The Hyperliquid Policy Center (HPC) has submitted a formal comment letter to the United States Securities and Exchange Commission (SEC) proposing five critical revisions to the regulator’s "Regulation Crypto Assets" framework. Released on October 19, the submission arrives at a pivotal juncture as the SEC nears the conclusion of its public comment period, which is set to close on October 20. The HPC’s intervention highlights a growing push from industry stakeholders to establish a definitive, legally sound pathway for crypto-asset developers, aiming to prevent the exodus of blockchain projects to more hospitable international jurisdictions.
The SEC’s proposed framework, originally introduced in August, outlines a multi-tiered structure for capital formation in the digital asset space. Under these provisions, qualifying crypto projects would be permitted to raise up to $5 million over a four-year period via a startup exemption, or up to $75 million annually under a separate, more robust fundraising exemption. Furthermore, the framework proposes a "safe harbor" mechanism for tokens that have evolved beyond the scope of traditional investment contracts, alongside potential exemptions from certain state-level securities registration requirements. While the HPC supports the core tenets of the SEC’s proposal, it argues that the current language remains ambiguous, potentially stifling the very innovation the agency seeks to regulate.
Chronology of the SEC’s Regulatory Evolution
The current regulatory climate is the result of years of legal friction between the SEC and the cryptocurrency industry. Since the SEC first signaled its intent to apply the Howey Test—a legal standard established in 1946—to digital assets, the industry has operated in a state of "regulation by enforcement."
The timeline of this friction is marked by several high-profile developments:
- 2017-2018: The SEC initiates a series of enforcement actions against Initial Coin Offerings (ICOs), setting the stage for increased oversight.
- 2020-2022: A wave of litigation ensues, most notably the SEC v. Ripple Labs case, which raised foundational questions about whether tokens sold on secondary markets qualify as securities.
- August 2024: The SEC publishes its "Regulation Crypto Assets" framework, representing its first comprehensive attempt to codify exemptions for digital asset issuers.
- October 20, 2024: The deadline for public comments regarding the proposed framework, serving as the final opportunity for industry advocacy groups like the HPC to influence the rulemaking process.
The Five Pillars of the HPC Proposal
The Hyperliquid Policy Center’s recommendations focus on eliminating the "regulatory gray zones" that prevent developers from building in the United States. The five specific revisions are as follows:
1. Clarifying Airdrops as Non-Securities
The HPC contends that token airdrops—where tokens are distributed for free to community members—should be explicitly classified as non-securities transactions. The group argues that administrative actions, such as connecting a digital wallet or completing basic identity and sanctions screening, do not constitute "tangible consideration." By categorizing these as marketing or network-bootstrapping efforts rather than securities offerings, the SEC could remove the compliance burden that currently deters many decentralized projects from engaging with US users.
2. Standardizing Secondary Market Trading
The group has requested clear guidelines on how secondary markets interact with tokens issued under the proposed exemptions. If a project raises capital under the SEC’s $75 million annual exemption, the current rules remain murky regarding whether decentralized exchanges (DEXs) or third-party intermediaries can legally facilitate the trading of those tokens. The HPC argues that without a clear secondary market framework, liquidity remains trapped, effectively punishing early investors and participants.
3. Enhancing the Safe Harbor Provision
The proposed safe harbor currently requires projects to admit that their tokens previously constituted investment contracts. The HPC argues this is a punitive hurdle that exposes developers to unnecessary retroactive litigation. They recommend expanding the safe harbor to allow projects to transition into a decentralized, functional state without the mandatory admission of past legal status, which would provide the necessary cover for projects that have achieved maturity.
4. Regulating Automated Buybacks
A key distinction requested by the HPC involves token buybacks. The group argues that automated, protocol-driven buybacks—which operate on pre-defined, immutable code—should be treated differently than discretionary buybacks managed by developers. The latter can be used for market manipulation, whereas the former are often essential to network economics and should be exempt from the stringent regulations applied to centralized corporate buybacks.
5. Federal Preemption of State Securities Laws
Finally, the HPC calls for permanent federal preemption of state registration requirements. Currently, crypto projects may comply with federal law only to find themselves subject to a patchwork of disparate and often contradictory state-level "Blue Sky" laws. The HPC warns that without federal preemption, mature projects will continue to face an insurmountable regulatory burden, effectively forcing them to block American users to avoid state-level litigation.
Supporting Data and Industry Context
The urgency of these recommendations is backed by recent industry data. According to reports from the Blockchain Association and various venture capital firms, the United States’ share of global blockchain development has steadily declined over the past 36 months. In 2021, approximately 40% of global crypto startups were headquartered in the US; by the third quarter of 2024, that figure had dropped to roughly 28%.
The primary driver for this shift is "regulatory arbitrage." Countries such as the United Arab Emirates (UAE), Singapore, and Switzerland have implemented specialized digital asset frameworks that offer clear, albeit stringent, compliance paths. For a startup, the cost of legal counsel required to navigate the SEC’s current ambiguous landscape can exceed $500,000 in the first year alone—a prohibitive expense for early-stage teams. By codifying the HPC’s proposed revisions, the SEC would effectively lower the "cost of entry" for legitimate developers, fostering a more competitive domestic environment.
Implications and Expert Perspectives
The impact of the SEC adopting these revisions would be significant. If the SEC accepts the distinction between "administrative tasks" and "tangible consideration" for airdrops, it would provide immediate relief to thousands of developers currently worried that their distribution methods violate federal securities law. Similarly, the federal preemption of state laws would provide a unified national standard, a goal long championed by fintech lobbyists.
However, critics of such proposals, including some consumer advocacy groups, caution that excessive exemptions could weaken investor protections. The SEC’s historical mandate is the protection of retail investors; regulators often argue that "safe harbors" can be exploited by bad actors to facilitate "pump and dump" schemes. The challenge for the SEC is to strike a balance between facilitating the growth of a nascent technology and ensuring that the public is not exposed to fraudulent fundraising schemes.
Legal analysts observing the process note that the SEC is unlikely to adopt all five recommendations exactly as written. However, the specific, granular nature of the HPC’s letter suggests a shift in advocacy tactics. Rather than pushing for wholesale deregulation, industry players are increasingly opting for "surgical" legislative proposals that align with the agency’s existing regulatory tools.
Looking Ahead: The Regulatory Horizon
As the October 20 deadline passes, the SEC will transition from the public comment phase to the review phase. The agency is not under a strict statutory deadline to finalize the Regulation Crypto Assets framework, but the political pressure is mounting. With the upcoming election cycles and the global competition for leadership in blockchain technology, the SEC faces immense pressure to provide clarity.
Whether or not the HPC’s recommendations are integrated into the final rule, their proposal has already achieved a primary goal: it has provided a concrete, actionable template for what "clearer rules" look like in practice. For the US to maintain its position as a hub for financial and technological innovation, the consensus among industry leaders is that the current regulatory ambiguity must be replaced by a framework that recognizes the unique, decentralized nature of modern digital assets. The coming months will demonstrate if the SEC is prepared to evolve alongside the industry, or if the current regulatory friction will continue to drive the future of finance beyond American borders.
