a16z: A New Era for Crypto — What Should the SEC Do?
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a16z: A New Era for Crypto — What Should the SEC Do?
Now is the time to take action.
Navigating Web3 tides with focused insightsAuthors: Scott Walker, Bill Hinman
Translation: Luffy, Foresight News
As technology continues to evolve, the U.S. Securities and Exchange Commission (SEC) must keep pace. This is especially evident in the realm of cryptocurrency. New leadership and the recently established Crypto Task Force present an opportunity for the agency to take concrete actions and make adaptive changes.
The time to act is now: The crypto market has grown significantly in both size and complexity, rendering the SEC’s prior approach—relying solely on enforcement while neglecting regulation—outdated and inadequate. As professional investment services enter this emerging sector, there is no alternative if we are to foster market development, encourage innovation, and protect investors. The principles underpinning securities laws—disclosure, fraud prevention, and market integrity—must remain sacrosanct. Yet applying these principles in a manner that reflects the unique nature of crypto assets requires targeted regulatory reforms.
This article outlines practical, immediately implementable adjustments the SEC should adopt to establish appropriate regulatory rules without compromising support for innovation or investor protection. While legislation is necessary to clarify the classification of crypto assets and oversight of secondary markets, these measures would deliver tangible benefits to the market right away.
1. Provide Interpretive Guidance on "Airdrops" and Other Incentive-Based Rewards
The SEC should issue interpretive guidance clarifying how blockchain projects can distribute crypto assets to participants without such distributions being deemed securities offerings. These distributions, commonly known as “airdrops” or “incentives,” are typically provided free of charge or for minimal consideration, often as rewards for early adoption or participation in a specific network or ecosystem. Such distributions are essential mechanisms for blockchain projects to build communities and progressively decentralize governance by distributing ownership and control to users.
This decentralization process offers multiple benefits. It protects investors from risks typically associated with securities and centralized control, while promoting network growth and increasing value. If the SEC provides clear guidance on permissible distributions, it could curb the current trend of limiting airdrops to non-U.S. persons—an approach that effectively transfers ownership of U.S.-developed blockchain technologies overseas, creating windfalls for non-U.S. individuals at the expense of American investors and developers.
Specific Actions:
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Establish eligibility criteria: Define baseline standards for crypto assets that may be distributed through airdrops or incentive programs without constituting investment contracts (and thus falling under securities regulations). For example, crypto assets whose market value primarily derives from the programmed operation of a distributed ledger or executable software deployed on such a system—and that do not fall into other categories of securities—should qualify for such exemptions.
2. Amend Crowdfunding Rules to Regulate Exempt Offerings
The SEC should revise its crowdfunding rules to better accommodate exempt offerings of crypto assets.
Current limitations on fundraising amounts and investor participation levels in Regulation Crowdfunding are ill-suited for crypto startups, which often require broad distribution of tokens to achieve sufficient user scale and network effects for their platforms, applications, or protocols.
Specific Actions:
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Increase fundraising caps: Raise the maximum amount that can be raised via crowdfunding to levels commensurate with enterprise needs (e.g., up to $75 million depending on disclosure depth, or a certain percentage of total network supply).
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Enable exempt offerings: Allow crypto projects to rely on exemptions similar to those under Regulation D while using crowdfunding platforms to reach a broader base of retail investors, rather than only accredited investors.
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Protect investors: Implement appropriate safeguards, such as individual investment limits (similar to current Regulation A+ frameworks), and detailed disclosure requirements covering information material to crypto enterprises. While traditional offering disclosures may focus on directors, compensation, and shareholdings, disclosures regarding the underlying blockchain, governance models, and consensus mechanisms are likely more relevant to crypto asset investors. Tailoring these requirements ensures investors are well-informed and protected against fraud.
These changes would enable early-stage crypto projects to access a wider pool of investors, democratizing investment opportunities while maintaining transparency.
3. Allow Broker-Dealers to Engage in Crypto Asset and Securities Business
The current regulatory environment restricts meaningful participation by traditional broker-dealers in the crypto space, primarily because engaging in crypto asset transactions requires separate approvals, and additional stringent oversight applies to broker-dealers wishing to custody crypto assets.
These restrictions create unnecessary barriers to market participation and liquidity. Permitting broker-dealers to facilitate trading of both security and non-security crypto assets would enhance market functionality, improve investor access, and strengthen investor protections. On today’s crypto trading platforms, non-security crypto assets (such as Bitcoin and Ethereum) trade seamlessly alongside assets the SEC may consider subject to securities laws.
Specific Actions:
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Create a registration pathway: Establish a clear registration framework enabling broker-dealers to register for activities involving (and custody of) crypto assets—including both securities and non-securities—with tailored requirements based on asset type.
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Strengthen regulatory oversight: Implement supervisory mechanisms to ensure compliance with anti-money laundering (AML) and know-your-customer (KYC) rules, preserving market integrity.
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Collaborate with industry: Work jointly with the Financial Industry Regulatory Authority (FINRA) to issue guidance addressing operational risks unique to crypto assets.
This approach would help build a safer, more efficient market, allowing broker-dealers to bring their expertise in best execution, compliance, and custody to the crypto market.
4. Provide Guidance on Custody and Settlement
Custody and settlement remain key obstacles to institutional adoption of crypto assets. Uncertainty around regulatory treatment and accounting rules deters traditional financial institutions from entering the custody market. As a result, many investors miss out on professional asset custody services and must self-invest and self-custody.
