Embracing the Digital Era: 6 Key Steps for the SEC to Regulate Crypto

As technological advancements continue to shape the financial landscape, the U.S. Securities and Exchange Commission (SEC) must adapt and evolve to ensure it remains effective in its role. This is particularly crucial in the realm of cryptocurrency, where the market has grown significantly in both size and complexity, necessitating an urgent update to the SEC's approach to regulation. The SEC's current method, which relies heavily on enforcement rather than providing clear regulatory guidance, is in need of revision. While comprehensive legislative action by Congress may be necessary for the long-term development of the crypto industry in the U.S., there are several immediate steps the SEC can take to establish 'fit-for-purpose' regulations that protect investors without stifling innovation. Here are six such steps: #1 Offering Clarification on 'Airdrops': The SEC should provide interpretive guidance on how blockchain projects can distribute incentive-based crypto rewards, known as 'airdrops,' to participants without these distributions being classified as securities offerings. This guidance is essential for enabling blockchain projects to decentralize by disseminating ownership and control to users, a process currently hindered by the lack of clear regulatory guidance, leading to these rewards being issued primarily to non-U.S. persons and effectively offshoring U.S.-developed blockchain technologies. #2 Adjusting Crowdfunding Rules: The SEC should revise its Regulation Crowdfunding rules to make them more suitable for crypto startups. These startups often require a broader distribution of crypto assets to achieve critical mass and network effects for their platforms, applications, or protocols. By doing so, the SEC can democratize access to investment opportunities in crypto, preserving transparency and empowering early-stage crypto projects to access a wide pool of investors. #3 Enabling Broker-Dealers in Crypto: The current regulatory environment restricts traditional broker-dealers from fully participating in the crypto industry, primarily due to the need for separate approvals to transact in crypto assets and more stringent regulations around custody. Removing these barriers would enhance market functionality, increase investor access, and improve investor protection by leveraging the expertise of broker-dealers in best execution, compliance, and custody. #4 Providing Clarity on Custody and Settlement: The ambiguity surrounding the regulatory treatment and accounting rules for crypto assets has deterred traditional financial institutions from entering the crypto custody market. This means many investors lack the benefit of fiduciary asset management for their crypto investments, forcing them to manage their assets independently. The SEC should provide clear guidance on these matters to increase institutional confidence, promote market stability, and foster competition among service providers, ultimately improving protections for both retail and institutional investors. #5 Reforming ETP Standards: The SEC should adopt reform measures for exchange-traded products (ETPs) that can foster financial innovation. This would promote broader market access for investors and fiduciaries accustomed to managing portfolios of ETPs, enhancing the overall efficiency and accessibility of crypto markets. #6 Implementing Certification for ATS Listings: In the decentralized crypto environment, where the issuer of a crypto asset may not play a significant ongoing role, there's a need to clarify who is responsible for providing accurate disclosures about the asset. The SEC can extend principles from traditional securities markets, such as Exchange Act Rule 15c2-11, which allows broker-dealers to trade a security if current information is available to investors. By permitting regulated crypto trading platforms to trade assets for which they can provide accurate, current information, the SEC can increase liquidity for these assets across regulated markets while ensuring investors have the information needed to make informed decisions. By taking these steps, the SEC can shift its focus from enforcement to providing much-needed regulatory guidance, thereby balancing investor protection with the facilitation of capital formation and innovation, aligning with its mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.