This week, in a Washington Post op-ed, Robinhood CEO Vlad Tenev called for a new approach to capital markets in the United States. He suggested a number of policies – modernizing accredited investor standards is an old favorite among finance wonks – but one stood out. “[T]here needs to exist a security token registration regime, allowing companies to create token offerings that are open to U.S. investors.” Here, Tenev seizes upon the skeleton key to unlock cryptocurrency’s full potential.
Here’s how securities markets work in the United States. By default, companies aren’t really allowed to sell equity at all. The Securities Act of 1933 defines securities and prescribes conditions – and penalties – for selling them. If a company wants to raise money, it hires a lawyer like me and either registers or finds an exemption like Regulation D (Reg D).
Most choose an exemption and go private. And as Tenev points out, many of those choose to stay that way – OpenAI, SpaceX or Stripe. But exempt securities do not trade easily. They’re generally encumbered by contractual and regulatory restrictions that make them illiquid. For the richest few companies, this might be fine – or even the point. But not for most. Without liquid secondary markets, investors can only realize profit through dividends. And where investors cannot realize gains, primary markets run correspondingly dry.
Registered securities, on the other hand, are highly liquid on the secondary market. This means that investors typically jump to participate in an initial public offering. But this process is also restricted to the richest companies by its massive price tag. PwC estimates that even relatively small initial public offerings cost millions of dollars, along with millions more in annual legal fees and compliance. This is still before considering the onerous transparency and forfeiture of control that come with registration. For these reasons now even top firms “avoid going public,” Tenev says.
It’s no secret this is a problem. Washington D.C. recently tried to address it by creating Regulation Crowdfunding (Reg CF) in the 2012 JOBS Act. The idea was to make exempt securities more accessible to small and medium businesses (SMBs), but they just couldn’t help themselves. Familiar restrictions on secondary liquidity hamstring the program. Combined with still-significant compliance costs, the result will never be a meaningful segment of U.S. capital markets.
Instead, the solution came from outside. Ethereum developers introduced the ERC-20 standard in 2015, allowing anyone to create an arbitrary number of tokens and sell them into instant liquidity. Project founders could restrict resale as they chose. But, in practice, the best projects developed deep, efficient markets quickly. These fungible tokens took various names and functions, but practically, for a time, they were the internet’s capital market.
On top of secure, trustless blockchain technology, the crucial breakthrough was just letting people buy and sell tokens freely. It turns out this is a product people really want, and initial coin offerings grew 100X between Q1 and Q4 of 2017.
This halcyon moment couldn’t last – wholly unregulated markets were a sink for scams, and the subsequent SEC campaign to end cryptocurrency fundraising is well documented. These days, it is extremely difficult to make a legal primary token sale in the U.S. Projects are left to give tokens away for free. Even then, a single successful Hyperliquid airdrop created more value in a day than all Reg CF offerings from 2021 to 2023 combined.
Rather than gesture to the past, though, Tenev emphasizes the future:
“Tokenizing private-company stock would enable retail investors to invest in leading companies early in their life cycles…enabling them to draw additional capital by tapping into a global crypto retail market… [It] would [ ] provide an alternative path to the traditional IPO[.]”
He calls this “tokenized real-world assets.” I call it a regulatory third way. Sitting between exempt securities and public offerings, the SEC should promulgate rules that allow projects to sell securities in the form of cryptocurrency tokens with limited compliance and disclosures – combining the relative simplicity of a private placement with the secondary liquidity of a public offering.
We already know the first-order effects of such a system. In 2017 and 2018 more than 2,000 projects sold tokens to raise over $13 billion. As Tenev points out, “the risks are highest where the opportunity for upside is greatest” and many of those early crypto companies failed. Many survived, though, and are still building today. Early investors grew rich, and their leaders remain faces of the industry.
The second-order effects are where the real value accrues. Compared to any traditional securities offering, cryptocurrency token launches are trivially cheap. By some estimates, there is as much as a trillion dollars of potential SMB capital demand in the United States. This suggests vast potential for on-chain fundraising. Nobody knows what access to this capital would mean – some would no-doubt be vaporized – but there is real potential that underserved markets experience asymmetric growth.
Of course, there are risks beyond lost investments, too. A liberalized cryptocurrency regime might displace some or all of the current public securities regime. This would, in effect, radically decrease the compliance and disclosure requirements for public companies, possibly undermining market efficiency and increasing deceit.
But why anchor to the status quo? A third-way regime can require disclosures without being as onerous as public registration. Consumer protection need not arise from laws that were written before running water was ubiquitous – much less cryptographically secure blockchain networks.
It’s not obvious that public securities would vanish anyway. The relative cost of compliance diminishes at scale. For mature companies, investors will probably demand traditional disclosures and be willing to pay a corresponding premium in exchange. If they don’t, maybe these laws’ time has come.
It’s hard to imagine anyone arriving at the contemporary regime from first principles. The president can launch a memecoin, but tokens tethered to business fundamentals are prima facie illegal. So, here I second what Tenev says, “It’s time to update our conversation about crypto from bitcoin and memecoins to what blockchain is really making possible.” Let’s put securities on-chain.
