As technology evolves, the US Securities and Exchange Commission (SEC) must evolve with it. This is no more true of crypto than it is now: The crypto asset market has grown in size and complexity, so the SEC’s recent pernicious approach to enforcement and deregulation requires an urgent update.
While the long-term future of the crypto industry in the US requires Congress to sign into law a full regulatory framework, here are 6 immediate steps the SEC can take to create “fit-for-purpose” regulations – protecting innovation or important investors.
Please provide instructions on #1 “Airfields”.
The SEC should issue guidelines that explain how blockchain projects can distribute incentive-based crypto rewards to participants — without characterizing it as an offering of securities.
Blockchain projects typically offer such rewards – often referred to as “airdrops” – to incentivize the use of a particular network. These distributions are an important tool for running blockchain projects gradual decentralizationthey extend ownership and control of the project to its users.
If the SEC were to issue a distribution order, it would prevent awards from being awarded exclusively to non-Americans — a trend that effectively offshores ownership of US-developed blockchain technologies, but at the expense of US investors and US investors. developers.
What to do:
Establish eligibility criteria for crypto-assets that may not be considered investment contracts when distributed as airdrops or incentive-based rewards under securities laws. (For example, crypto-assets that are not other securities and whose market value is substantially derived from or implied by the software operation of any distributed ledger or onchain executable software.)
#2 Changing Crowdfunding Rules
The SEC should reconsider Regulation of crowdfunding rules, so they are suitable for crypto startups. These startups often need a wide distribution of crypto-assets to develop critical mass and network effects for their platforms, applications or protocols.
What to do:
Expand the offering limits so that the maximum amount is equal to the needs of crypto businesses (for example, up to $75 million or a percentage of the total network, depending on the depth of disclosure).
Free crypto offers are similar Regulation Dallows access to crowdfunding platforms in addition to accredited investors.
Protect investors by limiting the amounts each person can invest (as Reg A+ currently does); disclosure requirements that include material information related to the crypto enterprise (for example, related to the underlying blockchain, its governance, and consensus mechanisms); and other guarantees.
These changes will democratize opportunities while maintaining transparency, allowing early-stage crypto projects access to a wider pool of investors.
#3 Allow broker-dealers to work in crypto
The current regulatory environment limits traditional broker-dealers from meaningfully operating in the crypto industry—primarily because it requires brokers to obtain separate permits to trade in crypto assets, and imposes more onerous rules around broker-dealers seeking to hold crypto assets.
These restrictions create unnecessary barriers to market participation and liquidity. Their removal would improve market functioning, investor access and investor protection.
What to do:
Enable registration for broker-dealers to deal in crypto assets, securities and securities.
Establish oversight mechanisms to ensure compliance with Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations.
cooperation with industry bodies such as FINRA Issue joint guidance addressing operational risks tailored to crypto assets.
This approach enables broker-dealers to bring their expertise to the broader crypto market in terms of best execution, compliance and oversight, contributing to a safer and more efficient market.
#4 Provide withholding and settlement guidance
The regulatory approach and lack of clarity regarding accounting rules have prevented traditional financial institutions from entering the crypto storage market. This means that many investors are unable to benefit from fiduciary asset management for their investments and are instead investing independently and arranging their own custody alternatives.
What to do:
Clarify guidance on how investment advisors should hold crypto assets Investment Advisers Actproviding adequate safeguards such as multi-signature wallets and secure off-chain storage. Also provide instructions on how to participate in and vote on management decisions for crypto assets under the supervision of investment advisors.
Develop specific settlement guidelines for crypto transactions – including deadlines, validation processes and error resolution mechanisms.
Creating a flexible, technology-neutral framework that meets regulatory standards without imposing technological mandates.
Correction of Accounting Treatment by SEC Reversal Accounting of employees 121 and balance sheet liability management for stored crypto assets. (SAB 121 moves custodial crypto assets to the custodian’s balance sheet – contrary to the traditional approach of accounting for custodial assets.)
This transparency provides greater institutional confidence, enhances market stability and competition between service providers, and improves protection for retail and institutional crypto investors.
#5 Reform of ETP standards
The SEC should take action on reform products traded on the stock exchange (ETPs) promote financial innovation. The offerings provide broad market access to investors and trustees used to managing ETP portfolios.
What to do:
Back to the historical market size test, this requires sufficient liquidity and price integrity for the regulated commodity futures market to support a spot ETP product. Currently, the SEC relies on “Winklevoss Test“Satisfying discretionary price disclosures for tracking contracts with regulated markets has delayed the approval of bitcoin and other crypto-based ETPs. This approach ignores the significant size and transparency of existing crypto markets, their regulated futures markets, and creates an arbitrary distinction. crypto-based Commodity-based listing guidelines for ETP listing guidelines and all other standards.
Allow crypto ETPs to settle directly on the underlying asset. This results in better fund tracking, cost reduction, price transparency and less reliance on risky derivatives.
Enforce robust storage standards for physically accounted transactions to reduce risks of theft or loss. Additionally, consider betting on the ETF’s non-performing underlying assets.
Implementation of certification for ATS listing #6
In a decentralized environment where the issuer of a crypto asset cannot play any significant role, who is responsible for providing accurate information around the asset? Here is a useful analogue of traditional stock markets, in the form of Exchange Act Rule 15c2-11which allows broker-dealers to trade in a security when current information about the security is available to investors.
Extending this principle to crypto asset markets, the SEC could allow regulated crypto trading platforms (both exchanges and brokers) to trade any asset where the platform would provide investors with accurate, current information. As a result, there will be more liquidity for such assets in SEC-regulated markets, while investors are equipped to make informed decisions.
What to do:
Establish a simplified 15c2-11 certification process for crypto assets listed on Alternative Trading System (ATS) platforms, with mandatory disclosures about the asset’s design, purpose, functionality and risks.
Require exchanges or ATS operators to perform due diligence on crypto assets, including the identity of the issuer, as well as critical features and functionality information.
It is required to make periodic disclosures to ensure that investors receive timely and accurate information. Also, clarify where necessary due to the decentralization of reporting by the issuer.
This framework allows innovation to flourish while ensuring transparency and market integrity.
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By taking the above steps, the SEC can move away from its historic and highly controversial focus and instead add much-needed regulatory guidance. Providing practical solutions for investors, fiduciaries and financial intermediaries balances achieving the SEC’s mission while protecting investors while supporting capital formation and innovation.
A longer version of this post originally appeared a16zcrypto.com.
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