The Future of Regulation in the Digital Era

A New (Digital) Age at the SEC

The U.S. Securities and Exchange Commission (SEC) must evolve with technology to effectively regulate the growing crypto market. The current approach of enforcement and abdication of regulation needs an urgent update.

Building a Fit-for-Purpose Regulatory Framework

While Congress will likely need to sign a comprehensive regulatory framework into law for the long-term future of the crypto industry, the SEC can take immediate steps to create “fit-for-purpose” regulations without sacrificing innovation or critical investor protections. Here are six key steps:

Providing Guidance on Airdrops

Establishing eligibility criteria for crypto assets that can be excluded from being treated as investment contracts under securities laws when distributed as airdrops or incentive-based rewards would help stem the tide of these rewards only being issued to non-U.S. persons, effectively offshoring ownership of blockchain technologies developed in the U.S. yet at the expense of U.S. investors and developers.

Modifying Crowdfunding Rules

Revising Regulation Crowdfunding rules to be suitable for crypto startups would empower early-stage projects to access a wide pool of investors, democratizing access to opportunities while preserving transparency. This could be achieved by expanding offering limits, exempting crypto offerings in a manner similar to Regulation D, and protecting investors through caps on the amounts any one individual may invest, as well as robust disclosure requirements.

Enabling Broker-Dealers to Operate in Crypto

Removing restrictions on traditional broker-dealers engaging meaningfully in the crypto industry would enhance market functionality, investor access, and investor protection. This could be done by enabling registration for broker-dealers to deal in and custody crypto assets, establishing oversight mechanisms to ensure compliance with anti-money laundering (AML) and know-your-customer (KYC) regulations, and collaborating with industry authorities like FINRA.

Providing Guidance on Custody and Settlement

Clarifying guidance on how investment advisers can custody crypto assets under the Investment Advisers Act would provide greater institutional confidence, increasing market stability and competition among service providers while improving protections for both retail and institutional crypto investors. This could be achieved by providing clarity on staking and voting on governance decisions for crypto assets in the custody of investment advisers.

Reforming ETP Standards

Reforming exchange-traded products (ETPs) standards to foster financial innovation would promote broader market access to investors and fiduciaries used to managing portfolios of ETPs. This could be done by reverting to the historical market-size test, permitting crypto ETPs to settle directly in the underlying asset, and mandating robust custody standards for physically settled transactions.

Implementing Certification for ATS Listings

Establishing a streamlined 15c2-11 certification process for crypto assets listed on alternative trading system (ATS) platforms would promote transparency and market integrity while allowing innovation to flourish. This could be achieved by requiring exchanges or ATS operators to perform due diligence on crypto assets, including verifying issuer identity as well as important feature and functionality information.

By taking these steps now, the SEC can begin to rotate away from its historic focus on enforcement efforts and instead provide much-needed regulatory guidance that balances protecting investors with fostering capital formation and innovation.