Finding God on Market Structure
How much is $150,000,000 really?
I started Brogan Law to provide top-quality legal services to individuals and entities with 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.
So, basically, there are two ways regulation can go. Either (i) you have too much of it, or (ii) you don’t have enough. And sure, that is overly simplistic, but it is a really powerful heuristic for systems thinking because, if you can figure out which is the problem, you know what you need to do.
I’d propose that it is pretty easy to look at a system and assess if it is over or under regulated. In order to sell a security on public markets, an issuer is required to spend somewhere in the range of $2-20 million at minimum, and then continue to spend several million more dollars (again, at minimum) on compliance annually forever. Just to be allowed to raise money from public markets. That is too much regulation.
On the other side of the spectrum, you have memecoins. Issuers can sell blockchain entries as quasi-financial products with no oversight at all. There are no rules, and the SEC has publicly stated that the tokens are beyond its jurisdictional remit. This is under-regulated.
So when you look at the problem of regulation of cryptocurrency in the United States, it is pretty clear that the reform that is actually needed is some mix of (i) relaxing the rules to allow trade in things that are currently illegal, or have been subject to litigation and enforcement, like selling cryptocurrency tokens and (ii) providing for regulatory oversight of things that are currently legal, but which undermine the orderly function of cryptocurrency markets, like memecoins.
In my view, the ideal new law would say, extremely generally, (i) that it is legal to sell cryptocurrency tokens to the public to fund a cryptocurrency venture, provided that you make certain disclosures and don’t do any fraud, (ii) that DEXs can exist to trade these tokens, and centralized exchanges can also exist with certain oversight, and (iii) that new pure memecoins cannot be listed for public sale.1
The primary effect of such a law would be to open the cryptocurrency market dramatically, but not to scams. The regulation of these products should be liberalized, but not undermined. The ancillary effect would, in all likelihood, be that most domestic capital markets, and perhaps global ones as well, would move onto cryptocurrency rails.
They wouldn’t have to migrate! But cryptocurrency rails would be less burdensome than traditional securities pathways, and so, my guess, this modality would pretty quickly come to dominate. If they didn’t, it would be because cryptocurrency was substantially worse than incumbent capital markets in some meaningful way, and that would be fine. There is no reason to be dogmatic about the future.
And, lucky us, we don’t have to think about this in the abstract anymore. Over the years, there have been a number of proposals to regulate cryptocurrency markets in the United States, and a few weeks ago Congressmen French Hill, Bryan Steil, and Dusty Johnson released a new discussion draft (the “Act” or “Market Structure”). So this week, I figured it would be fun to go through and see if it does any of what I said above!
I marked up my copy, and you can see that here if you’d like to follow along at home.
The Structure of Market Structure
This is a big bill2 and there is a lot going on. It is split into five titles which interrelate, but touch on different aspects of the novel market structure.
Title I covers definitions. Because the bill is relatively far-reaching, this section generally modifies all three of the Securities Act of 1933, the Securities Exchange Act of 1934, and the Commodity Exchange Act. This title also contains some odds and ends, like a savings clause specifying what the bill doesn’t change in the affected laws, modifications to the Bank Secrecy Act, etc.
Title II, Offers and Sales of Digital Commodities will be seen by many as the meat of this bill. This section specifies the conditions under which cryptocurrency tokens may be sold in primary offerings, the conditions under which they may be sold on secondary markets, and creates a nebulous decentralization framework to tie it all together.
Title III and Title IV provide for registration of intermediaries at the SEC and CFTC. We’ll discuss further a little later, but much of this law provides for concurrent or at least complementary regulatory authority between the two Commissions. These titles draw heavily on existing regulatory frameworks to create a framework for legal intermediaries to custody certain cryptocurrency assets.
Finally, Title V, Innovation and Technology Improvements, provides for a number of studies on things like decentralized finance, non-fungible digital commodities, and “expanding financial literacy amongst digital commodity holders.” It’s easy to be dismissive here so I will be. This title does nothing of note.
This Bill Creates a Pathway to Offer Tokens Legally
The headline of the market structure law, as written, is that it creates a path to sell project tokens legally. Currently, this type of offering exists firmly within a gray area of U.S. law. While stablecoins and memecoins are presumptively outside of the SEC’s jurisdictional remit, the previous SEC administration brought a number of enforcement actions against firms and individuals alleging that the sale of cryptocurrency tokens tied to projects constituted the unregistered sale of securities. Famously, Ripple was locked in a battle with the SEC over this basic fact pattern for years. Other smaller projects like LBRY lost in court defending their tokens, generally bolstering the SEC’s litigation posture.
But, subsequently, the Trump SEC dropped the majority of its pending enforcement actions. I wrote a Cointelegraph article a month ago summarizing these cases, if you are curious about the details.
