Volume 20
Volume 20.1
Price Fixing: Regulating the Face Value Effect in Cryptocurrency
Edward Lee & Andrew Moshirnia
This Essay is the first in legal scholarship to identify the face value effect in cryptocurrency, a cognitive bias that affects people’s ability to understand how much they are really spending when using cryptocurrency. We call this bias the cryptocurrency illusion: people think they are spending less when the cryptocurrency is worth more than a U.S. dollar and, conversely, think they are spending more when the cryptocurrency is worth less a U.S. dollar. The former scenario — which can result in overspending with cryptocurrency — presents an issue of greater concern for policymakers. Using an experiment modeled on the past behavioral economics research of foreign currencies, our study found that people overspend when using a cryptocurrency that is stronger than a U.S. dollar, meaning that one dollar can buy only a fraction of the cryptocurrency, as is the case with Bitcoin, Ether, and XRP, the three most successful cryptocurrencies based on market cap. The ramifications of our study are profound. Although Congress has considered numerous bills to regulate cryptocurrencies and President Trump’s National Economic Council Working Group on Digital Asset Markets issued a 160-page report outlining a comprehensive regulatory framework for cryptocurrency and digital assets, none addresses the cryptocurrency illusion. Put simply, due to the face value effect that afflicts people’s spending in currency other than their home currency, people may engage in massive overspending in and with cryptocurrencies valued greater than a dollar. Because cryptocurrency is already being used in the markets for NFTs, loot boxes, and virtual items in popular video games, and is now being integrated into payment systems like PayPal and used in some real estate and retail transactions, the problem we identify is real, not hypothetical. And President Trump’s agenda of making the United States the “crypto capital of the world” portends greater adoption of cryptocurrency. To address this problem, we propose that Congress enact a simple requirement of domestic currency pricing (DCP) for any cryptocurrency price used in commercial and financial transactions: whenever such transactions are denominated in cryptocurrency prices, they must also include, with greater prominence, the equivalent price in the domestic currency.
Recalibrating Reg D and the Accredited Investor Definition
Ben Rosenblum
Regulation D offerings are the most common way for private companies to sell securities in the United States. Natural persons other than “accredited investors” are generally excluded from investing in Regulation D offerings, and the financial thresholds for persons who qualify as “accredited investors” have not been adjusted in more than forty years. Commentary on the financial thresholds in the accredited investor definition generally falls into one of three camps: (i) abandon the financial thresholds in favor of general “sophistication” concepts, (ii) keep the thresholds where they are, or (iii) update the thresholds for inflation that has occurred since the thresholds were originally set.
This article suggests that none of these options consider the information that can be learned from forty years of Regulation D offerings, and that rather than picking either of these arbitrary numbers, the SEC should use the data from the last forty years to find the financial thresholds that best accomplish the goals of Regulation D. In addition, this article also suggests modest reforms to Regulation D to allow non-accredited investors to invest a limited amount of money in Regulation D offerings, in order to ensure that investors are not being unfairly barred from participation in potentially lucrative securities offerings on the basis of a lack of wealth.
FINRA and the Public/Private Divide: When Article II Constrains Industry Self-Regulation
Qiuyang (Marx) Wang
Recent challenges to the constitutionality of the Financial Industry Regulatory Authority (FINRA)—a nominally private organization operating in a self-regulated industry—have brought the private nondelegation doctrine back into the spotlight. Applying that doctrine presupposes that the entity in question is not part of the government for constitutional purposes, thereby skipping the threshold question of where to situate it along the public/private divide. Avoiding that inquiry, however, risks acquiescing in the evasion of Article II’s requirements on the proper appointment of officers, which apply only when entities are deemed public. Tracing the history and development of FINRA in the securities industry, this Note argues that the promotion of governmental objectives under sufficient government control is essential for an entity to be subject to the Appointments Clause. It advances this claim by revisiting Lebron v. National Railroad Passenger Corp., a foundational Supreme Court decision that provides a test for this determination, but one that has generated a split among the federal courts of appeals in its interpretation. After undertaking a close reading of the Lebron opinion and a comprehensive review of how every circuit has applied it, this Note contends that most courts have erred by treating a set of collectively sufficient conditions in that case as individually necessary.
This Note thus advocates for a flexible reading of Lebron, one that permits the consideration of previously overlooked functional and structural factors, without undermining its status as the controlling precedent. By placing FINRA in the broader context of self-regulatory organizations, this Note further identifies profit motive and institutional evolution as important circumstantial evidence in the public/private inquiry.
