A Tokenized Future : Regulatory Lessons from Crowdfunding and Standard Form Contracts

This Article examines the rapidly-changing world of risk investing in the cryptoeconomy through initial coin offerings (ICOs) and secondary crypto trading. While the Securities and Exchange Commission (SEC) would like to regulate crypto offerings, many cryptos are not securities under the Howey test.For those cryptos that are not securities, this Article proposes a regulatory solution of a “warning box” disclosure that would need to be provided to crypto buyers. The warning box, initially proposed by Ian Ayres and Alan Schwartz for consumer standard form contracts, maps neatly onto ICOs by including prominent disclosures of terms that both would surprise and negatively impact crypto buyers. Coupled with the whitepapers already being provided by crypto developers, the warning box properly balances innovation and investor protection. Recognizing that many new crypto buyers will buy post-ICO, on a crypto exchange, the warning box has a dynamic aspect, keeping it current long after the ICO and during secondary trading.For well-known cryptos like Bitcoin, nothing would be required in the warning box. Risks from investing in BTC, from environmental impact to price volatility, are well-known. Tether developers, however, should have disclosed that its stablecoins were not fully backed by fiat currency reserves, and Ethereum developers should still be disclosing that gas fees can be much higher than normal transaction fees investors may be accustomed to. This Article’s approach to crypto regulation favors market mechanisms over SEC overreach in this emerging area