Cryptocurrency Regulation and an Economic Classification of Tokens

We discuss some of the core regulatory issues concerning crypto-tokens and digital currencies. While regulation can potentially address the needs of market participants and enhance market confidence, current approaches are either excessive or too light. As a start, we need to categorize different types of tokens, consider what protections are needed, and then model regulation around them. In particular, we highlight why token classification matters for regulation and present a classification framework based on the economic functions of tokens.

By Lin William Cong & Claire Wilson^[1]

I. INTRODUCTION

Cryptocurrencies compete with traditional fiat currencies, disrupt existing financial systems, and create challenges for regulatory agencies. With illegal activities, as well as pseudonymous networks (allowing for discrete, anonymous transactions), governments are wary of allowing wide adoption and usage. Careful and comprehensive regulations can address the needs of market participants and boost market confidence.

Excessive regulation may kill innovation. As crypto continues to grow in popularity internationally, strong regulation is becoming necessary. With China, India, and South Korea already severely limiting their countries’ interactions with private crypto, many fear this wave of crackdowns might spread to the rest of the world.^[2] Yet, the laissez-faire approaches in many countries may be too light.  As a starting point, we need to categorize differ