11 Drexel L. Rev. 539 (2018-2019)
Overreaching Its Mandate: Considering the SEC's Authority to Regulate Cryptocurrency Exchanges

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             OVERREACHING ITS MANDATE?
 CONSIDERING THE SEC'S AUTHORITY TO REGULATE
             CRYPTOCURRENCY EXCHANGES

                      Michael J. O'Connor*

                           ABSTRACT

  Both the SEC and private cryptocurrency attorneys assume that if
a crypto token-for example, a bitcoin-is a security when issued,
then it is a security when traded on exchanges like Coinbase, Gemini,
and Circle. Based on that assumption, the SEC regularly threatens
exchanges with enforcement for unlicensed trading. While the liter-
ature increasingly examines cryptocurrency's appropriate regulatory
treatment, this baseline assumption has gone unquestioned. This
Article suggests that assumption is incorrect. A fundamental differ-
ence separates a token when issued by a developer from a token when
traded on an exchange: an issuer promises further development and
price appreciation, while the exchange promises neither. Unlike stocks
and bonds, crypto tokens fall under a different category in the securi-
ties laws, regulating investment contracts. To be an investment
contract, a commodity like a crypto token must be accompanied by
this extra promise for further development or price appreciation. For
that reason, when traded on exchanges, tokens are no longer securities.
  This conclusion-that exchanges are not subject to the securities
laws-has profound practical implications. The crypto market is
worth hundreds of billions of dollars. To avoid SEC jurisdiction,
exchanges like Coinbase, Gemini, and Circle have significantly limited
the tokens they will trade. If exchanges are not subject to SEC jurisdic-
tion, then the business conducted by these exchanges could increase
substantially and immediately.


* Visiting Assistant Professor of Law, Penn State Law School; J.D., University of Pennsylvania
Law School; B.S. (Computer Science), Penn State University. This draft has benefited from
comments by Sam Bray, Andrew Hinkes, Ben Johnson, and others. All errors are mine alone.

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