Investors don’t get their rights in a court of law

Crypto tokenholders, increasingly impatient with their meager returns, have lately been lobbying for the kind of rights that shareholders enjoy in the stock market, the idea being that stock-market-like legal protections will deliver stock-market-like returns.

But the surprising truth is that, for the most part, they already have them — not because tokenholders have more rights than they think, but because shareholders have fewer.

Tokenholders envy the treatment that shareholders get in the stock market, where they’re viewed as owners of the companies they invest in. 

But that’s not because the law requires it. 

Corporate law, Lynn Stout explains, grants shareholders ownership-like rights only in the extreme cases of bankruptcy and takeovers — giving them a claim on residual assets in bankruptcy and pro rata proceeds in an acquisition.

In all other cases, Stout says, "shareholders are entitled to receive nothing from the firm unless and until the directors decide they should receive something."

Hardly the position of an owner.

Daniel Greenwood takes this interpretation of corporate law even further, arguing that shareholders have "no special claim on a corporation’s economic returns" at all — not even in the case of bankruptcy or acquisition. 

"As a matter of law, neither property, contract nor agency entitle shareholders to [residual earnings]."

Instead, Greenwood says, investors receive their share of earnings "because directors and CEOs believe they are entitled to them."

In other words, shareholders’ rights are delivered by social consensus, not the law.

Shareholders naturally expect to benefit when the companies they invest in do well. But Stout says that, when they do, it’s only thanks to an "implicit contract" they have with management — there’s no law that says a company has to share its good fortune with its shareholders. 

Legally, she notes, shareholders are no more entitled to higher payouts when a company does well than employees are entitled to higher salaries. 

Greenwood concurs, adding that the relationship between a company’s earnings and a shareholder’s claim on them is "fundamentally non-contractual." 

Shareholder rights, he says, are based on "the power of words" and "the metaphors of ownership."

Stout thinks there’s no other way to do it, arguing that it’s "not realistic to make such expectations explicit."

So what does this mean for tokenholders who want to be treated as owners? 

Do they only need to use their words, then?

That might be their best option, if Stout is correct that it’s only bankruptcy and M&A laws that protect investors. 

Especially as neither provides much real security.

Bankruptcy law grants equity investors a claim on residual assets — but after creditors have been paid, that might protect them from losing 100% of their investments instead of, say, 98%.

(From repeated personal experience, I can assure you that a 98% loss feels exactly the same as a 100% one.)

And the rights of shareholders in the event of an acquisition can be nearly as tenuous.

Consider the recent "licensing deal" between Nvidia and Groq, which was effectively an acquisition in which Nvidia paid Groq investors (including employees) $20 billion — an astounding three times what the company had been valued at just three months earlier. 

But not because the law required it. Despite the fact that no equity changed hands, Nvidia cashed out Groq’s investors and employees as if it had to, simply because it was the right thing to do. 

They chose to honor the social contract that investors and employees should benefit when a successful company is acquired.

This is Greenwood’s insight in practice: Shareholder rights are predicated on ideology and expectations, not legal compulsion.

Even voting rights provide shareholders little protection. "Given widely dispersed share ownership," Stout notes, "shareholder influence on board is often so diluted as to be negligible."

What actually works for investors is voting with their feet.

When management disregards shareholders, investors sell, causing the company’s stock price to decline, which costs management their reputation, hinders them from raising capital, and threatens their jobs.

All that happens long before any lawsuit could be filed, let alone resolved.

The same market-based mechanism would work for crypto. There’s no reason tokenholders can’t secure the same social consensus similarly by voting with their wallets.

It would take time — possibly a long time. 

But consider what it would cost to shortcut the process by imposing legal rights of ownership on crypto tokens.

A lot of things would have to change. The anonymous whale who holds tokens purchased with ETH that was passed through a mixer can’t walk into court and claim their rights were violated. The first thing the court would ask is, "Who are you, and where did these tokens come from?" 

Legal rights require a legal identity. If you want a court to recognize you as a tokenholder with rights, you’ll need to prove who you are (KYC), prove you own the tokens (with regulated custody or an on-chain record tied to your identity), prove you acquired them legally (transaction reporting), and prove you’ve paid your taxes (which you probably haven’t). 

Answering those kinds of questions means sacrificing permissionlessness, because the infrastructure that enables enforcement also enables surveillance, control, censorship — everything that crypto was meant to undermine.

The choice is therefore a stark one: marginal improvements in legal protections versus crypto’s core values of permissionlessness, privacy and global accessibility.

That seems like an easy call to make, because tokenholders already have what shareholders ultimately rely on: the ability to build social consensus through market discipline. 

Trading crypto’s defining features for traditional legal rights would mean surrendering something valuable for something that barely matters.

— Byron Gilliam

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