American Business Law Journal
Volume 58, Issue 3, 643–705, Fall 2021
Regulation of Crypto: Who Is the Securities
and Exchange Commission Protecting?
Carol R. Goforth*
SEC v. Telegram and SEC v. Kik, both decided in 2020, establish some ground-breaking
rules about how the federal securities laws apply to cryptotransactions. In both cases, the
court concluded that a large, reputable social media company had conducted a crypto offer-
ing in violation of federal law. In neither case was fraud or other criminal conduct an
issue; the sole problem was failure to register the sales or comply with an exemption from
registration. To find a violation, both opinions collapsed a two-phase offering into a single,
integrated scheme. This approach appears to be an unnecessarily overbroad application of
the law, protecting neither investors nor capital markets. A cost of this approach is that
crypto entrepreneurs are being forced away from the United States, and American inves-
tors are denied opportunities to participate in a potentially desirable technological revolu-
tion. This article examines the rationale employed in these two decisions in light of the
existing statutory and regulatory framework. It also considers recent amendments to fed-
eral rules defining the “integration doctrine,”which was relied on explicitly in the Kik
decision. This article suggests how future crypto offerings might be structured to avoid the
pitfalls created by the Kik and Telegram opinions. It advocates a more limited approach
than the one urged by regulators. Its suggestions depend not on a change in law but only a
change in understanding what is required in order to conduct a compliant crypto offering.
INTRODUCTION
We are in the midst of a rapidly developing technological revolution that
some have called the Blockchain era
1
and others have compared to the
*Carol R. Goforth is a University Professor and the Clayton N. Little Professor of Law at
the University of Arkansas, in Fayetteville. She has decades of experience with corporate,
securities, and business law issues in the United States and has recently published a number
of articles and blog posts dealing with the regulation of cryptotransactions. She is also the
author of REGULATION OF CRYPTOTRANSACTIONS (West Academic, 2020).
1
See, e.g., Yoav Vilner, The Basics of Security Needs in the Blockchain Era,FORBES (June
22, 2018, 02:13 AM EDT), https://www.forbes.com/sites/yoavvilner/2018/06/22/the-basics-of-
security-needs-in-the-blockchain-era/?sh=32a8b3704ac2 [https://perma.cc/BCT7-MHY3].
©2021 The Authors
American Business Law Journal ©2021 Academy of Legal Studies in Business
643
profound changes ushered in with the Internet.
2
We have moved from a
theoretical idea in a pseudonymously posted white paper
3
to a genesis
transaction involving Bitcoin, the first blockchain-hosted cryptoasset,
4
to
having more than 5100 privately issued cryptoassets.
5
Even more
recently we have begun contemplating global stablecoins, such as
Facebook’s proposed Libra tokens (as originally contemplated),
6
and a
multitude of potential central bank digital currencies.
7
2
Daniel Lanyon, Blockchain Will Be “as Transformativeas the Internet,”ALTFI (Apr.23, 2018), https://www.
altfi.com/article/4334_blockchain-will-be-as-transformative-as-the-internet [https://perma.cc/8ZW4-
CWRR] (reporting that “[a]lmost 9 in 10 technology professionals believe blockchain technology will
beas transformative for businessas t he internet has been for business over the past few decades”).
3
The person or persons who used the pseudonym “Satoshi Nakamoto”wrote about the potential
to create blockchains for digital assets using new consensus protocols in late 2008. SATOS HI
NAKAMOTO,BITCOIN:APEER-TO-PEER ELECTRONIC CASH SYSTEM (2008) (Aug. 5, 2021), https://
bitcoin.org/en/bitcoin-paper. This “white paper”originally appeared in an online discussion of
cryptography.
4
The Bitcoin genesis block (the initial mining transactions in which the first Bitcoins were
issued) was validated in early 2009. See A Brief History on Bitcoin & Cryptocurrencies,L
EDGER
(Oct. 23, 2019), https://perma.cc/NCF4-UNZB.
5
The rapid growth of crypto was a central thesis of a recent report on cryptoassets prepared
for the European Parliament. See ROBBY HOUBEN &ALEXANDER SNYERS,POLICY DEP’T FOR
ECON., SCI.AND QUALITY OF LIFE POLICIES,CRYPTO-ASSETS –KEY DEVELOPMENTS,REGULATORY
CONCERNS AND RESPONSES 25 (2020) (Aug. 5, 2021), https://www.europarl.europa.eu/
RegData/etudes/STUD/2020/648779/IPOL_STU(2020)648779_EN.pdf.
6
The Libra project was formally announced in June 2019. Rajarshi Mitra, What Is Facebook Libra
Cryptocurrency? [The Most Comprehensive Guide]- Part 1,B
LOCKGEEKS, https://blockgeeks.com/guides/
understanding-facebooks-cryptocurrency-libra/ [https://perma.cc/D4DR-CX9F] (last visited Aug.
