Reform Needed in U.S. Crypto Regulation

The essence of each blockchain network is a "consensus mechanism," a set of rules aligning participants in updating the network's state. Occasionally, participants must consent to a modification referred to as a "hard fork" or remain on the legacy version of the network.

With a new administration on the horizon, the SEC has a chance for a hard fork regarding its stance on crypto regulation. While comprehensive legislation is essential for establishing a legal framework for crypto, the SEC can shift from enforcement-based regulations to a more pro-innovation approach that can adapt to emerging markets.

Key Areas for Reform

We need a hard fork in crypto regulation to address four critical issues:

Issuance

Currently, any offer or sale of a security must be registered with the SEC unless an exemption applies, which raises two main concerns for crypto asset issuers:

• It's often unclear whether a specific crypto asset can be classified as a security.
• The existing registration process is burdensome and not well-suited for the unique nature of many crypto offerings.

Staking

In proof-of-stake networks, users pledge their crypto assets to secure the network and earn rewards according to its consensus model. The SEC, however, regards these arrangements as investment contract securities subject to registration, which may not align with technical offerings.

Custody

The diverse participant base in the crypto market calls for various custodial solutions. SEC regulations tend to complicate access to both non-custodial and custodial solutions, leading to numerous challenges for participants.

Trading

Crypto asset trading platforms face uncertainties due to regulatory definitions and compliance issues, which hinders innovation and market access.

To facilitate a healthier landscape for crypto innovation, the SEC should consider a revised framework that embraces and comprehends these emerging technologies.