. At the same time, the amount of money available in the broader system expanded rapidly and this caused the incentives of system participants to predominate over the ideas that the system stood for.2
This second Donald Trump presidency will be an opportunity for the cryptocurrency industry to carve a niche for itself, but first it has to know what that niche will be.
I have an idea.
Regulatory Arbitrage
At the nadir of the last crypto winter, I liked to ask people what their bull case for the industry was. Many had no answer, they had forgotten what they were doing here. When they did answer, they tended to center on technology, or else anchor to web3 cliches that had already lost purchase. This was unsatisfying.
So here is my answer. The cryptocurrency industry is regulatory arbitrage. Cryptocurrency is the vessel through which financial markets can be remade.
The current regime is broked. The history of modern financial regulation in the United States goes back around a hundred years. In the lead up to the Great Depression, people made bad investments, lost all their money in the crash, and were mad. To remediate this, and restore faith in the broken securities industry, Congress passed the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Company Act of 1940.3
There has been new lawmaking since then, like the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, but the current system is still a vestige of a different era. Over the years, these regimes have been distorted by sclerosis an bloat, subject to “capture”—the phenomenon when existing entities foster a regulatory environment so complex and expensive that it is almost impossible for smaller competitors to emerge. Compliance is now unweildy.
For skittish leftists this is a feature, because any product that could cause retail customers to lose money (read: any financial product) codes to them as bad. From this perspective, intrusive regulation is good because it tends to prevent novel financial products from reaching the market at all.
But consumer protection is not necessarily value maximizing. I think access to finance is actually good, and so new regimes that liberalize access are good. In my view, this has been the actual function of the cryptocurrency industry for years, and this should be our unifying idea for the next four years.
Here is why.
Capital Markets
Equity is this really great, simple idea—you sell shares, the proceeds from that sale funds your business, and the shareholders get to participate in the profits of your business. However the current regime makes this process practically illegal for all but the largest businesses. This is bad.
As a baseline, sales of equity in the United States are presumptively subject to SEC jurisdiction as an “investment contract.” Absent exemption, any such sale of a “security” is subject to the “full array of securities regulation (including, but not limited to, the obligation to publish a prospectus, the creation of prospectus liability, the prohibition of insider trading, and the authorization of financial intermediaries involved in token sales by national regulators).” Making such a sale also invokes ongoing, indefinite reporting requirements.
The cost of complying with these obligations is millions of dollars a year, making such public offerings impossible for all but the largest companies.
There are exceptions to this standard (covered here before), Reg D, Reg A, Reg CF, Reg S — each with its own compliance obligations and quirks. These regimes are designed to allow small to medium sized companies to fundraise with equity without requiring full public-offering type compliance. While these regimes are more manageable (particularly if you only sell to accredited investors), they still require significant compliance.
More importantly, exempt equity is highly illiquid. Resale is typically restricted by law, and each regime places different lengths and types of restrictions, making it difficult for a single marketplace to form. Even where it is legal to sell them, the bespoke contracts creating this equity often imposes company controls and lockups.
This is a problem because the ability to find a liquid market to sell an asset is crucial to realizing its value. Without a secondary market to sell the asset, the only way for investors to realize the value of an investment is from dividends, which are obviously inferior along a number of different criteria.4
In a bizarre catch-22, the net is that (i) primary markets for exempt securities are limited, and (ii) secondary markets are anemic. Without robust, standardized primary markets for exempt securities there is not a high enough volume for secondary markets to thrive, and without robust secondary markets, investors are wary of making primary investments. The end result is small and medium businesses have less access to finance than large ones and suffer.
The failure of these markets to develop is not from lack of trying; numerous large companies like Republic and StartEngine attracted major investment to try to solve these problems by serving as a primary and secondary marketplace for exempt securities, and have been able to capture upwards of 80% of total Reg CF investment. They just haven’t quite succeeded and secondary market volumes remain relatively low. For example, in 2023 less than $500 million was raised using Reg CF.
