REG CRYPTO: MAKING ICOs GREAT AGAIN
EXECUTIVE SUMMARY
The U.S. Securities and Exchange Commission (SEC) has proposed “Regulation Crypto Assets,” rules that would create a new regulatory regime for public fundraising via the issuance of blockchain protocol tokens. The rules are not likely to be implemented for roughly a year, do not address many of the legal gray areas that would be cleared up by the increasingly long-shot Clarity Act, and could be rolled back by a future administration and legislature.
But “Reg Crypto” would, for the first time, impose U.S. federal oversight on a fundraising tool specific to the technology and structure of cryptocurrency networks. It enables the advance sale of tokens as a way to fund “decentralized” infrastructure, whose value then accrues (in theory) to the tokens. This process was illustrated by the Initial Coin Offerings (ICOs) that raised around $8 billion via public retail crowdsales in a brief 2017-2018 window of ambiguous legality. An SEC crackdown, culminating in the Gary Gensler SEC’s aggressive “regulation by enforcement,” subsequently pushed cryptocurrency firms back towards traditional venture capital funding.
The proposed Regulation Crypto rules move the opposite direction, potentially both legitimizing and constraining the fundamental dynamics of ca 2018 ICOs. The rules establish fundraising caps of $5 million and $75 million, compared to hundreds of millions raised in prior, unregulated ICOs.
The rules require disclosure of project plans, development details, and milestones. Most importantly, it requires personnel specifics. Many ICO ‘founders’ ca 2018 remained problematically anonymous, not least because legal ambiguity left them vulnerable - but this also provided excellent cover for pseudonymous scammers.
That’s a step forward, but Reg Crypto will place few restrictions on secondary token sales or distribution, in the name of quickly dispersing token ownership. That laissez-faire treatment, which includes no mandatory lockups for insider sales, may create opportunities for bad actors - potentially even making “dumping” on investors entirely legal.
These rules, insiders broadly agree, are definitely not final or perfect. Anyone with an interest at stake should plan to file a comment letter on the rules ahead of the October 20, 2026 deadline. Letters can be submitted via this SEC comment form.
THE BEAR CASE: NEW SOLUTIONS TO OLD PROBLEMS
We come at this milestone from two different perspectives - and have two fairly different takeaways.
From the tradfi innovation perspective, Austin thinks that this isn’t a big deal.
This is very limited legalization for small amounts of fundraising ($5M), and then significant disclosure for moderately small amounts of fundraising ($20M-$75M). These may be of some limited usefulness, but the rules are no replacement for the Clarity Act, which contains many measures excluded from Reg Crypto, like developer protections.
Clarity is on its last legs and unlikely, in our judgment, to pass the current lame-duck Congress. Some have read Reg Crypto as a bit of pressure from the SEC: pass the legislation, or we’ll just take care of this ourselves.
But agency rulemaking simply can’t cover all the questions that would be resolved by Clarity – even setting aside the recent weakening of those agencies’ independent rulemaking powers by the Supreme Court. It certainly can’t provide trustworthy developer protections against the Bank Secrecy Act.
More critically, neither Reg Crypto nor Clarity contemplates the new questions that have continued to emerge as blockchain technology continues to advance and further integrates with the broader financial system.
Is there a pathway to a formal regime of onchain securities trading? No.
Is there a framework that would solve some of the thorny issues around AMMs, custody, or clearing? Also no.
Is there a contemplated regulation of on-chain managed “vaults”? Again, No.
It's good to see the SEC start chopping wood — but there's a lot of wood left in the pile.
THE BULL CASE: SMALL IS BEAUTIFUL
While the tradfi stakes may be low, David’s crypto-native perspective still sees immense potential in Reg Crypto.
ICOs were the right way to fund truly decentralized, community-driven blockchain infrastructure — and they still are. It is fundraising to match the grand “cypherpunk” vision of a financial system that transcends the nation-state, empowering individuals by democratizing finance.
U.S. oversight potentially dampens their one major downside: Serious susceptibility to fraud.
I agree that Reg Crypto’s new fundraising path is too small or out of step to really change the game at a finance-industry level. But the small end of the Reg Crypto spectrum has some fantastic possibilities for impactful projects by more ideologically committed types. Whether you like it or not, fundraising through crypto tokens is what peak innovation looks like, and allowing it in the U.S. will unleash … a lot of stuff.
