SEC’s Crypto Conundrum: A Guide to Not Losing Your Mind

by

As the universe continues its relentless march towards technological enlightenment (or chaos, depending on your perspective), the U.S. Securities and Exchange Commission (SEC) finds itself in a bit of a pickle. You see, the crypto market has grown so large and sophisticated that the SEC’s current approach—akin to using a rubber band to hold together a spaceship—needs a serious upgrade. 🚀

While the long-term future of the crypto industry in the U.S. may require Congress to finally put down their coffee and sign a comprehensive regulatory framework into law, here are six steps the SEC could take immediately to create regulations that are “fit-for-purpose” without sacrificing innovation or the critical investor protections that everyone pretends to care about.

#1 Provide guidance on ‘airdrops’

The SEC should really consider providing some interpretive guidance on how blockchain projects can distribute those delightful incentive-based crypto rewards—known as “airdrops”—without accidentally labeling them as securities offerings. Because who doesn’t love a good airdrop? It’s like a surprise party, but with less cake and more digital currency.

These airdrops are crucial for blockchain projects to decentralize, which is a fancy way of saying they want to share the wealth with users instead of hoarding it like a dragon with a pile of gold. If the SEC were to provide guidance, it might just stop the trend of these rewards being issued only to non-U.S. persons, effectively offshoring ownership of U.S.-developed blockchain technologies. And we wouldn’t want that, would we? 😏

What to do:

  • Establish eligibility criteria for crypto assets that can be excluded from being treated as investment contracts under securities laws when distributed as airdrops or incentive-based rewards. (For example, crypto assets that are not otherwise securities and whose market value is, or is expected to be, substantially derived from the programmatic functioning of any distributed ledger or onchain executable software.)

#2 Modify crowdfunding rules

The SEC should take a long, hard look at its Regulation Crowdfunding rules and give them a good shake. Crypto startups often need a broader distribution of crypto assets to develop critical mass and network effects for their platforms, applications, or protocols. Think of it as throwing a digital party and hoping everyone shows up.

What to do:

  • Expand offering limits so the maximum amount that can be raised is on par with crypto ventures’ needs (e.g., up to $75 million or a percentage of the overall network, depending on the depth of disclosures).
  • Exempt crypto offerings in a manner similar to Regulation D, allowing access to crowdfunding platforms beyond accredited investors.
  • Protect investors through caps on the amounts any one individual may invest (as Reg A+ currently does); robust disclosure requirements that encompass the material information relevant to the crypto venture (e.g. relating to the underlying blockchain, its governance, and consensus mechanisms); and other safeguards.

These changes would empower early-stage crypto projects to access a wide pool of investors, democratizing access to opportunities while preserving transparency. Because who doesn’t love a little transparency in their financial dealings? 🙄

#3 Enable broker-dealers to operate in crypto

The current regulatory environment is about as welcoming to traditional broker-dealers as a cactus in a balloon factory. They’re restricted from engaging meaningfully in the crypto industry, primarily because they need separate approvals to transact in crypto assets. It’s like needing a special license to buy a sandwich—utterly ridiculous!

Removing these restrictions would enhance market functionality, investor access, and investor protection. It’s a win-win, unless you’re a fan of unnecessary barriers, in which case, why are you even reading this?

What to do:

  • Enable registration so broker-dealers can deal in – and custody – crypto assets, both securities and nonsecurities.
  • Establish oversight mechanisms to ensure compliance with anti-money laundering (AML) and know-your-customer (KYC) regulations.
  • Collabor

Read More

2025-01-23 21:47