Compare this volume to the potential. When I asked Braham Mehta, Head of Capital Markets at the fintech firm FundBox how much unallocated capital could be raised by small and medium businesses, he described the market as “[A] trillion dollars. Literally.”
And here’s the thing, that unallocated money is an actual drag on the real economy. Many small and medium sized companies would sell equity to finance their operations if they could, and there would likely be buyers, but this rarely happens because of the difficulty establishing these markets.
Crypto Solves Illiquidity
In contrast to these fragmented and expensive regimes, issuance of cryptocurrency tokens allows projects to fund themselves directly. Initially, this was realized through “Initial Coin Offerings” (ICO) where a project would sell cryptocurrency tokens to raise funds. Almost immediately, these unregulated capital markets gained massive traction. According to researchers at the University of Chicago:
In 2016, a modest $98.7 million was raised by initial coin offerings (ICOs) worldwide. This increased to $6.6 billion in 2017 and then $20.3 billion in December 2018. As of publication, more than $27 billion has been raised in about two years. ICOs such as Filecoin and Tezos each managed to collect more than $200 million from investors. The Russian messaging service Telegram raised a whopping $1.7 billion in two token presales. The internet startup Block.one even raised $4 billion without having a live product.
The success of these markets was massively bolstered by large, highly liquid, secondary markets. The speculative appreciation of certain of these cryptocurrency tokens was so great that some projects could credibly fund themselves without ever doing an initial offering simply by giving away tokens for free, and then selling some of their reserves on decentralized exchanges after the value of the airdropped tokens appreciated.
Today, many of the most successful cryptocurrency firms were originally capitalized between the ICO boom in 2017 and 2021. Polkadot (DOT) raised $65 million in a public token sale in 2017, and now has a market cap of nearly $7 billion after the tokens appreciated 15x. Solana (SOL) raised $1.76 million in a 2020 public token sale at a price of $.22 per token, which has now appreciated more than 900x to $198.89 per token. Chainlink (LINK) raised $32 million in a 2017 ICO priced at $.11 per token, which has since appreciated 123x to $13.56 per token.
Obviously, these are all large entities, and not the “small and medium businesses” that are my main focus here. Remember though, large companies are just the small ones that succeeded. Many companies that ICO’s in 2017 and 2018 failed and lost all value quickly, but rapid iteration of positive expected value bets increases the total value to the investor by reaching the long run sooner.
And all this success was only possible becuase cryptocurrency more or less ignored regulation. The traditional regulatory regimes probably prohibit the kind of rapid, relatively low-information fundraising and highly liquid secondary markets, but promoters developed facially plausible arguments that securities law did not apply to them, and ran with these before the government had time to do anything about it.
The circumvention of these regulations was just not some orthogonal consequence of technologists developing financial products from first principles, it was actually the value proposition of the entire sector. The existing regulatory regimes had become so obstructive and usurious that financial products that otherwise might have been uncompetitive with large banks or payment processors like Visa were able to rapidly develop massive interest and capture a meaningful segment of traditional finance.
More importantly, this was not just zero-sum piracy. Access to capital markets grew as a result of this arbitrage. So while investors did grow rich, so, too, was society as a whole enriched.
Then they made it illegal.
Regulation
This massive boom of cryptocurrency growth stopped suddenly in 20215 when the Biden administration came into power and appointed Gary Gensler as SEC chair. I have written about this here ad naseum, but the upside is that the Gensler regime took an aggressive, prohibitionary stance to cryptocurrency, and that stance was successful.
Of the cryptocurrency tokens listed on the CoinDesk 20 index, only one has been launched since 2021. As Crypto.com attorney Justin Wales told me last week, the current iteration of the SEC is “solely focused on litigation aimed at halting crypto in the United States.”
But now Gensler will be out. Technically, there is a question as to whether Trump can fire him directly, but the historical practice is for Chairs to resign when a new President takes office. There is no reason to think that will be different this time, and Trump is already vetting potential SEC chair candidates.