That’s more likely to be good stuff if issuers and investors both understand the mechanics of token value accrual (Joel Monegro’s “Fat Protocols” thesis); and if there’s real accountability for those issuers. $5 million, under the smaller and least onerous of the two exemptions, won’t get you in the door on Wall Street. But there are a lot of developers out there with interesting ideas, and the ability to make $5 million go a long, long way.
The symbolism of Reg Crypto may be as important as the direct impact. For the first time, regulators have straightforwardly acknowledged that the inherently decentralized nature of crypto networks demands accommodation to a truly new kind of fundraising.
And it may wind up perfect for the sort of smaller projects that have the hardest time raising at venture scale, including those with lower profit potential.
The risk, as ever, is that hype overwhelms sense: realistically, very few current crypto investors understand token value accrual, or even the difference between a protocol token and a real-world-asset wrapper (the latter aren’t a topic of Reg Crypto).
That requires serious protections against fraud — and Reg Crypto still needs improvement on insider lockups, entity formation, and other critical topics.
RULE HIGHLIGHTS
Contracts, Not Tokens: The rule clarifies, finally, that a digital token in itself is not an investment contract. Instead, securities laws regulate the transactions and promises made by promoters, not the token itself.
What’s Missing: Developer Protections; Vaults; On-chain securities trading.
$5 Million Startup Exemption (Rule 200): Early, light-lift fundraising, on a four-year timeline, with no incorporation or GAAP financial statements required.
$75 Million Fundraising Exemption (Rule 300): Modeled on Regulation A, this exemption provides a structured path for larger public raises. Tier 1 (up to $20 million) permits unaudited financial statements, while Tier 2 (up to $75 million) requires full audits.
Staking and Airdrops: According to Rodrigo Seira of Cooley Law, the draft rule’s “covered transactions” include staking and airdrops. Staking, which distributes tokens in exchange for decentralized service provision, is a sterling example of the profound differences between tokens and equity.
Principles-Based Disclosures (Rule 103): The rule replaces existing corporate disclosure frameworks with ten principles-based disclosure topics, including technical security, smart contracts, and tokenomics (including pre-launch distributions).
Unrestricted Secondary Trading: Tokens issued under these rules would be quickly and broadly tradeable, unlike private equity funding. This is intended to facilitate network effects, but it also introduces pump-and-dump risk.
No Insider Lockups: Related to the above, insiders do not have pre-set lockup timelines for selling their own tokens. Instead, this is expected to be tailored and disclosed individually by each project.
No “At The Market” Sales: The rule prohibits market-price sales of a digital asset by a project after its initial fixed-price sale. However, given the lack of insider lockups and the lack of any formal organization at the $5 million tier, it's unclear how ATM sales could be separated from individual insider sales.
An Exit from Howey (Rule 400): The rule deems a covered investment contract to have ceased to exist once promoters permanently cease all essential managerial efforts and file a transition report. This is the “progressive decentralization” path that SEC Commissioner Hester Peirce has been working to articulate for years.
Preemption of State "Blue Sky" Laws (Rule 500): The rule preempts state registration requirements for both primary offerings and secondary market trades, streamlining compliance across U.S. jurisdictions.
U.S. Domestic Eligibility and “Reshoring”: The rule applies to entities organized in the U.S., administered principally in the U.S., and composed of a majority of U.S. citizen/resident officers — meant to draw funding and projects back from offshore jurisdictions.
Bad Actor Disqualification (Rule 104): The rule uses the "bad actor" disqualification standard of Regulation A's Rule 262(a). Criminal convictions and specific judicial sanctions restrict participation or require additional disclosures.
The (Partial) End of “Regulation by Enforcement”: The new ruleset will normalize an issuance and fundraising process that had been considered a securities law violation. However, the new rules don’t protect developers from other kinds of risk, as the Clarity Act would have.
What’s Happening
On August 21, the Securities and Exchange Commission made a shocking announcement: crypto bros would get the fundraising rules they’d spent nearly a decade begging for.
At the highest level, “Regulation Crypto” creates a legal path for “Initial Coin Offerings.” This would allow projects to effectively “pre-sell” blockchain-backed tokens to fund the construction of new blockchain infrastructure, in a way broadly similar to how the sale of equity stakes in a startup funds the creation of a business.
