Abstract
Cryptocurrency enthusiasts rejoiced last year when the Securities and Exchange Commission (SEC) approved the listing of bitcoin-based and ether-based exchange-traded products (ETPs). For over a decade, cryptocurrency entrepreneurs have sought to trade cryptocurrency products on traditional securities exchanges. Listing bitcoin and ether ETPs gave retail investors an easily accessible, transparent, and perhaps, more cost-efficient means of investing in cryptocurrencies while reducing the credit and custodial risks of dealing with unregistered digital asset exchanges or digital asset intermediaries. The listing of cryptocurrency ETPs may also represent a substantial step toward completing the marketplace for financial transactions in bitcoin and ether.
There is a certain irony in this result, however: Why did the digital asset community actively advocate for the regulation of cryptocurrency funds and products as a security when it has resisted regulation of cryptocurrencies themselves (and by extension, other digital assets) as a security? The Digital Asset Market Clarity Act of 2025 (the “CLARITY Act”), among other legislative proposals, would strip the SEC of its jurisdiction over certain digital commodities “intrinsically linked” to a “mature blockchain system.” And yet, sponsors of cryptocurrency-based trusts have argued for the listing of such instruments on U.S. stock exchanges precisely on the grounds that, once decentralized, digital assets are not readily susceptible to manipulation or fraud—and derivatives on such assets are therefore suitable for trading on public securities markets.
This apparent paradox, in part, reflects the complementary roles of regulatory agencies and self-regulatory bodies. For example, the SEC’s general approach toward digital asset regulation under the former Chairman Gary Gensler was frequently decried as “regulation by enforcement,” insofar as the SEC used civil enforcement actions to stake the outer limits of its statutory authority while calibrating the exercise of its cumbersome exemptive and rulemaking authority. By contrast, exchanges and other self-regulatory organizations (SROs) have more flexibility to shape their rules and infrastructure to accommodate new products, transactions, and market conditions. Indeed, I argue that self-regulation as a process can serendipitously reveal new strategies for innovation, competition, and investor protection.
In this Article, I use the evolution of cryptocurrency ETPs to illustrate not only the coordinating role that SROs play in the regulation of securities and derivatives markets, but also how they may craft nuanced compromises to manage challenging legislative and regulatory choices. I make two distinct contributions: First, I trace the historical evolution of bitcoin-based ETPs to highlight the role of informational and surveillance structures maintained by SROs in bringing these products to market. I then explore the normative question, whether the ETP structure—as tailored to cryptocurrencies or other digital assets—may complement or enhance legislative efforts to provide legal certainty in digital asset markets without compromising customer safeguards.
For example, in the wake of the 2024 elections, the SEC has dramatically reconsidered its regulatory posture with respect to digital assets and has already taken significant steps to liberalize the application of federal securities laws to digital assets and associated products. At the same time, Congress has yet to enact legislation clarifying how digital assets will be classified and how digital asset issuers and intermediaries will be regulated. I argue that digital asset ETPs not only serve as a useful placeholder that helps regulators manage a transition to a new regulatory paradigm, but may also serve as a critical component of that new paradigm. More generally, I contend that the facilitative role played by SRO rules, processes, and infrastructure in fostering financial innovation should temper judicial skepticism toward SROs, even as federal courts interrogate the constitutionality of their rulemaking and disciplinary authority.
This Article proceeds as follows: Part I briefly describes the relevant securities law framework for analyzing the role of SROs in financial innovation. Part II discusses how securities exchanges persuaded the SEC to approve listing standards for non-traditional exchange-traded products, while Part III explores how bitcoin advocates used the mechanisms of self regulation under federal securities law and the Commodity Exchange Act (CEA) to access regulated markets. In Part IV, I explore whether the regime created by the convergence of these processes may serendipitously facilitate the evolution of digital asset regulation. I conclude with some thoughts on the implications of these developments for congressional action, SEC enforcement, and ultimately, self-regulation.
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