Volume 20.2
AI Tokens: A New Challenge for Fintech Law
Farshad Ghodoosi
Financial technology (fintech) is posing new complexities for the regulators. In this paper, I introduce "AI Tokens," a novel class of AI-driven, blockchain-based investment tokens that signal a transformative shift in investment strategies with the possibility of complementing or replacing exchange-traded funds (ETFs) and index funds. AI Tokens are self-managed investment schemes, with decision-making capabilities that function on a decentralized network. Intriguingly, AI Tokens can evolve through reinforced learning and human feedback loops. Their transactions, secured by blockchain technology's immutability, provide unmatched investment process transparency. A crucial question arises: Can the existing securities law, framed around an "investment contract," regulate the AI Tokens? The introduction of AI Tokens, where there is no "other," calls for a fundamental reassessment of securities law and challenges our traditional understanding of what constitutes an investment. This paper makes the following contributions. It is the first to introduce the concept of AI Tokens, raising interesting issues for academics and entrepreneurs alike. It then analyzes AI Tokens using recent court decisions involving Ripple, Terraform, Coinbase, and Binance. In doing so, it offers cutting-edge insight into the status of AI Tokens under the existing securities law framework of investment contracts, swaps (derivatives), and funds. The paper demonstrates that the integration of AI and blockchain can generate a new wave of investment vehicles, with AI Tokens as a prime example, thereby expanding the traditional concept of investment. Regulators and legislators should carefully consider this potentially novel development in their ongoing law-making efforts in the crypto space.
Reverse Engineering Smart Contracts
Eliza Mik
Smart contracts are computer programs. Somewhat inexplicably, they are also contracts. Can computer programs be contracts? Can code be enforceable? Can contracts self-enforce or self-execute? Can programs execute contracts or automate the performance of contractual obligations? What exactly are smart contracts? What is the benefit of smart contracts being contracts in the legal sense? For something that is supposed to be a building block of the new crypto economy, there is surprisingly little consensus as to the meaning of the term. Popular narratives promise a decentralized future, where empowered individuals remain in control of their destiny and no longer require overpriced lawyers, evil bankers, and corrupt judges. The theories surrounding smart contracts are captivating, indeed. The accompanying legal analyses, however, are somewhat shallow. Glossing over inconsistent definitions and conveniently bypassing fundamental questions, legal scholars often seek refuge in tweet-sized one-liners. The new era of crypto-economy starts with a large doctrinal debt concerning the very nature of smart contracts and their role in contract law, if any. The problem is not purely academic in nature. The spate of recent regulations, enforcement actions, and court orders reveal a deep-seated conceptual confusion surrounding both the technology and some fundamental legal concepts.
The Wild West of Finance: Exposing Securities Law’s Inadequacy in Addressing Cryptocurrency-Based Fraud
Christopher Jernigan
Cryptocurrencies, beyond serving as popular investment vehicles in recent years, have become an alternative capital-raising method to traditional securities. However, they have also become an increasingly popular vehicle for fraud. This paper explores the legal ambiguities of cryptocurrency offerings under securities law which may have allowed for this hotbed of fraud to fester. It then argues that clarifying these ambiguities surrounding the classification of cryptocurrencies under securities law ironically accomplishes little. Legal workarounds to the compliance costs and liability risks associated with registration under the Securities Act and shortcomings within securities law's antifraud provisions render the current law deficient in preventing fraud. Moreover, signs from the current Trump administration have indicated that the government will oversee crypto with a light touch, losing whatever concededly inadequate protection current securities law can provide. The paper then concludes that addressing the growing problem of cryptocurrency-based fraud consequently requires a substantive augmentation in federal law beyond merely classifying cryptocurrency offerings as securities sales or more stringently enforcing existing law. This paper is topical because cryptocurrencies are arguably the most salient issue in securities law right now. Moreover, as the paper discusses, growing instances of fraud have occurred using cryptocurrencies as their vehicle, and current trends do not indicate that the problem will abate any time soon. Both the salience and the worsening nature of the problem of fraudulent cryptocurrency offerings call for a deeper discussion of the issue and its nuances.