Like equity, those tokens would be expected to grow in value once a project is complete. At that point, according to the logic of both ICOs and the new Reg Crypto, the tokens begin to accrue value from demand for the service. ICOs raised an estimated $8 billion directly from public retail crowdsales and an estimated $13 billion in total capital for crypto startups from 2017 to 2018. While the lack of any oversight means that largely went to scams and failures, projects like Brave (BAT) and Ethereum itself show that honest ICOs can build products and return value to investors.
This is similar to the way startup equity rises in value, but with some critical differences we will unpack below: the way tokens interact with decentralized infrastructure is completely different from the way equity interacts with users of a corporate service. Those differences are what make a separate regulatory framework necessary.
But while positive on its own terms, Regulation Crypto could be viewed as a disappointing outcome. It lacks many of the most important provisions included in the Clarity Act, a comprehensive bill that has had a rocky road through Congress – substantially because of allegedly improper crypto activity by President Donald Trump.
In that context, Reg Crypto looks a little bit like a mollifying bone thrown to the legion of crypto industry donors who made sure Trump was elected in the first place. So far, groups like Coinbase’s Stand with Crypto have gotten very little (aside from a few ethically questionable pardons) for their estimated $245 million in contributions to Trump’s 2024 campaign.
The rule is subject to public comment until October 20, 2026, followed by extensive review. That means it may not be implemented for as long as a year. And once it is implemented, the procedural and political circumstances mean a new U.S. President and legislature could work to retract it as soon as 2029.
All of that adds up to an odd situation: Crypto advocates might get exactly what they were asking for eight years ago, but it’s a failure compared to what was on offer just a few months ago. And as rulemaking rather than legislation, it’s less durable.
Even leaving aside the threat of retraction, some industry veterans and insiders have been skeptical of the market impact, given that venture capitalists have largely filled the funding void left by ICOs. Austin tends towards that skeptical view, while I am a bit more excited about the potential for grassroots activity under, in particular, the smaller $5 million window. Both of those views are reflected below.
We align closely, however, on some shortcomings of the proposed rule. In addition to what’s missing compared to Clarity, the rule is heavily reliant on disclosure rather than specific bright lines, which we view as an unnecessary risk to investors. In particular, Reg Crypto contains no specified lockups or other restrictions for insider token allocations. We believe this gap in particular is a recipe for disaster, given the historical dynamics of the hype-driven crypto market, where it has been all too common for insiders to “dump” assets before a project has fulfilled its promises to investors.
CUTTING THE UTILITY KNOT
Over the past decade, crypto firms have constantly repeated some variation of “please regulate us.” Biden SEC Chair Gary Gensler insisted that crypto was perfectly well-regulated under existing securities laws, ignoring or dismissing even reputable experts who disagreed.
Reg Crypto instead takes the premise seriously: for technical reasons fundamental to the operation of decentralized networks, crypto tokens are simultaneously instruments for both investing and transacting.
Attempts to regulate crypto tokens as securities, as Gensler did so aggressively, highlight the problems created by this fundamental difference. For instance, the basic operation of a proof-of-stake blockchain involves the emission of new tokens to node operators — is that a securities transaction? Reg Crypto resolves this and similar questions by including airdrops and similar token payments under "covered transactions" in the exemption frameworks (Rule 117).
Equally burdensome, treating tokens as synonymous with stock certificates turns spending any cryptocurrency into a taxable event, because it involves exchanging a security for goods at some price. Imagine you had to use McDonald’s stock certificates to buy a Big Mac: that’s basically how crypto works. We know it sounds stupid, don’t ask us; we just work here.
Reg Crypto solves this fundamental problem by embracing the concept of “progressive decentralization,” and placing very few restrictions on secondary sales.
During the designated exemption period(s), tokens distributed through sale or other means are covered by an investment contract, with all of its implications. But after a certain period, in theory, when the project team is ready to cease development operations, they file a form on EDGAR,the tokens are separated from the investment contract and circulate, in essence, as commodities like Bitcoin and Ethereum.
WHAT’S MISSING
Regulation Crypto would solve one fundamental and serious problem in cryptocurrency markets, but it falls far short of what was meant to be included in the Clarity Act, which now faces an uphill battle through a lame-duck Congress.
Skeptics across the crypto industry question whether the SEC’s offering is even meaningful in the face of that failure. They see it as solving a problem that should have been solved many years ago, while leaving current issues untouched.
