Regulation
What Reddit’s IPO Filing Says About Crypto Regulation
Reddit can only hold an “intangible” amount of Bitcoin (BTC)ether (ETH) and Polygon (MATIC)but how it treats cryptography is important.
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On Thursday, the idiosyncratic chatroom platform revealed that it holds crypto assets as part of its treasury holdings and as a means of payment, in a filing preparing it to go public in the United States. This should come as no surprise, given that Reddit is among the few social media giants that began experimenting with crypto tokens, NFTs, and blockchain tools during the pandemic-era bull run — and is arguably the giant from the Web2 era that took cryptography most seriously.
What is surprising are some of the assumptions Reddit has made about the crypto world in its United States Securities and Exchange Commission. deposit. First, Reddit announced that it had joined a select a club of companies that hold both BTC and ETH in their corporate treasury. Although a number of native crypto companies hold the two major cryptocurrencies in reserve, most will likely follow MicroStrategy’s “Bitcoin only” approach.
So Reddit joins KPMG Canada And Meitu, so what? Well, the company’s reasoning, laid out in its S-1 filing – a lengthy, thorough and highly vetted legal document – is telling. Based on public statements from the SEC, the Commodities Futures Trading Commission, and other “high-ranking” regulators, it has determined that Ethereum’s native token is “probably” not a security.
While Reddit’s compliance team had to add this line saying “such determinations, however, are judgments based on the risks we bear.” [and] do not constitute a legal standard,” this opinion is important, given the SEC’s recent hesitation over the legal status of ETH following Ethereum’s transition to proof-of-stake.
This is especially relevant since most crypto discussions on Reddit take place in a section revealing the risks. The company notes that human errors and computer malfunctions can result in the loss or destruction of private keys needed to access their funds, a small insight into why, perhaps, crypto has not exploded in popularity as a cash asset.
Reddit also notes regulatory risks that could prevent it from accessing or selling its holdings. But what’s more interesting is how regulations are already shaping the company’s approach to crypto.
Two rules in particular are worth noting: first, the SEC rules controversial Staff Accounting Bulletin No. 121 of March 2022, which provides “guidance” on crypto protection on behalf of users. SAB 121, as it is commonly known, requires companies to track their holdings on their balance sheets and hold in reserve an equal amount of assets to what customers hold on the platform – which has been described as an onerous request and too cautious.
The rule itself does not affect Reddit in any material way, because Reddit’s crypto experiments were completely non-custodial. “We do not provide custody or backup services, maintain private keys or have the ability to recover private keys, do not engage in record keeping…and do not protect against the risk of theft or loss,” notes the company.
But it’s possible that as one of the largest websites in the world, it would have wanted to. After less than a year, Reddit has decided to end its “Community Points” crypto rewards token pilot, which was hailed as a success when it launched. While decentralization maxis live by the maxim that “not your keys, not your coins”, the simple reality is that key management is difficult and true self-custody will never scale to a platform as big as Reddit.
It’s possible that Community Points would still exist if Reddit had the ability to help users recover their keys in the same way they can help recover their passwords. At the very least, the existence of SAB 121 will determine the type of crypto projects any American company will attempt.
Second, there are Generally Accepted Accounting Principles (GAAP) which impact how Reddit recognizes crypto on its balance sheet. Under current rules, companies that hold cryptocurrencies can only recognize price changes when they decrease (i.e. a “depreciation” cost), but not when they increase. This is why during the bear market, MicroStrategy and Telsa made headlines by posting losses totaling hundreds of millions as bitcoin declined.
“This accounting treatment may have a negative impact on our results of operations in periods where we have recorded an impairment,” Reddit noted. Depreciation costs are treated as a “general and administrative” expense, even if the losses are only on paper, perhaps another reason why more companies are not buying Bitcoin.
Fortunately, the Financial Accounting Standards Board released new crypto accounting guidance in December 2023 that will allow businesses to recognize the fair value of digital assets rather than their cost basis.
Regardless, it’s pretty clear that Reddit sees “significant potential” in crypto, even in a document as conservatively worded as an S-1. Indeed, the legalese itself is a useful snapshot of what even tech-savvy companies think (or are forced to think) about blockchain: “a relatively recent trend,” increasingly synonymous with “inappropriate, illegal or fraudulent activities” with an unstable legal basis. and uncertain consumer demand.
Oddly enough, after noting that he held ETH and MATIC for payments, he noted that most of these purchases came from Reddit’s product and engineering teams. Who knows if crypto will ever be mainstream on Reddit. But, for now, it’s a safe bet that the R&D teams are having fun.