Whoever that new chair is, the odds are very good that crypto will get closer to a fair shake than it ever did during the Gensler regime. We know this for a couple reasons, for one, current Republican commissioners Hester Pierce and Mark Uyeda have repeatedly told us that they would treat cryptocurrency differently in public statements and dissents. Second, the treatment of the industry could almost be no worse.
But you already know that, and here is why this post is unusually long and sprawling. If this opportunity is just a bullish indicator for the assets in each of our wallets as individuals, it will mean little. Incentive driven individualism is not enough for the cryptocurrency industry to thrive. We need a unifying idea, and that idea is regulatory arbitrage.
This may seem strange to some, after all, cryptocurrency has been among the purest technology driven industries since its inception. The original point was to supplant financial intermediation with technology. The problems that contemporary cryptocurrency firms are trying to solve now are often technological. Shouldn’t the raison d’etre, then, be something technological?
In my view, all this was a trojan horse to sneak old products past regulators for long enough that they could take hold. In taking hold, they displaced old regimes, and it was in that displacement that the majority of their value was achieved.6
Think about it, all the things that crypto does, you could already do before its invention! There were public offerings, loans, swap contracts, and so on. The problem with all these was not that they were technologically impractical. If J.P. Morgan had wanted to build an ersatz ledger to allow any random business to issue shares without compliance in 2017, it definitely could have. And in a lot of ways, that technology might have been superior to what was built on the blockchain at the time. J.P. Morgan would never do that though, because for J.P. Morgan to offer that kind of product would be clearly illegal, then and now.
The value of technology was in allowing someone who was not a well-known, regulated market participant to offer a product with enough ambiguity to avoid scrutiny for long enough to become undeniable.7
The Next Four Years
Well, now those constraints may be lifted, and so now is the time to run into the breach. The cryptocurrency industry should view every moment between November 5, 2024 and January 20, 2029 as a singular opportunity to inculcate ourselves as indispensable.
It has become de rigueur for the crypto legal cognoscenti to concede that, yes, some cryptocurrency tokens are probably securities, as Iowa Solicitor General Eric Wessan told me in our recent discussion: “If a company issues a product that will issue a return to its investors or purchasers based on the success of the company, that comes a lot closer to the traditional definition of security under Howey.” This is unsatisfying.
If we concede that traditional regulatory regimes can apply to cryptocurrency more or less as normal, then we forfeit much of the progress made in the years before 2021.
For the next four years, it seems plausible that cryptocurrency firms will be permitted to operate outside of these traditional strictures.8 But make no mistake, cryptocurrency’s propagation is a zero-sum battle with the regulatory authority of the SEC, the CFTC, and state regulators.9 Either there is less regulation, and cryptocurrency is relatively empowered, or there is more regulation, and regulators are relatively empowered. There is no ambiguity available in this struggle, it is a war over control. Who gets to decide what financial products look like?
While the Trump administration may be relatively friendly to cryptocurrency, and may even take a laissez-faire approach for a time, these circumstances are fundamentally unstable. When you view the cryptocurrency industry as a direct challenge of regulatory regimes, it is obvious that regulators will not simply concede their authority. It is inevitable that this posture will continue to lead to battles between the industry and the government actors whose power is being curtailed.
Ultimately, if the industry wants to fully manifest its expansive potential, it has to win this battle and disempower these regulators, not just broker a ceasefire. This is the fight Crypto.com has taken to the SEC in E.D.Tex., which is why I view that case as so laudable. But it is unlikely these court battles will be enough on their own.
The real path forward, in my view, has two prongs. The first prong is seizing the opportunity of the next four years as completely as possible. Make products so obviously valuable that in 2029, no matter who is SEC Chair, retail users will not tolerate a new prohibition. The second prong is to take this fight to the government, and use the political clout available from our millions of users to implement a legislative solution that formally inculcates cryptocurrency as a regulatory third way.
