US SEC Needs an Innovative Approach to Cryptocurrency Regulation

- Possibility of Change in Cryptocurrency Regulation Direction by the SEC under the New Administration - Focus on Crypto Issuance, Staking, Custody, and Trading [Unblock Media] At the core of blockchain networks lies the consensus mechanism. A consensus mechanism is a rule system that participants follow to update the state of the network. Sometimes, participants need to agree on modifications to these rules, called a hard fork. Through a hard fork, the network can be upgraded, or participants can choose to remain on the existing version. For example, a hard fork can apply new features or security patches. With the new administration, the U.S. Securities and Exchange Commission (SEC) is considering an innovation-friendly approach within the crypto regulatory framework. Such a change could lead to a regulatory hard fork. Crypto Asset Issuance The first issue to address is the issuance of cryptocurrency assets. All securities offerings or sales must be registered with the SEC, presenting two issues for crypto asset issuers. It's unclear which crypto assets count as securities, and the current registration process and exemptions do not align well with the characteristics of many crypto asset offerings. Generally, securities include stocks, bonds, investment contracts, and more. Federal courts have consistently ruled that cryptocurrency assets themselves are not securities but can be sold as objects of investment contracts. Stocks and warrants, even if issued in token form, are considered securities. However, most crypto assets share characteristics with currencies, trading cards, or other commodities, not fitting the securities definition. The current registration process isn't tailored to each crypto asset's nature, highlighting the need for a specific solution to address these mismatches. Crypto asset issuers have utilized various registration exemptions when offering crypto assets that can be objects of investment contracts. However, the SEC has prosecuted these issuers for registration requirement violations. The new administration could clarify registration requirements for crypto assets so issuers don't face regulatory friction. Issuers of crypto assets meeting the securities definition must submit registration or use exemptions, which suits large companies but burdens software development teams. The SEC needs to evaluate the registration process to alleviate this burden. Additionally, the SEC holds broad authority to exempt certain activities, products, and transactions from registration requirements if it serves the public interest. The SEC could propose additional registration exemptions for the distribution methods inherent to cryptocurrencies. Also, the SEC should propose a safe harbor exemption from registration for airdrops. Airdrops are not considered sales unless the recipient personally provides cash or other definable consideration. Yet, the SEC has regarded airdrops as needing registration. Staking The second issue is staking. Users of Proof-of-Stake blockchain networks stake assets to secure the network and earn rewards. Many users do this via providers of staking services or liquid staking protocols. However, the SEC considers such staking agreements as investment contract securities and applies registration requirements. The SEC needs to establish exceptions to these requirements if staking services qualify as securities. Custody Solution The third issue is custody. Various participants in the crypto market require a wide range of custody solutions. However, the SEC imposes barriers for industry participants to use these solutions. The SEC has prosecuted developers of some non-custodial software products, claiming these developers facilitate securities transactions. Moreover, the SEC has required public companies offering crypto asset custody services to report these assets as liabilities. Consequently, many custody banks cannot provide these services due to negative regulatory capital treatment. These regulations place a significant burden on small to medium-sized exchanges or financial institutions, complicating industry participation and limiting investor choices. Crypto Asset Registration The fourth issue is trading. Cryptocurrency exchange operators and developers face several challenges. First, crypto assets initially sold as objects of investment contracts can only be traded on SEC-registered platforms. Second, current securities exchange registration requirements don't suit centralized or decentralized cryptocurrency exchanges. Third, SEC-registered exchanges can only list registered securities, whereas most circulating crypto assets are not SEC-registered. Actually, crypto asset traders must navigate a legal minefield. Federal securities laws offer general exemptions for those not issuers, underwriters, or dealers when selling securities. Still, the SEC considers many crypto asset purchasers as underwriters and dealers. The SEC needs to withdraw lawsuits against crypto exchange providers and revise exchange registration requirements for crypto trading platforms. Also, the SEC should evaluate the possibility of exempting certain crypto assets from trading restrictions by considering them exempted securities. The SEC should retract its recent amendment to the exchange definition, which disadvantages crypto software protocols, and clarify rules concerning underwriter status when purchasing crypto assets as investment contract objects.