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.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.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.Regulation DThese changes would empower early-stage crypto projects to access a wide pool of investors, democratizing access to opportunities while preserving transparency.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 crypto assets.These restrictions create unnecessary barriers to market participation and liquidity. Removing them would enhance market functionality, investor access, and investor protection.FINRAThis 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.Ambiguity over regulatory treatment and accounting rules has deterred traditional financial institutions from entering the crypto custody market. This means that many investors are not getting the benefit of fiduciary asset management for their investments, and instead are left investing on their own and arranging their own custody alternatives.Investment Advisers ActStaff Accounting Bulletin 121This clarity would provide greater institutional confidence, increasing market stability and competition among service providers while improving protections for both retail and institutional crypto investors.The SEC should adopt reform measures for exchange-traded products (ETPs) that can foster financial innovation. The proposals promote broader market access to investors and fiduciaries used to managing portfolios of ETPs.Winklevoss TestIn a decentralized environment where the issuer of a crypto asset may play no significant continuing role, who bears responsibility for providing accurate disclosures around the asset? There’s a helpful analog from the traditional securities markets here, in the form of Exchange Act Rule 15c2-11, which permits broker-dealers to trade a security when current information for the security is available to investors.Extending that principle into crypto asset markets, the SEC could permit regulated crypto trading platforms (both exchanges and brokerages) to trade any asset for which the platform can provide investors with accurate, current information. The result would be greater liquidity for such assets across SEC-regulated markets, while simultaneously ensuring that investors are equipped to make informed decisions.This framework would promote transparency and market integrity while allowing innovation to flourish.***By taking the above steps now, the SEC can begin to rotate away from its historic and heavily contested focus on enforcement efforts, and instead add much-needed regulatory guidance. Providing practical solutions for investors, fiduciaries, and financial intermediaries will better balance protecting investors with fostering capital formation and innovation — achieving the SEC’s mission.A longer version of this post originally appeared on a16zcrypto.com.
