Paradigm Files Comment Letter on the SEC’s Regulation Crypto Assets Proposal
Today, Paradigm filed a comment letter with the SEC in response to the agency’s proposed Regulation Crypto Assets, a tailored offering regime for investment contracts involving crypto assets.
In 2023, we wrote that registration was not a viable path for crypto projects because the SEC had never adapted its framework to the realities of digital assets. If this regulation is completed, that will no longer be the case.
Reg Crypto is a thoughtful and detailed proposal that includes principles-based disclosure, exemptions for early- and growth-stage projects, and clear guidance about when a token is no longer subject to an investment contract. It is a significant step, and the Commission deserves credit for that.
But creating a new rulemaking is only the first step towards actually bringing clarity to crypto. There is a second step: the regulation has to actually be workable. Here, the proposal still has a bit further to go, partly because it seems to itself be built around the crypto industry’s past instead of its present and future.
The SEC’s proposal assumes a single token, a single identifiable issuer, and an investment contract that follows the token to the secondary market. Today’s projects do not always fit that mold, and our letter recommends several improvements that would make this proposal even more transformational for the current and future crypto ecosystem:
Remove or revise the single-asset requirement. As proposed, a “covered investment contract” can involve only one crypto asset and no other asset. But many blockchains now use separate tokens for gas and governance, and vaults issue tokens representing a share of the assets deposited in them. We recommend that the SEC remove this condition so Regulation Crypto Assets can accommodate the structures builders are using today and planning for the future.
Allow mixed offerings and protect good-faith determinations. Builders routinely raise money through combinations of SAFEs, SAFTs, token warrants, and private offerings. With a proper disclosure, we believe that issuers should be able to include other assets, such as equity, in a covered investment contract as part of these vital fundraising tools. We also recommend that SEC provide a safe harbor for an issuer that determines in good faith that its token is not a security if a future Commission changes its view.
Clarify the treatment of secondary trading. The proposal treats secondary trades as securities transactions until the token separates from its investment contract. But that creates a catch-22 where projects are cut off from the exchanges and DeFi protocols they need to reach users, making it harder to ever reach separation. To avoid this Scylla-and-Charybdis situation, we ask the SEC to clarify that certain secondary trades are not securities transactions.
Reg Crypto has the potential to give builders, for the first time, a lawful path to raise capital in the U.S. But the details will determine whether that path is one that anyone will actually walk or, like registration before it, whether it becomes something that exists only on paper. We do not have time as an industry, nor does the SEC have time as a regulator, to spend on well-intentioned regulations that do not work in reality.
We appreciate the Commission’s engagement and look forward to continued dialogue as it moves toward a final rule. You can read Paradigm’s full comment letter here.