5, 2021). The project’s white paper further describes the proposed Libra token. See LIBRA WHITE
PAPER V2.0 (2020), https://perma.cc/W8ZJ-Q2U8; see also Welcome to the Libra Project,LIBRA, https://
perma.cc/T7B4-4HEJ. The project had not launched as of the end of 2020, and sincethe time of
its original announcement, the Libra project has been substantially scaled back. See FacebookCrypto-
currency Libra to Launch as Early as January but Scaled Back: FT,R
EUTERS (Nov. 27, 2020, 2:10AM),
https://www.reuters.com/article/us-facebook-cryptocurrency/facebook-cryptocurrency-libra-to-
launch-as-early-as-january-but-scaled-back-ft-idUSKBN2870UY[https://perma.cc/F4MT-L5LH].
7
Research on central bank digital currencies, often abbreviated as CBDCs, began in 2017,
with initial reports appearing in 2018. See, e.g., BANK FOR INT’LSETTLEMENTS,CENTRAL BANK
DIGITAL CURRENCIES 34 (2018) (Aug. 5, 2021), https://www.bis.org/cpmi/publ/d174.pdf; see
also CHRISTIAN BARONTINI &HENRY HOLDEN,PROCEEDING WITH CAUTION—A SURVEY ON CEN-
TRAL BANK DIGITAL CURRENCY 1 (2019), https://www.bis.org/publ/bppdf/bispap101.pdf. The
E.U. has also actively been considering the potential role of CBDCs. HOUBEN &SNYERS,
supra note 5, § 3.2. China has actually initiated regional beta tests or trials of its CBDC. See
Patrick Thompson, China’s Latest CBDC Airdrop,C
OINGEEK (Feb. 4, 2021), https://coingeek.
com/chinas-latest-cbdc-airdrop/ [https://perma.cc/455C-N24T].
644 Vol. 58 / American Business Law Journal
To illustrate how far things have advanced, on May 22, 2010, it
required 10,000 Bitcoins to buy two pizzas.
8
Ten years later, on May
22, 2020, the market value of the Bitcoins paid for those two pizzas
would have exceeded $90 million.
9
Early on the first day of 2021, the
value of that number of Bitcoins would have exceeded an astronomical
$294.5 million, as the trading price of Bitcoin reached new heights, at
$29,450.23 per coin, and on February 17, 2021, it climbed over $50,000
for the first time.
10
As history demonstrates, where innovation outpaces regulatory
response and there is money to be made, fraudsters and scam artists step
in.
11
The crypto markets have proven to be no exception to this phe-
nomenon, unfortunately fostering the false narrative that crypto is for
8
This transaction reportedly occurred on May 22, 2010, when Laszlo Hanyecz agreed to
pay 10,000 Bitcoins for two delivered Papa John’s pizzas. See Aaron Hankin, Bitcoin Pizza
Day: Celebrating the $80 Million Pizza Order,I
NVESTOPEDIA (June 25, 2019), https://www.
investopedia.com/news/bitcoin-pizza-day-celebrating-20-million-pizza-order/ [https://perma.
cc/ZRH6-DMYT].
9
On May 22, 2020, the value of Bitcoin (traded under the symbol “BTC”) fluctuated
between $9008.64 and $9232.94. See Historical Data for Bitcoin,C
OINMARKETCAP, https://
coinmarketcap.com/currencies/bitcoin/historical-data/?start=20200521&end=20200529
[https://perma.cc/2TSM-RHR7] (last visited Oct. 17, 2020).
10
See Today’s Cryptocurrency Prices by Market Cap,COINMARKETCAP, https://coinmarketcap.com/
[https://perma.cc/7H4Y-UDLQ] (last visited Jan. 1, 2021). The February 17 high price can
be accessed by going to CoinMarketCap.com and checking on the historical data applicable
to Bitcoin.
11
For a consideration of “fraud and other dubious financial practices, their determinants
and their consequences,”see Hugo van Driel, Financial Fraud, Scandals, and Regulation: A
Conceptual Framework and Literature Review,61B
US.HIST. 1259, 1259, 1261 (2018), https://
www.tandfonline.com/doi/full/10.1080/00076791.2018.1519026 (citing evidence that “(clus-
tered) technological changes enlarge the opportunities for fraud by increasing uncertainty
and information asymmetry, with the asymmetry making it harder both for investors and
regulators to monitor fraud”). One particularly cogent criticism of the cycle of scandals and
regulation is that “the habitual knee-jerk responses to scandals, mainly originating from law
professors who lack business experience, have resulted in ‘a pile of regulations with little
rhyme and no reason.’” Id. at 1261 (quoting JERRY W. MARKHAM,AFINANCIAL HISTORY OF
MODERN U.S. CORPORATE SCANDALS:FROM ENRON TO REFORM 662 (M.E. Sharpe 2006)); cf.
Roberta Romano, The Sarbanes-Oxley Act and the Making of Quack Corporate Governance,
114 YALE L.J. 1521, 1524 (2005). One of the conclusions offered by van Driel was that the
era of tighter regulation from 1945 to 1980 “saw relatively few big and widely publicised
[sic] scandals,”while the deregulation dating from the late 1970s “is now seen by many as
responsible for the big scandals that surfaced in the following decades.”van Driel, supra,
at 1273.
2021 / Regulation of Crypto 645
