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While the crypto industry’s ultimate path to becoming a “real boy” likely lies in legislation authorizing the creation of a comprehensive regulatory framework, this Davis Polk memo provides the next SEC Chair with a “to do” list of actions that the memo says will get the regulatory ball rolling. Here’s an excerpt with some specifics:

Withdraw SAB 121, the 2022 accounting policy that requires a public company with responsibility for safeguarding crypto assets to recognize liabilities for those assets on its balance sheet. While there may be some logic to this staff-promulgated directive, the SEC is not the nation’s accounting standard-setter. That task falls to the FASB, who approaches its remit thoughtfully and with due process and broad public input as opposed to simply announcing a full-blown major GAAP policy change via press release.

Withdraw the Framework for “Investment Contract” Analysis of Digital Assets.  Although well-intentioned, this 2019 staff effort has created years of confusion over the securities status of individual crypto assets. Is the crypto asset itself a security, or is it instead only a thing sold as part of a broader securities transaction? The answer to this basic question has a profound impact on all parties active in the crypto markets. But with more than sixty suggested “considerations” that supposedly make a crypto asset more or less likely to be a security, the guidance has proven impossible to interpret and apply in a manner that yields consistent results. What could help replace this guidance? See #6 below.

Place a moratorium on enforcement threats against intermediaries based on activities involving tokens they did not issue. This goes hand-in-hand with withdrawing the staff’s Framework. If a trading platform, market maker or other intermediary did not itself issue a particular crypto asset, then the intermediary did not deploy the token in a primary capital-raising transaction and its activities do not implicate the fundamental policy concerns of the Securities Act of 1933. Until we have designed and implemented a thoughtful regulatory solution, the SEC should stop harassing businesses that are meeting this vast market’s daily liquidity needs.

Stop holding up crypto company IPOs. The chair should direct the Corporation Finance staff to treat companies in the crypto asset industry trying to go public just like companies in every other industry—and provide comments on a regular timetable that will facilitate the company’s ability to go public in 3 to 4 months, rather than 3 to 4 years (or never).

Other recommendations include exercising prosecutorial discretion for registration violations not involving fraud and publishing the Staff’s Howey analysis for bitcoin and ether.

– John Jenkins