Someone recently asked me why the unchecked growth and lack of responsible regulation in the digital asset space bothered me. It was a fair question from someone I respect in the space, so I wanted to take the time to address it. By way of background, I am an asset management attorney. I represent financial institutions—namely investment advisers—complying with federal securities laws. I represent several registrants who tailor their services to Bitcoin and other digital assets. I have done considerable legal and regulatory due diligence on digital asset managers and platforms for clients.
I. Investor Protection
Investors, especially retail investors, deserve investment advice that is in their best interest. They deserve to have complete information about the investments that are being hawked to them. They deserve to interact with counterparties that are not gouging, defrauding, or deceiving them. They deserve to be able to believe that markets aren’t being manipulated. Some even believe that investors deserve more paternalistic protection from harming themselves.
State and federal securities laws have developed over the years to provide these protections. On the whole, I believe that federal securities laws have served us well and have ultimately done more good than harm. They have protected investors, promoted fair and efficient markets, and have adequately assisted with capital formation for companies across the country. They are arguably responsible for the status of the United States as a global leader—at least in part.
As it relates to digital assets, they resemble securities (even if some might not technically be in a legal sense). People are investing in them, recommending them, managing them, trading them on exchanges, placing them in pooled funds, buying them on margin, lending them, securitizing them, all with the expectation of making a profit.
Why shouldn’t the same regulatory system that has served us well over the years apply to digital assets, their markets, and their market participants? I believe that doing so provides ample investor protections without necessarily stifling innovation.
II. Unfair Advantage – Regulatory Arbitrage
Investments are always competing for money. Whether it be real estate, art, securities, franchises, or digital assets. Everyone is competing for the next investable dollar. Given the similarity between securities and digital assets, I suspect that any regulatory arbitrage between the two encourages capital to flow to the underregulated asset—in this case—digital assets.
Take for example Tom Brady’s recent tweet and video promoting FTX. If FTX were a securities broker-dealer, this advertisement would have been less likely to have been aired. It showed people quitting their jobs to invest in digital assets. Without substantiation, it claims to be the “most trusted way to buy & sell crypto”. With this type of advertisement, FTX is able to promote itself in ways that Robinhood (or perhaps Fidelity is a better example) wouldn’t. In the competition of investable assets between securities and digital assets, this regulatory arbitrage would seem to help more dollars flow to digital assets.
From a policy perspective, we ought to be asking, “Do we want this regulatory arbitrage to exist? Do we want assets to flow from securities markets to digital asset markets? What externalities is this regulatory arbitrage creating?” I personally don’t want this regulatory arbitrage to exist. I don’t want digital asset markets taking opportunities from securities markets solely because of this arbitrage. I want to see a fair fight.
Full disclosure. I represent registrants in the financial services industry complying with its various laws, regulations, and guidance. If there are more rules or an extension of current rules to digital assets and their marketplaces, I could stand to benefit. I could have more clients, more regulatory issues to advise on, and more examinations and enforcement actions to defend.
III. The Hysteria
The recent tulip-like hysteria of investors seeking to invest in digital assets makes me uneasy. There, I said it. Young and old alike are watching their favorite professional athletes promote Bitcoin and digital asset exchanges—almost always without disclosure about their net worth, the percentage of their portfolio they are investing, and their compensation for making favorable statements. While professional athletes are extremely influential because of their fame and place in our society, they aren’t necessarily the best barometers of investing success. Professional athletes have historically been amongst some of the most likely investors to be defrauded or preyed upon financially.
There seems to be substantially more people promoting Bitcoin and other digital assets than there are tempering expectations about these assets, the risks of investing in Bitcoin and other digital assets, or how to do it responsibly. For example, those electing to receive their entire paychecks in Bitcoin might not be prepared to lose forty percent of their income or savings in a few days, but this could have happened to someone implementing this strategy in May of 2021.
Another facet of the hysteria that worries me is many who are aggressively investing in and recommending digital assets are subject to confirmation bias and are currently trapped in an echo chamber. Bitcoin and other digital assets have performed extremely well in the last few years. Anyone who has been invested in digital assets early enough has experienced investment returns like we have never witnessed in a short period. I continue to hear anecdotes of those investing a few thousand dollars in a relatively new digital asset and now have millions of dollars in gains just a couple of years later. These are the stories that become legend, but not everyone will obtain these results. This is where you can call me a boomer or remind me to “have fun staying poor”. For every early Ethereum millionaire, there will be XYZ token losers. For every early investor in Amazon, there were as many in Webvan and Pets.com. It is impossible to predict whether Bitcoin or any other digital asset will be worth as much as it is today in the future.
Social media algorithms also cause us to see commentary that intrigues other internet users and ourselves. It then keeps that information fresh in our minds and constantly on our screens. On Twitter, an army of mostly anonymous Bitcoin and digital asset fans exist that challenge and attack others if they remotely question the utility or merit of these assets. This leads many to remain quiet about expressing their reservations or hesitancy on digital assets. All of this is to say that there is a vacuum for pro-digital asset views, their markets, and their market participants.
These factors make me pause in considering the future of this young industry and make me favor regulation to promote fair and honest markets and discourse about these assets.
IV. Personal Hesitancy
Generally, I am a big proponent of saving and responsible investing. My father passed down his philosophy of investing (and life) and it has served both of us well. I won’t gamble more than $100 in Atlantic City. I don’t bet more than $200 a year on sporting events or fantasy sports. I max out my IRA, save as much as I can, and invest in well-known stocks, ETFs and index funds. I avoid complex and alternative investments. I admit that I am a boring investor and I am never going to hit a grand slam. I am alright with this strategy, because I’m also not willing to take risks with mine or my family’s future. I have moments where I want to commit a substantial amount of money to Bitcoin, Ethereum, and Solana, but then I remind myself to stay my own course.
The only risk I see of staying the course as an investor is if (i) Bitcoin or another digital asset replaces or diminishes the standing of the US Dollar, or (ii) the digital asset ecosystem somehow replaces the current financial system, in either case rendering my income and my assets worthless or worth less. I view each of these two possibilities as incredibly more remote than the risk created by investing in Bitcoin or in the new digital asset ecosystem. For that reason, I won’t personally invest any more of my assets in Bitcoin or any other digital asset and will continue to reassess these factors on a periodic basis.
As someone in this industry, I see incredible value in blockchain technology. I see benefits in digital assets eliminating the concept of the unbanked. I can see tokens replacing certain asset classes—such as gold. But, at the end of the day, I don’t believe the risk-to-reward ratio of having meaningful exposure to this asset class is prudent for myself, my family, or large swaths of retail investors currently.
V. Not All Players are Doing it Wrong
I think there are some players in this space that are doing a fantastic job in telling a fair and balanced story about digital assets and keeping the exuberance rational. Just to name a couple. Onramp is educating advisors on digital assets first and foremost, but also helping advisors plan and manage held away digital assets. Similarly, Interaxis is leading with education for the financial advisor community. Neither Onramp nor Interaxis is a client of mine currently, but Tyrone Ross of Onramp has been gracious about inviting me to share my legal knowledge about digital assets as it relates to regulatory issues.
I’m just one federal securities lawyer-investor providing his thoughts about the federal regulatory regime surrounding digital assets and the risk involved with them. I’d encourage you to do your own homework and make your own choices.
 This is mostly beyond the scope of this article. I used to be a free market believer. Over the years, I have seen too much self-induced harm involving retail investors and my view on paternalism is evolving.
 I have made a few very small investments in Bitcoin and Polygon.