Probably the most burning issue not addressed here is vaults. These are on-chain managed and structured strategies that have become a huge business for providers like Morpho, Euler, and Perena (a ZK client). But their legal status in the U.S. is unclear at best, even when administered by a licensed fund manager: just as with tokens themselves, the technological form factor is being allowed to take precedence over the substance of the activity.
Also missing compared to the currently-pending Clarity Act are provisions that protect non-controlling software developers from classification as money transmitters. That provision might have protected Tornado Cash developer Roman Storm from his current prosecution, the subject of my forthcoming documentary project.
More systematically, without that protection, the right to issue tokens alone may not lead to much new development activity.
CONTEXT WINDOW: THE PATH TO U.S. CRYPTO REGULATION
2009: Bitcoin launches.
March 2013: The first formal U.S. regulatory action on crypto. FinCEN issues guidance applying Bank Secrecy Act "money transmitter" rules to virtual currency businesses (not users).
November 2013: The U.S. Senate's first hearings on Bitcoin.
April 2014: IRS Notice 2014-21 classifies virtual currency as property for federal tax purposes, not currency.
August 2015: New York's Department of Financial Services launches the BitLicense, whose notoriously challenging process pushes many exchanges out of the state.
September 2015: The U.S. CFTC formally declares Bitcoin and virtual currencies "commodities" under the Commodity Exchange Act, its first claim of jurisdiction over crypto derivatives.
July 2017: The SEC's DAO Report concludes that the DAO's 2016 token sale was an unregistered securities offering under the Howey test.
December 2017: CME and CBOE launch the first U.S.-regulated Bitcoin futures contracts.
June 2018: William Hinman, then a director at the SEC, gives a speech on “Digital Asset Transactions: When Howey Met Gary (Plastic)”, suggesting Bitcoin and (a sufficiently decentralized) Ether are not securities — a statement that shaped years of industry debate.
November 2022: FTX collapses, arguably thanks to lax U.S. regulation pushing it and other crypto projects into offshore, light-touch jurisdictions like the Bahamas.
2022–2023: SEC Chair Gary Gensler responds to FTX's collapse with a wave of "regulation by enforcement" suits against Coinbase, Binance, Kraken, and other firms and projects.
August 2023: In Grayscale v. SEC, the D.C Circuit rules the SEC's denial of a spot Bitcoin ETF was "arbitrary and capricious," forcing the agency to reconsider. 11 Bitcoin ETPs are approved in January 2024.
July 2025: President Trump signs the GENIUS Act into law, creating a licensing and reserve framework for payment stablecoins.
COMPARE AND CONTRAST: JAPANESE CRYPTO REGULATION
February 2014: Mt. Gox, then the world's largest Bitcoin exchange, collapses. Japan's Financial Services Agency (FSA) forms a study group on crypto regulation.
2016: Japan's Payment Services Act (PSA) is amended to regulate "virtual currencies" and require exchange registration.
2018–2019: The Japan Virtual Currency Exchange Association (JVCEA) is established as a self-regulatory body, and further amends the PSA and Financial Instruments and Exchange Act (FIEA) to tighten custody, advertising, and leverage rules.
May 2020: Strengthened PSA/FIEA amendments mandate cold-storage segregation of customer assets and restrict misleading advertising.
June 2023: The FSA again amends the PSA to add a stablecoin framework, restricting issuance to banks, trust companies, and licensed money transfer agents.
The REG CRYPTO Timeline
The first notable date for the proposed rule is October 20th of 2026. That’s the end of the 60-day comment period, which is sure to draw absolute floods of feedback on omissions or other problems. We highlight some of our own concerns or uncertainties below.
Those comments must be reviewed carefully by the SEC to ensure compliance with the Administrative Procedures Act (APA) and constitutional equal protection. One source familiar with regulatory procedure expected the rule to be implemented no earlier than Summer or early Fall of 2027 – a year from now.
RULE REVERSAL
At a high level, we find a lot to like in Reg Crypto. It’s a large part of what the industry had been hoping for, and takes decentralization seriously.
But there’s no denying that the spirit of Gary Gensler will haunt the measure. That is, there is now a large contingent of U.S. political leadership, almost entirely concentrated in the Democratic Party, who will continue to stand against even this largely sensible measure based on a mix of partisan polarization and misunderstandings of the technology and sector.
