The Skeleton Key to Unlock Cryptocurrency's Full Potential

This week, in a Washington Post op-ed, Robinhood CEO Vlad Tenev called for a new approach to capital markets in the United States.

Robinhood CEO Vlad Tenev recently called for a new approach to capital markets in the United States in a Washington Post op-ed. He proposed a number of policies, including modernizing accredited investor standards, a long-standing favorite among finance enthusiasts, 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 identifies the skeleton key to unlocking cryptocurrency’s full potential.

Here's a breakdown of how securities markets operate in the United States. By default, companies are largely prohibited from selling equity at all. The Securities Act of 1933 defines securities and outlines the 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 a secondary market, 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 typically ensures that investors will jump to participate in an initial public offering. But this process is also restricted to the richest companies by its massive price tag. According to PwC, even relatively small initial public offerings cost millions of dollars, with millions more in annual legal fees and compliance. This is before considering the onerous transparency and forfeiture of control that come with registration. For these reasons now even top firms “avoid going public,” says Tenev.

It’s no secret that this is a problem. Recently, Washington D.C. 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. The program is hamstrung by the familiar restrictions on secondary liquidity. 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. In 2015, Ethereum developers introduced the ERC-20 standard, 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 quickly developed deep, efficient markets. 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 なんですが 2021 to 2023 combined.

But rather than gesture to the past, 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