Author: Scott Walker, Chief Compliance Officer of a16zcrypto; Bill Hinman, Advisory Partner of a16zcrypto and former Director of the Division of Corporate Finance of the U.S. SEC; Translator: 0xjs@黄金财经
As technology evolves, the U.S. SEC must evolve with it. This is especially true in the field of cryptocurrency. New leadership and the establishment of a new cryptocurrency working group provide the agency with an opportunity to take meaningful action and adapt.
Now is the time to act: the size and complexity of the crypto asset market are growing, so the U.S. SEC's recent approach to harmful enforcement and abandonment of regulation needs urgent updating. As professional investment services begin to operate within this new industry, there is no other way to promote market efficiency, encourage innovation, and ensure that investor protection is adopted. The basic principles of relevant securities laws - disclosure, fraud prevention, and market integrity - should remain inviolable. However, applying these principles in a way that reflects the unique characteristics of crypto assets requires targeted regulatory changes.
This article proposes immediate, easily implemented adjustments that the SEC should take to develop regulations that are fit for purpose without sacrificing innovation or critical investor protections. While legislation is necessary to provide adequate regulatory clarity regarding crypto asset classification and secondary market oversight, these measures will provide immediate benefits to the market.
1. Provide interpretive guidance on "airdrops" and other incentive rewards
The SEC should provide interpretive guidance on how blockchain projects can distribute crypto assets to participants without being considered securities offerings. These distributions are often referred to as "airdrops" or "incentive-based rewards," and blockchain projects often make these distributions for free or with a minimal value as a reward for prior use of a particular network or ecosystem. Such distributions are a key tool that enables blockchain projects to build communities and gradually decentralize as they spread ownership and control of the project to its users.
This decentralization process has multiple benefits. Decentralization protects investors from the risks typically associated with securities and centralized control, and promotes the expansion of the network, thereby increasing its value. If the SEC provides guidance on distribution, it will stem the tide of airdrops and incentive rewards only to non-U.S. persons—a trend that effectively transfers ownership of U.S.-developed blockchain technology overseas and creates windfall profits for non-U.S. persons at the expense of U.S. investors and developers.
What to do:
Establish eligibility criteria: Set benchmark criteria for crypto assets that qualify for exemption from securities law investment contract treatment in airdrops and incentive reward distributions. For example, if the market value of a crypto asset derives primarily from (or is reasonably expected to derive primarily from) the programmatic functionality of any distributed ledger or similar technology, or any executable software deployed to a distributed ledger or similar technology, and these crypto assets are not originally securities, they should be eligible for such distributions.
2. Modify crowdfunding exemption issuance rules
The SEC should modify crowdfunding regulatory rules to more effectively regulate the exempt issuance of crypto assets.
Current restrictions on fundraising and investor participation in crowdfunding campaigns are not appropriate for crypto startups, which often need to distribute crypto assets more broadly in order to develop critical mass and network effects for their platforms, applications, or protocols.
What to do:
Expand offering limits: Increase the maximum amount that can be raised through crowdfunding to a level consistent with the needs of the business (e.g., up to $75 million or a percentage of the entire network, depending on the depth of disclosure).
Exempt offerings: Allow crypto projects to rely on an exemption similar to Regulation D while leveraging the accessibility of crowdfunding platforms to more broadly reach investors beyond accredited investors.
Protect investors: Put in place appropriate protections, such as limiting the amount an individual can invest (as Reg A+ currently does) and strict disclosure requirements covering material information related to cryptocurrency investments—which current regulations do not cover. (For example, while offering disclosures typically address matters such as directors, their compensation, and shareholding details, disclosures about the underlying blockchain, its governance, and consensus mechanisms may be more important to cryptoasset investors.) Tailoring these requirements to digital asset investors can ensure that they are fully informed and protected from fraud.
These changes will enable early-stage crypto projects to reach a broad range of investors, democratizing promising investment opportunities while maintaining transparency.
3. Enable broker-dealers to deal in crypto assets and securities
The current regulatory environment limits the meaningful participation of traditional broker-dealers in the crypto space—primarily because it requires brokers to obtain separate approval to trade in crypto assets and imposes more onerous regulations on broker-dealers that wish to custody crypto assets.
These restrictions create unnecessary barriers to market participation and liquidity. Allowing broker-dealers to facilitate trading in both security and non-security crypto assets will enhance market functioning, investor access, and investor protection. It will also recognize that on today’s crypto platforms, crypto assets that are clearly not securities (e.g., Bitcoin, Ether, or fiat-backed stablecoins) can be traded seamlessly alongside crypto assets that the SEC may deem subject to securities laws.
What to do:
Allow registration: Create a clear path for broker-dealers to register to trade (and custody) crypto assets (both securities and non-securities), with customized requirements that reflect the nature of these assets.
Strengthen the regulatory framework: Establish oversight mechanisms to ensure compliance with anti-money laundering (AML) and know-your-customer (KYC) regulations and maintain market integrity.
Work with industry: Work with the Financial Industry Regulatory Authority (FINRA) to issue joint guidance that addresses operational risks unique to crypto assets.
This approach will promote safer and more efficient markets, enabling broker-dealers to bring their expertise in best execution, compliance, and custody to the cryptocurrency markets.
4. Provide custody and settlement guidance
Custody and settlement remain key barriers to institutional adoption of crypto assets. Ambiguity in regulatory treatment and accounting rules has prevented traditional financial institutions from entering the custody market. This means that many investors cannot obtain investment returns from trust asset management, but can only invest on their own and arrange their own custody alternatives.