The upside of this is that, as of right now, it is impossible to say whether the SEC considers a token launch to be an investment contract (and thus, a security) or not.
For the industry to have certainty, the “affirmative legality” that I have often harped on here, one of two things has to happen. Either some legislation exempting cryptocurrency tokens from the securities laws has to pass, or the SEC has to engage in rulemaking to use its exemptive authority under the various securities laws to carve out cryptocurrency tokens.
The proposed Market Structure bill does the former through some Byzantine jiu-jitsu. First, Section 103 defines “Digital Commodity” as “a commodity the value of which is, or is reasonably expected to be, derived from the relationship of the commodity with the blockchain system to which the commodity relates.” Next, Section 201 modifies the Securities Act to say “The term ‘investment contract’ does not include an investment contract asset” and then defines “investment contract asset” as a subset of digital commodities that “can be exclusively possessed and transferred, person to person, without necessary reliance on an intermediary, and is recorded on a blockchain” and is an investment contract “either registered under section 6 or conducted in reliance on an available exemption from the registration requirements of this Act.”
What is the “available exemption from the registration requirements of this Act,” you ask? Now we turn to Section 203, Exempted Transactions in Digital Commodities, which provides conditions under which the sales of up to $150,000,000 of tokens may be sold in any twelve month period if the issuer is either (i) certified as a mature blockchain system or (ii) “the issuer intends for the blockchain system to which the digital commodity relates to be a mature blockchain system not later than [four years from the first sale of the digital commodity].”
A mature blockchain system, in turn, is defined by Section 205 of the Act. The SEC is generally permitted to issue rules through which a blockchain system may be considered mature, and more narrowly, a blockchain system will be deemed mature where it meets exacting criteria that the token derives its value from the “programmatic functioning of the blockchain system”, that the system is “functional”, “open”, “programmatic”, under broadly decentralized control, and impartial.
Ok, now take a deep breath.
The Purpose of a System is What it Does
The reality is, I really don’t want to publish an article saying that this Market Structure draft is unworkable. I know a lot of people who are very invested in this legislation, and I want them to like me. So I’d much rather tell you that this exemption from the securities laws is going to be the panacea that cryptocurrency has always deserved.
But it’s not. It’s a problem. Let me count the ways.
From the outset, the $150,000,000 limit on fundraising is senseless. $150,000,000 is a lot of money. Obviously, it is a lot of money. To me or you, raising that much money would be a lot of money. But here is the thing about $150,000,000: it is really, really not a lot of money. It wasn’t a lot of money when David Fincher made The Social Network in 2010, and it still isn’t now.
On the scale of enterprise, it is actually a trivial amount of money, and that is a big problem.
Compare that figure to some recent initial public offerings in traditional securities markets. Reddit raised $750 million in 2024. Rivian raised $12 billion in 2021. eToro raised $620 million three days ago. The scale of public fundraising far exceeds what is possible under the token exception under the Act, and that simply means that exempt tokenizs under the Act will never be a serious alternative to public markets for real businesses. In other words, the mechanical effect of this approach is to leave American capital markets unchanged.
And maybe that is the point, but it is punting on cryptocurrency’s highest calling, as a catalyst to liberalize and disintermediate capital markets in the United States.
A recent paper by Austin Campbell and TuongVy Le, entitled “Crypto and the Evolution of the Capital Markets” provides an interesting survey of the history of the organization of capital markets in the United States. They identify five regulated intermediaries, brokers, national security exchanges, alternative trading systems, dealers and market makers, and clearing and transfer agents — all of which can be collapsed into a single entity, or removed entirely, to facilitate crypto settlement.
Campbell and Le diagram the differential flow of funds between the two paradigms, which is striking. Regulated capital markets have become highly intermediated.
Compared to cryptocurrency markets, which are, uh, not.
Now, from first principles, which of these models do you think is preferable?
If these markets are kneecapped by law, this dream can never be realized, and the project of cryptocurrency will be meaningfully diminished on a durable basis.
This problem is made worse by further stipulations within the Act that explicitly prohibit the use of the exemption for tokenized assets. The end of Section 203(a)(1) states that the exemption does not apply to investment companies or entities “excluded from the definition of investment company by section 3(b) or section 3(c) of that Act.” Under current tokenization practices, any domestic RWA issuer of would likely qualify as an investment company, forcing it out of this regime.
Not just that, but all exempt securities, including such tokenized assets, where they are sold under a Reg D exemption instead, will not even qualify as “digital commodities” because the law explicitly says that “securities” are excluded from the definition.
In turn, because these Reg D securities are not “digital commodities,” they won’t be able to avail themselves of the Sec. 202 “Treatment of Secondary Transactions in Digital Commodities.” This is the probably the fastest growing segment of the cryptocurrency economy, and this Act would shut it out.