Volume 20.3
Oversizing Caremark: An Empirical Analysis
Yehonatan Shiman
This Article argues, through the first empirical research on the taxonomy of oversight litigation, that the celebrated Caremark revolution requiring directors to adopt information and monitoring systems is more rhetoric than reality. While a seemingly heightened compliance requirement has reshaped boardroom practices, Delaware courts rarely convert this perception into liability. What emerges is a disconnect between Caremark's symbolic prominence and its doctrinal modesty, a phenomenon this Article refers to as the oversizing of Caremark.
This Article seeks to correct the prevailing assumptions regarding the gravitas of Caremark and explain how a compliance narrative developed beyond the bounds of judicial reality. It addresses this disjunction through an empirical analysis of all Delaware Caremark cases decided since the doctrine's inception to provide instructive insights into the nature of successful oversight claims and thus the parameters of directors' oversight duties.
To achieve this aim, this Article employs a hand-collected dataset of Delaware oversight decisions, drawing from judicial opinions, and when available, underlying pleadings and hearing transcripts. The dataset captures key elements such as claim type, litigation triggering events, case outcomes, and judicial rhetoric. By examining the interplay between these components, this Article uncovers patterns that offer a more accurate picture of how Caremark jurisprudence operates in practice.
The result of this Article's empirical findings is that the dominant narrative around Caremark is false. While Information Systems claims are celebrated as Caremark's most important contribution, they are pled in fewer than half of cases and rarely succeed on their own. These claims, which arise when directors utterly fail to establish proper reporting systems and compliance mechanisms, appear to have limited prominence and success thereby undermining the notion that Caremark chiefly polices ex-ante compliance architecture. Instead, the data reveals that Delaware courts are concerned with scrutinizing bad actors, not bad systems. This becomes evident in the fact that Red Flags claims overwhelmingly dominate the litigation profile appearing in 89% of cases. These claims, which pre-date Caremark, target directors who ignored clear signs of wrongdoing that should have triggered intervention. Similarly, claims that the board adopted an illegal business strategy had the highest success rate, making them the most effective oversight pathway.
By examining successful Caremark claims over the course of the doctrine's history, the data reveals that liability is largely limited to three scenarios. This Article identifies those as (1) cases when directors implement sham monitoring systems; (2) failures by directors to oversee misconduct by their own fiduciaries; and (3) the adoption of illegal business practices as a matter of corporate strategy. The rarity and specificity of these scenarios reaffirm that Caremark remains a limited and exceptional doctrine.
Tracing the courts' application of Caremark reveals that its true influence lies in its power of norm creation. Delaware courts maintain exacting thresholds for oversight liability but nonetheless offer substantial judicial commentary on the subject which, along with market responses, drives corporate governance behavior in the boardroom. By reframing the Caremark discussion, this Article lays the groundwork for a more realistic understanding of the doctrine's influence.
Insider Trading in the Era of Prediction Markets
Raj Ashar
The era of prediction markets is upon us. On these platforms, users wager on sports, the ratings of movies, words used in speeches, and even the weather. While faced with some early legal challenges, prediction markets now appear to have the blessing of the Commodity Futures Trading Commission (CFTC). But as these markets grow, so do the risks of insider trading. Due to the breadth of contracts offered, these platforms effectively democratize insider trading. Even in their early months, there have been suspected cases of insider trading in markets involving Taylor Swift's engagement and the winner of the Nobel Peace Prize.
This Article provides a comparison of insider trading regulation across securities, commodities, and gambling regimes to demonstrate where prediction markets fall short. It shows that the current enforcement and monitoring regime is limited in scope and resources, leaving prediction markets vulnerable to insider activity. Drawing in part on the measures used in similar markets, the Article offers a few possible solutions: establishing lower position or accountability limits for select markets, creating a self-regulatory organization (SRO) for prediction markets, and instituting employer-based trading policies. These reforms balance the interest in the information generated by the markets with their institutional risks and need for trader protection.
Cross-Selling Governance
Omari Scott Simmons
Corporate governance faces threats from all sides—not just the familiar narratives of CEO malfeasance and inattentive directors, but lawyers, bankers, accountants, management consultants, and other professional service providers (PSPs) who engage in cross-selling. Cross-selling, or leveraging an existing client relationship to sell additional services, is a ubiquitous business strategy. While it may create opportunities for corporate clients, it can also lead to abuses. The quality of PSP advice, upon which company directors and officers often rely to fulfill their fiduciary duties and responsibilities, can be undermined. Existing regulation of PSP cross-selling does not adequately address corporate governance risks. Their elimination will require a synthesis of both regulatory and private ordering approaches.