So now that Trump has won, we have a brief window to make this happen. We’d better unite around a common idea, and we had better start right now.
In the meantime, you will always be able to get vital legal and regulatory advice from Brogan Law PLLC. This week’s newsletter was unusually long to accommodate the moment, but next week we will return to typical policy and legal analysis. One topic I want to flesh out in the coming weeks is exactly the character of political action that the industry can take. Stay tuned for that and thank you for joining along! Until next week.
Personally I find his domestic policy alarming, his foreign policy very alarming, and I wish he would stop talking about penises in public forums.
It seems to me that these perverse incentives are a common feature of rapidly growing or changing economies. My pet annoyance of the contemporary economy is the misalignment of incentives caused by social media. Traditional media environments offered relatively few seats for talent, and compensation of similar orders of magnitude to other professional pursuits. This changed with the advent of monetizable social media platforms like Instagram and TikTok and quasi-social media like YouTube and Spotify. Over time, I’ve observed that more and more participants in prestigious but non-lucrative fields like academia migrate into media. Some recent examples that I found galling were Barack Obama, Jon Favreau, and my old professor Steven Levitt. Levitt specifically identified the availability of media franchise as a primary factor in his decision to leave the University of Chicago:
While there are high rewards to fame on social media, media is actually a zero-sum game to partition a discrete amount of watchtime among all humans. One marginal media creator just displaces another, and so adds, at most, a tiny amount of value to society. On the other hand, Barack Obama, Jon Favreau, and Steve Levitt were each among the most talented in their fields. Given then, we as a society are harmed by the exodus. This isn’t to scold any of these individuals, they are just people responding to incentives like everyone else. There is easy money for the well-known in podcasting and media, and it's perfectly rational to take it. The same distorting incentives may be affecting the cryptocurrency industry.
There may be good reasons for these regimes. It’s undeniable that security markets are an easy target for grift and fraud. This article is too long to consider the correct regulatory regime, but there should be some recourse against bad actors. There is a lot of space, however, between the current regimes and complete laissez-faire capitalism. We can protect consumers while opening up these markets to new entrants at the same time.
Dividends are taxable events at the time they are paid to the stockholder, meaning, even if they are reinvested, the rate of investment compounding is curtailed. On the other hand, if the same money was reinvested in the company to increase its value, those increases would not become taxable until the holder sold (and would, even then, only be taxable as capital gains). While it may seem a small difference, over time, this makes quite large differences in the rate of compounding. In addition to this, selling an asset realizes its whole value at once, making that asset a better surrogate for cash-like assets, whereas the value of income generation, but illiquid assets, can only be realized over time. In this way liquid assets are fundamentally more valuable than illiquid assets, even if they represent the exact same share of some company in all other ways.
It is fair to point out here that around this same time there were some other problems in the cryptocurrency industry. 2022 saw the collapses of TerraLuna, Three Arrows Capital, and FTX/Alameda along with a string of other crypto bankruptcies. While these are not independent from the approach to enforcement that regulators have taken since, it is worth considering the regulation in a vacuum anyway because, after all, there will always be financial collapses wherever there is finance.
Of course, the technology is essential for security and usability. If the industry builds products that suck, it won’t get anywhere.
This is a well-tested model. Uber is not a valuable company on the back of an innovative matching engine, it is valuable because cities used to require companies to purchase expensive medallions to run a taxi business, and the groups that held those medallions had no incentive to offer improved technology that might threaten their monopoly. The same is true of AirBnB and hoteling. It was in vogue a few years to describe this as “disruption” to the extent it became a cliche, but this is what crypto began to do to financial regulation before it was pushed back in 2021.
Current commissioner and possible future chair Mark Uyeda recently argued that “The Commission’s war on crypto must end, including crypto enforcement actions solely based on a failure to register with no allegation of fraud or harm.” This suggests that he might abstain from enforcing the costly prospectus requirement associated with traditional public offerings.
Of course, the industry itself is not zero sum, we are increasing the whole pie! But the fight at the center of it is.
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