Given political realities on the ground (read: Donald Trump’s abysmal and falling approval rating), there is a strong chance that those Democrats will take control of the Presidency, and one or even both branches of the legislature.
That makes April of 2028, near the beginning of Trump’s final full year in office, an incredibly important deadline. If the new crypto rules are implemented after that month, they will still be within the one-year horizon of the Congressional Review Act when the next administration takes over.
This Congressional review is the fastest and most efficient way that the rulemaking might be vacated by a subsequent administration. It requires a simple majority vote of both houses of Congress and the President’s signature – again, not a farfetched scenario come 2029.
April of 2028 sounds like a lot of time. But given that the Trump administration has seemingly failed to get its own signature crypto legislation across the finish line, there’s little reason to take for granted that Reg Crypto will be handled with any more focus.
SUFFICIENT DECENTRALIZATION?
One potential pitfall in the current rules is the lack of a uniform standard for the fulfilment of the initial investment contract entailed in the sale of tokens. The rules lay out paths for either the success or failure of a project, but the standards for a successful exit are judged entirely against a promoters’ own stated development goals.
At the end of the safe harbor paths, a project would file a form (TR) on the SEC’s Edgar system, declaring that they have halted all essential managerial activities in connection with the initial contract. This exit can be either a success or failure, and the SEC expects a detailed analysis of those outcomes in relation to the initial planned goals.
However, this has raised some worries that it discourages project founders from spelling out their goals - if they’re not written down, nobody can get mad at you for failing.
There are also no technical standards for what counts as “decentralization.” That’s particularly thorny given that purportedly “decentralized” activities, including the mining or staking activity that keeps a blockchain system functional, can be undertaken by separate successor organizations with no obligations to token buyers.
So Reg Crypto is arguably still a little nebulous on the exact innovation it brings to the table: the process for turning a contract-based blockchain token into free-floating commodity.
A FUNDRAISING DOUBLE DIP?
Our most immediate concern about the details of reg crypto is a certain degree of ambiguity around the groups or organizations that might launch fundraising efforts, and what they are able to do after such a fundraise.
As it stands, it seems plausible that a group of individuals could pursue a “tokenized” fundraise under reg crypto, then start a conventional equity-structured corporation to provide defined “support” services for the project. If such a support firm eventually grew to IPO scale, this presents the hypothetical possibility of a fundraising “double dip,” once in tokens and once in equity.
This comes down to the proposed rule’s stance that “Once such network or application is functional, it is our view that services tosecure, maintain, improve, or enhance such a network or application or its functionality, or to facilitate network effects, whether through sponsoring or funding development projects or other similar activities, would not constitute essential managerial efforts.”
This is the point at which a group either simply “walks away” from a project completed without any formal entity formation (for projects under the $5 million exemption), or actually dissolve and disband the organization (for those under the $75 million exemption).
So once a decentralized project is running, the principals’ obligations to token investors are terminated. But it appears, under the currently proposed rule, that the same individuals could form an equity firm with the purpose of engaging in “support” activities, possibly including mining or staking activity to maintain the network they built, as well as distributing third-party development grants and administering bug bounty programs to solicit services from (again) third parties.
The premise here is broadly sound: activities like staking can be performed by any participant in a public blockchain network, so there’s some sense to the idea that these are no longer managerial activities.
But this dynamic can be easily abused, for instance by a successor organization who becomes the dominant actor on the nominally “decentralized” network they have built themselves. This could be abused in numerous ways, but very broadly, a devious group could fundraise for a “decentralized” project that’s cleverly designed to funnel future profits to an organization to which token buyers have no claim.
YOUR COMMENT IS REQUESTED
We plan to raise this successor organization issue in our own comment letter, but our readers certainly have their own perspectives. No matter how big or small you may think you are, now is a vital opportunity to weigh in on rules with potentially major long-term implications.
That’s especially true for the kinds of smaller organizations and even individuals most likely to benefit from Reg Crypto. The SEC is obligated to read all comments submitted about the new proposal - one of the reasons the rulemaking process is so long. So your voice will be heard, in some sense.
Some advice on maximizing the impact of those comments: Don’t rely excessively on AI to write your comment letter. Not only will it be recognizable to many, it is likely to wind up overlong and vague in ways that reduce its impact even on those who can’t spot an LLM.
This is a job for a real expert, who knows what’s most important to you, and can put it across with convincing human commitment.