What’s more, by my reading, this exclusion also means that venture capital investment raised through token sales will have to be included in the token exemption in the Act, and this will count against the $150,000,000 limit — further undermining fundraising. Either that, or else these major investors will also not be able to trade on the digital commodity exchange frameworks that the Act creates.
This is a big problem!
I know that there are skeptics. Indeed, the Decentralization Research Center recently released its issue list for the discussion draft, which I highly recommend you read, and they squarely disagree with my view on the $150,000,000 cap. They think it is too high!
And I get their point. Within the segment of the broader cryptocurrency industry that has always been dedicated to developing systems that manage trust dependencies through design rather than regulation, the expanded scope is distortionary. The risk of perverse incentives crowding out such systems is genuinely high.
But put another way, this is likely to be the only bite at legislation on the treatment of cryptocurrency assets that the industry ever gets. And this law, as written, will make it extremely difficult for the industry to grow in scope and scale in future years. Realistically, how many new entities will ever meet the criteria of “mature blockchain systems?” Vanishingly few, is my guess.
Reading this law, my impression is that the exemption will be difficult to execute and so rarely used. In recent years, lawmakers have passed a series of laws creating exempt securities regimes to attempt to bridge the gap between onerous public markets and closed off private ones. The resulting Reg A+ and Reg CF regime have been failures, failing to attract even 1% of the volume of public securities markets. In 2023, there was a total of $420 million invested through Reg CF. Compare that to $1.1 trillion in public offerings. That is a joke. And, ultimately, this Market Structure law is at risk of a similar fate.
I am all for decentralization, but I think we are being parochial here. If the highest promise of the cryptocurrency industry is to reimagine capital markets from first principles, should we spend our political capital enshrining a new regulatory regime that can never accommodate that eventuality?
It's a rhetorical question.
Exchange Structures
I’d be remiss not to say that, while I am skeptical of the exemption criteria as they are written in the current draft of Market Structure, most of the rest of the draft law seems quite sensible to me. Titles III and IV form a regulatory regime for novel digital asset exchanges. These are well designed to prevent the kind of self-dealing observed in FTX’s collapse, and to position assets held on exchanges as bankruptcy remote.
This all makes complete sense! But if the assets to be traded in these newly registered systems are enfeebled by the issuance regime, they won’t be much use.
I do think that the concurrent jurisdiction between CFTC and SEC is likely to be territorial and pissy, but there are other things in here that I think are laudable. The “End User Distribution” concept that facilitates distribution through airdrops and as rewards is well designed. As is the developer exclusion in the Section 409 Exclusion for Decentralized Finance Activities.
These elements should become primitives in the new capital markets, but we need to let the broader economy in as well. This industry will never flourish as a walled garden.
Final Grade
I proposed a criterion at top to evaluate the success of a new cryptocurrency law. It would have to (i) relax the laws that currently make it difficult to issue cryptocurrency tokens, and (ii) provide for oversight of memecoins and related scams.
I don’t think the current market structure bill meaningfully does either. If the SEC continues to abstain from enforcement of non-fraud securities laws against token issuers, then the constraints imposed by this draft Market Structure law would actually make it harder to issue new cryptocurrency tokens than it currently is. And sure, this administration is not forever, but three years is a long time to lock in and grow stronger. Reasonable minds could differ on whether it is better to inculcate something imperfect today versus fighting for exemptive relief at the SEC.
As to the second point, nothing in this law would make memecoins any harder to issue than they are today. And there are very good reasons why that is. This bill will need all of the Republicans to vote for it in order to pass, and the big Republican himself, Donald Trump, is quite fond of his memecoin. It is hard to blame them for not including some kind of limitation here.
But still, if Market Structure doesn’t deliver on either of the goals I have for a piece of crypto legislation, why should anyone support it? That is a genuine question. If you have a view, please tell me.
I’ve felt for a while that this is all a little academic. The reason I didn’t write about the draft bill last week was I didn’t think this Act had a snowball's chance in hell of passing. Even GENIUS looked DOA at the time.
But as I was writing today, there were signs of life on the Democratic side of the aisle. So maybe there is hope yet.
And what do I know anyway. I’m hardly the D.C. whisperer. For that, you need to talk to George Leonardo.
Until next week.
Brogan Law is a registered law firm in New York. Its address and contact information can be found at https://broganlaw.xyz/
Brogan Law provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers.
I am extremely hesitant to suggest that anything should be illegal. In general, I don’t have a problem with gambling, which is what memecoins boil down to. But I do think the social costs are pretty obvious in this case, without any countervailing benefit. Ultimately, it is probably impossible to stop people from creating these tokens and selling them, but they shouldn’t be listed alongside legitimate financial assets.
Though not the “big beautiful bill” itself.