As technology evolves, the U.S. Securities and Exchange Commission (SEC) must evolve with it. Nowhere is this truer than in crypto, and now: The market for crypto assets has grown in size and sophistication such that the SEC’s recent harmful approach of enforcement and abdication of regulation needs urgent updating.
While the long-term future of the crypto industry in the U.S. will likely require Congress to sign a comprehensive regulatory framework into law, here are 6 steps the SEC could immediately take to create “fit-for-purpose” regulations – without sacrificing innovation or critical investor protections.
#1 Provide guidance on ‘airdrops’
The SEC should provide interpretive guidance for how blockchain projects can distribute incentive-based crypto rewards to participants — without those being characterized as securities offerings.
Blockchain projects typically offer such rewards — often called “airdrops” — to incentivize usage of a particular network. These distributions are a critical tool for enabling blockchain projects to progressively decentralize, as they disseminate ownership and control of a project to its users.
If the SEC were to provide guidance on distributions, it would stem the tide of these rewards only being issued to non-U.S. persons — a trend that is effectively offshoring ownership of blockchain technologies developed in the U.S., yet at the expense of U.S. investors and developers.
What to do:
Establish eligibility criteriafor 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 revise Regulation Crowdfunding rules so they are suitable for crypto startups. These startups often need a broader distribution of crypto assets to develop critical mass and network effects for their platforms, applications, or protocols.
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.
#3 Enable broker-dealers to operate in crypto
The current regulatory environment restricts traditional broker-dealers from engaging meaningfully in the crypto industry — primarily because it requires brokers to obtain separate approvals to transact in crypto assets, and imposes even more onerous regulations around broker-dealers who wish to custody crypto assets.
These restrictions create unnecessary barriers to market participation and liquidity. Removing them would enhance market functionality, investor access, and investor protection.
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.
Collaborate with industry authorities like FINRA to issue joint guidance that addresses operational risks tailored to crypto assets.
This approach would promote a safer and more efficient marketplace, enabling broker-dealers to bring their expertise in best execution, compliance, and custody to the broader crypto market.
Full op-ed here.