Specific Actions:
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Issue custody guidance: Provide clarity under the Investment Advisers Act on how investment advisers can custody crypto assets, ensuring robust safeguards such as multi-signature wallets and secure offline storage. Guidance should also cover staking of idle assets held in custody and voting on governance decisions.
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Settle settlement standards: Issue specific guidance on settlement for crypto transactions, including timelines, verification procedures, and error resolution mechanisms.
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Adopt a technology-neutral framework: Allow flexibility in adopting innovative custody solutions as long as they meet regulatory standards, without mandating specific technical implementations.
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Correct accounting treatment: Rescind SEC Staff Accounting Bulletin No. 121 (SAB 121), so that the accounting for custodied digital assets reflects the economic reality of custodial arrangements rather than presuming a liability. Background: SAB 121 states that “as long as a company is responsible for safeguarding crypto assets held on its platform… the company should recognize a liability on its balance sheet reflecting its obligation to safeguard the crypto assets held for platform users,” along with a corresponding asset. The overall effect of SAB 121 is to place custodied crypto assets on the custodian’s balance sheet—a practice contrary to traditional accounting for custodied assets. Consequently, unlike typical custodial arrangements, if a custodian becomes insolvent, SAB 121 could result in custodied crypto assets becoming part of the custodian’s bankruptcy estate. Worse still, SAB 121 lacks proper legal authority. The Government Accountability Office found it to be a rule subject to congressional review under the Congressional Review Act. In May 2024, both the House and Senate passed a joint resolution disapproving SAB 121, but it was vetoed by President Biden.
Such clarity would lay the foundation for institutional confidence, enabling larger players to enter the market while enhancing market stability and competition among service providers. Moreover, both retail and institutional investors would benefit from the protections associated with professional, regulated asset management services.
5. Reform Exchange-Traded Product (ETP) Standards
The SEC should implement reforms specific to exchange-traded products (ETPs) to promote financial innovation. These proposals aim to expand market access for investors and custodians accustomed to managing ETP portfolios.
Specific Actions:
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Restore the market size test: The SEC's reliance on the "Winklevoss test"—requiring surveillance-sharing agreements with a "regulated market of significant size" for commodities or derivatives—has delayed approval of Bitcoin and other crypto ETPs. Because the SEC does not recognize crypto exchanges as "regulated markets," this effectively limits ETP approvals to crypto assets with futures markets (regulated by the CFTC) capable of robust price discovery. This ignores the substantial scale and transparency of current crypto markets. More importantly, it creates an arbitrary distinction between standards applied to crypto ETP listings and those for all other commodity-based ETPs. We recommend reverting to the historical market size test: requiring only that a commodity futures market have sufficient liquidity and price integrity to support an ETP. This adjustment would align crypto ETP approval standards with those for other asset classes.
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Enable physical settlement: Allow crypto ETPs to settle directly in underlying assets. This would improve fund tracking accuracy, reduce costs, increase price transparency, and decrease reliance on derivatives.
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Apply custody standards: Impose strict custody requirements for physically settled ETPs to minimize theft or loss risks. Additionally, allow staking of idle assets within ETPs.
6. Implement 15c2-11 Certification for Listings on Alternative Trading Systems (ATS)
In decentralized environments, issuers of crypto assets may no longer play an ongoing central role, raising the question of who should be responsible for providing accurate disclosure about the asset. Fortunately, a useful precedent exists in traditional securities markets: Rule 15c2-11 under the Securities Exchange Act allows broker-dealers to trade a security if, among other conditions, investors have access to current information about it.
Extending this principle to crypto markets, the SEC could permit regulated crypto trading platforms (including exchanges and broker-dealers) to list any asset for which the platform can provide investors with accurate, up-to-date information. This would increase liquidity for such assets within SEC-regulated markets while ensuring investors can make informed decisions. Two clear benefits would follow: digital asset pairs (where one asset is a security and the other is not) could be traded on SEC-regulated venues, and the incentive for trading platforms to operate offshore would be reduced.
Specific Actions:
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Simplify certification: Establish a streamlined 15c2-11 certification process for crypto assets listed on Alternative Trading Systems (ATS), requiring mandatory disclosures on asset design, purpose, functionality, and risks.
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Adopt due diligence standards: Require exchanges or ATS operators to conduct due diligence on crypto assets, including verifying issuer identity and validating key features and functions.
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Clarify disclosure obligations: Mandate regular updates to ensure investors receive timely and accurate information. Also clarify when, due to decentralization, ongoing issuer reporting is no longer meaningful or required for potential buyers.
This framework would promote transparency and market integrity while enabling vibrant innovation within a regulated environment.
Conclusion
The SEC stands at a pivotal moment in shaping the future of crypto asset regulation. The creation of the new Crypto Task Force signals the Commission’s intent to shift course from previous leadership. By taking the key steps outlined above, the SEC can begin moving away from its controversial, enforcement-heavy past toward providing much-needed regulatory clarity and practical solutions for investors, custodians, and financial intermediaries. This would better balance investor protection with capital formation and innovation.
The proposed changes would reduce uncertainty and support financial innovation in the crypto space. With these adjustments, the SEC can reclaim its mission and reposition itself as a forward-looking regulator, ensuring U.S. markets remain competitive while safeguarding the public interest. The long-term future of the U.S. crypto industry may ultimately require Congress to establish a comprehensive, fit-for-purpose regulatory framework. But until then, the steps outlined here represent a viable path toward sensible regulation.
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