What to do:
Tailor-made custody guidance: Provide guidance on custody rules under the Investment Advisers Act to clarify how investment advisers can custody crypto assets, ensuring that adequate safeguards are taken, such as multi-signature wallets and secure off-chain storage. This should also include guidance on pledging idle assets and voting on governance decisions for crypto assets in custody of investment advisers.
Set settlement standards: Develop specific guidance on the settlement of crypto transactions, including timelines, verification processes, and error resolution mechanisms.
Establish a technology-neutral framework: Allow innovative custody solutions that meet regulatory standards to proceed flexibly without imposing prescribed technical requirements.
Correct the accounting treatment: Repeal SEC Staff Accounting Bulletin 121 to allow accounting for custodial digital assets to reflect the nature of the custodial arrangement, rather than a constructive liability. For context, SAB 121 states, among other things, that “as long as [a company] is responsible for safeguarding crypto assets held on its platform… the company should list liabilities on its balance sheet to reflect its obligation to safeguard crypto assets held for its platform users” and list the corresponding assets. The overall effect of SAB 121 is to move custodial crypto assets onto the custodian’s balance sheet—a practice that runs counter to traditional accounting treatment of custodial assets. As a result, unlike a typical custodial arrangement, this accounting treatment could result in the custodial crypto assets being dragged into the custodian’s bankruptcy estate if the custodian goes bankrupt. Perhaps worst of all, SAB 121 lacks legitimacy. The Government Accountability Office found that it was actually a rule that should be submitted to Congress for review under the Congressional Review Act, and in May 2024, the House and Senate issued a joint resolution to repeal SAB 121, but that resolution was vetoed by President Biden.
Such clarity will lay the foundation for institutional confidence, enabling large players to enter the market while increasing market stability and competition among service providers. In addition, cryptocurrency investors (whether retail or institutional) will receive protections associated with professional, regulated asset management services.
5. Reform ETP standards
The U.S. SEC should adopt exchange-traded product (ETP) reform measures that promote financial innovation. These proposals will provide broader market access for investors and trustees accustomed to managing ETP portfolios.
What to do:
Restore market size test: The U.S. SEC relies on the "Winklevoss test" to develop market supervision agreements, which has delayed the approval of Bitcoin and other cryptocurrency-based ETPs. The test requires that for national securities exchanges such as the NYSE or Nasdaq to trade commodity-based ETPs, the listing exchange must enter into a supervision agreement with a "regulatory market of considerable size" for the commodity or its derivatives. Given that the US SEC does not consider crypto trading platforms to be “regulated markets”, this functionally means that ETPs can only exist in crypto assets that have futures markets (regulated by the Commodity Futures Trading Commission) that are clearly highly predictive of price discovery for the underlying commodity. This approach ignores the size and transparency of the current crypto market. More importantly, it creates an arbitrary distinction in the standards that apply to cryptocurrency-based ETP listing applications and all other commodity-based listing applications. Therefore, we propose to restore the historical test for markets of considerable size: requiring only that commodity futures markets have sufficient liquidity and price integrity to support ETP products. This adjustment will align the approval of crypto ETPs with the standards applicable to ETPs for other assets.
Enable physical settlement: Allow crypto ETPs to be settled directly in the underlying asset. This will lead to better fund tracking, lower costs, greater price transparency, and less reliance on derivatives.
Implement custody standards: Implement strict custody standards for physically settled transactions to reduce the risk of theft or loss. In addition, provide an option to pledge idle assets for ETPs.
6. Implement 15c2-11 certification for listing on alternative trading systems
In a decentralized environment, the issuer of a crypto asset may not play any significant ongoing role, so the question arises: who should be responsible for providing accurate disclosure about the asset. Fortunately, the traditional securities market has a useful similar rule, namely Rule 15c2-11 of the Exchange Act, which allows broker-dealers to trade securities as long as there is the latest information on the securities available to investors.
Extending this principle to the crypto asset market, the US SEC can allow regulated crypto trading platforms (including exchanges and brokers) to trade any asset as long as the platform can provide investors with accurate and up-to-date information. As a result, these assets will have greater liquidity on the US SEC-regulated markets, while ensuring that investors can make informed decisions. Two obvious benefits of this are that digital asset pairs (one of which is a security and the other is a non-security asset) can be traded on the US SEC-regulated markets, and that trading platforms are inhibited from operating overseas.
What to do:
Streamline the certification process: Establish a streamlined 15c2-11 certification process for crypto assets listed on alternative trading system (ATS) platforms and enforce disclosure of the design, purpose, functionality, and risks of the assets.
Adopt due diligence standards: Require exchanges or ATS operators to conduct due diligence on crypto assets, including verifying the identity of the issuer and important features and functional information.
Clarify disclosure requirements: Require regular updates to ensure that investors receive accurate information in a timely manner. In addition, clarify when issuers are no longer required to report because the reports are no longer relevant to potential purchasers due to decentralization.
This framework will promote transparency and market integrity while allowing innovation to flourish in a regulated environment.
Conclusion
The SEC is at a critical juncture in determining the future of crypto asset regulation. The creation of a new crypto task force signals that the SEC intends to change course from the previous administration. By taking the key steps above, the SEC can begin to move away from its historically controversial enforcement priorities and add much-needed regulatory guidance and practical solutions for investors, fiduciaries, and financial intermediaries. This will better balance protecting investors with promoting capital formation and innovation. The proposed changes above—from modernizing crowdfunding rules to setting clear standards for custody and ETPs—will reduce ambiguity and support financial innovation in the space. With these adjustments, the SEC can reaffirm its purpose and reposition itself as a forward-looking regulator that ensures U.S. markets remain competitive while protecting the public. The long-term future of the U.S. crypto industry may require a comprehensive, fit-for-purpose regulatory framework from Congress. Until that framework is in place, however, the steps outlined here are just one way to achieve appropriate regulation.
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