Written by: Marty Tate, Partner
In the week following the 2024 Presidential Election, I received a number of calls from clients asking what this to expect. The internet was a firestorm of speculation and rumors, including the possibility of the new administration dismantling the SEC. As a securities lawyer with over 25 years of experience and having gone through multiple changes in administrations, I tried to balance history with some of the unprecedented changes being tossed around.
We are now a a few weeks into the new administration and we have seen a definitive course of change from prior administrations, including the first term of the current administration. The signing of executive orders, the nomination of Paul Atkins, a crypto industry professional, to serve as the new SEC Chairman, Mark Uyeda to serve as the interim commissioner and Hester Pierce to be part of Crypto Task Force signal a drastic change in the industry. The SEC’s recent shift in leadership and the formation of a dedicated cryptocurrency working group signal an opportunity for meaningful regulatory reform that could balance innovation with investor protection. I believe that the need for solid regulation and guidance is long overdue, but do not believe that a complete lack of regulation and oversight is in the best interest of issuers, investors or anyone else. Here are some areas needing SEC guidance and change that have been discussed among industry leaders:
1. Provide Guidance on “Airdrops” and Incentive-Based Distributions
“What about Airdrops?” was a weekly inquiry. It’s a crucial part of engagement and the SEC’s current regulatory framework does not provide clear guidance on how cryptocurrency projects can distribute tokens through “airdrops” or incentive-based rewards without triggering the registration requirements for securities offerings. Airdrops typically involve the free or low-cost distribution of tokens to participants as a reward for previous engagement with a blockchain network. The current thinking has been that airdrops constitute a securities offering as an investment contract. Given their role in promoting decentralization and community involvement, the SEC should provide interpretive guidance that clarifies how such distributions may occur without being categorized as securities offerings and without the distributed tokens being deemed securities. Key considerations could include:
• Whether the distributed tokens derive their value primarily from the functionality of the underlying blockchain or distributed ledger technology.
• Whether the tokens in question were initially issued as securities, in which case they may still fall under SEC jurisdiction.
• Establishment of a safe harbor for tokens meeting these criteria, which would provide legal certainty for blockchain projects in the U.S.
This guidance would also address the trend of incentivizing international participants at the expense of U.S. investors, thus aligning the regulatory framework with national interests.
2. Modify Crowdfunding Exemption
The round hole for the square peg of token offerings has been the crowdfunding rules. The SEC’s current crowdfunding rules allow for the sale of securities using general solicitation, but the rules impose limitations on the amount that can be raised, which may be insufficient for cryptocurrency startups that rely on broad token distribution to achieve network effects. Increasing the limitations and providing guidance on the use of crowdfunding rules for digital assets.
3. Broker-Dealer Participation in Crypto Assets
Currently, traditional broker-dealers face significant regulatory hurdles when attempting to trade crypto assets, primarily because they must obtain separate approvals to engage in crypto transactions and meet additional regulatory requirements. This creates a barrier to market participation, hindering liquidity and broad market access. The SEC should create a streamlined registration process for broker-dealers wishing to trade and custody crypto assets, both securities and non-securities. This would include the development of a regulatory framework for crypto asset transactions, particularly in relation to anti-money laundering (AML) and know-your-customer (KYC) rules. Regulators should collaborate with self-regulatory organizations (e.g., FINRA) to issue joint guidance that addresses the unique risks of crypto asset trading.
4. Custody and Settlement Guidance for Crypto Assets
Ambiguity regarding the regulatory treatment of crypto asset custody and settlement rules presents a significant obstacle to institutional adoption. Financial institutions are hesitant to engage with crypto assets due to unclear guidance on custody practices and accounting treatment. The SEC should provide explicit guidance regarding the custody and settlement of crypto assets. Guidance could include clarification on how investment advisers can hold crypto assets under the Investment Advisers Act, with an emphasis on safeguards such as multi-signature wallets and off-chain storage; establish industry-wide standards for the settlement of crypto transactions, including timelines, dispute resolution processes, and transaction verification mechanisms; and repeal or amend SEC Staff Accounting Bulletin 121, which currently imposes liability accounting for custodial crypto assets, creating unnecessary risks for custodians and potentially harming investor protection.
5. Implementation of Section 15c2-11 Certification for Crypto Asset Listings
In decentralized networks, issuers of crypto assets often lack a central entity responsible for providing continuous disclosures, raising concerns about the availability of accurate and current information for investor. The SEC should extend Section 15c2-11 of the Securities Exchange Act to apply to crypto asset trading platforms. This would allow these platforms to trade any crypto asset, provided they can demonstrate up-to-date information about the asset’s design, functionality, and risks. Changes would include a streamlined certification process for crypto assets on alternative trading systems (ATS), ensuring transparency and accuracy of information; require exchanges to conduct robust due diligence on crypto assets, including verifying the identity of the issuer and its operational details.
Meme Coins
On February 27, 2025, the U.S. Securities and Exchange Commission (SEC) made a significant announcement that has reverberated across the cryptocurrency ecosystem: meme coins, or cryptocurrencies inspired by internet memes and viral trends, are not considered securities. This ruling has sparked questions within the world of securities regulation and sparked new debates about the role of meme coins in the broader crypto market and the future of cryptocurrency as a whole. This was not something that most people felt was a priority and could arguably lead to more uncertainty about what constitutes a security and will likely lead to further distrust of the crypto industry.
Where next?
The U.S. SEC faces a critical opportunity to reshape its approach to crypto asset regulation in a way that supports innovation while maintaining investor protection. The proposed regulatory adjustments, from clarifying the treatment of airdrops to reforming the rules for crowdfunding, custody, and ETPs, would provide much-needed clarity to market participants and foster growth in the sector. While these changes would not constitute a comprehensive regulatory framework, they represent essential steps toward modernizing the SEC’s oversight and ensuring that the U.S. remains competitive in the global cryptocurrency market.
Through these actions, the SEC can strike a balance between protecting investors, ensuring market integrity, and encouraging capital formation and innovation in the rapidly evolving crypto space.
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