As the landscape of technology rapidly evolves, the U.S. Securities and Exchange Commission (SEC) must adapt accordingly. This necessity is especially pronounced in the realm of cryptocurrency, where the market has expanded significantly in both size and complexity. The SEC’s current approach, characterized by enforcement actions and a lack of comprehensive regulation, requires urgent reform to better align with the needs of the industry.
The Future of Crypto Regulation: A Call for Action
While a long-term regulatory framework for cryptocurrency will likely need Congressional approval, the SEC can take immediate action by implementing six key steps. These measures aim to create regulations that are tailored to the unique nature of the crypto market, ensuring that innovation flourishes while still protecting investors.
Guidance on Airdrops: Clarifying Incentive-Based Distributions
One crucial area for the SEC to address is the treatment of “airdrops,” which are incentive-based crypto rewards distributed to participants in blockchain projects.
Airdrops play a vital role in encouraging the use of specific networks and contribute to the decentralization of blockchain projects by distributing ownership among users. However, without clear guidance from the SEC, many projects are limiting these distributions to non-U.S. participants, effectively offshoring the ownership of American-developed blockchain technologies.
What the SEC Can Do:
– Establish clear eligibility criteria for crypto assets that can be excluded from being classified as investment contracts when distributed as airdrops. For instance, assets that are not securities and derive their value from the operational functionality of a blockchain could be exempt.
Revising Crowdfunding Regulations: Supporting Crypto Startups
The SEC should reassess its Regulation Crowdfunding rules to better accommodate the unique needs of crypto startups. These companies often require broader distribution of their crypto assets to foster critical mass and network effects essential for their platforms.
What the SEC Can Do:
– Increase the maximum amount that can be raised through crowdfunding to align with the financial requirements of crypto ventures, potentially allowing up to $75 million.
– Create exemptions for crypto offerings similar to Regulation D, broadening access to crowdfunding platforms beyond just accredited investors.
– Introduce investor protection measures, including investment caps per individual and robust disclosure requirements.
Empowering Broker-Dealers: Enhancing Market Participation
Current regulations impose significant restrictions on traditional broker-dealers wishing to engage with the crypto market. The necessity for separate approvals and stringent custody regulations creates barriers that hinder market liquidity and participation.
What the SEC Can Do:
– Allow broker-dealers to register for dealing in and custody of both securities and non-securities crypto assets.
– Develop compliance oversight mechanisms for anti-money laundering (AML) and know-your-customer (KYC) regulations.
– Collaborate with industry authorities such as FINRA to create guidance tailored to the operational risks associated with crypto assets.
Custody and Settlement Clarity: Encouraging Institutional Participation
The ambiguity surrounding regulatory treatment and accounting rules has deterred traditional financial institutions from entering the crypto custody market. This lack of clarity leaves many investors without the benefits of fiduciary asset management.
What the SEC Can Do:
– Provide clear guidance on how investment advisers can securely custody crypto assets, including the use of multi-signature wallets.
– Develop guidelines for the settlement of crypto transactions, covering important aspects such as timelines and error resolution.
– Create a flexible framework that can adapt to innovations in custody solutions while meeting regulatory standards.
Reforming ETP Standards: Fostering Financial Innovation
The SEC’s current standards for exchange-traded products (ETPs) need reform to better support innovation in the financial sector. By allowing broader market access to crypto ETPs, more investors can participate in this burgeoning market.
What the SEC Can Do:
– Revert to a historical market-size test, only requiring sufficient liquidity and price integrity for the regulated commodity futures market to support spot ETP products.
– Permit crypto ETPs to settle directly in the underlying asset, enhancing fund tracking and reducing costs.
– Implement robust custody standards to mitigate risks associated with theft or loss.
Certification for ATS Listings: Ensuring Accurate Disclosures
In a decentralized environment, determining who is responsible for providing accurate disclosures about crypto assets can be challenging. The SEC can draw from traditional securities market practices to establish a certification process for alternative trading systems (ATS).
What the SEC Can Do:
– Create a streamlined certification process for crypto assets listed on ATS platforms, mandating disclosures about the assets’ design, purpose, and risks.
– Require due diligence from exchanges or ATS operators to verify issuer identity and essential asset information.
– Mandate periodic disclosures to keep investors informed and clarify when reporting is no longer necessary due to decentralization.
Conclusion: A Balanced Approach to Regulation
By implementing these strategic steps, the SEC can transition away from its historically enforcement-driven focus, moving toward a more balanced regulatory approach. Such changes will provide practical solutions for investors, fiduciaries, and financial intermediaries, aligning with the SEC’s mission to protect investors while fostering capital formation and innovation in the ever-evolving cryptocurrency market.
