What Reddit’s IPO Filing Says About Crypto Regulation

Reddit
may
only
hold
an
“immaterial”
amount
of
bitcoin

(BTC),
ether

(ETH)
and
Polygon’s

(MATIC),
but
the
way
it
treats
crypto
is
significant.

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On
Thursday,
the
idiosyncratic
message
board
platform
disclosed
it
held
crypto
assets
as
part
of
its
treasury
holdings
and
as
a
means
of
payment,
in
a
filing
readying
it
to
go
public
in
the
U.S.
This
shouldn’t
come
as
a
surprise,
given
that
Reddit
is
among
the
few
social
media
giants
that
started
experimenting
with
crypto
tokens,
NFTs
and
blockchain
tools
in
the
pandemic-era
bull
run
—
and
is
arguably
the
Web2
era
giant
that
took
crypto
most
seriously.

What
is
surprising
are
some
of
the
assumptions
Reddit
makes
about
the
world
of
crypto
in
its
U.S.
Securities
and
Exchange
Commission

filing.
First,
Reddit
announced
it
has
joined
a

select
club
of
companies
that
holds
both
BTC
and
ETH
in
its
corporate
treasury.
While
a
number
of
native
crypto
companies
hold
both
leading
cryptos
in
reserve,
most
are
likely
to
follow
MicroStrategy’s
“bitcoin-only”
approach.

So
Reddit
joins

KPMG
Canada
and

Meitu,
so
what?
Well,
the
company’s
reasoning,
outlined
in
its
S-1
filing
–
a
long,
thorough
and
highly-vetted
legal
document
–
is
telling.
Based
on
public
statements
from
the
SEC,
Commodities
Futures
Trading
Commission
and
other
“high-ranking”
regulatory
bodies,
it
has
determined
Ethereum’s
native
token
is
not
“likely”
a
security.

While
Reddit’s
compliance
team
must
have
added
that
line
saying
“such
determinations,
however,
are
risk-based
judgments
made
by
us
[and]
do
not
constitute
a
legal
standard,”
it
is
significant
as
an
opinion,
given
the
recent
hem
hawing
by
the
SEC
over
ETH’s
legal
standing
following
Ethereum’s
transition
to
proof-of-stake.

This
is
all
the
more
relevant
given
that
most
of
Reddit’s
discussion
of
crypto
happens
in
a
section
disclosing
risks.
The
company
notes
that
human
errors
and
computer
malfunctions
can
result
in
the
loss
or
destruction
of
the
private
keys
needed
to
access
their
funds,
a
little
bit
of
insight
into
why,
perhaps,
crypto
has
not
exploded
in
popularity
as
a
treasury
asset.

Reddit
also
notes
the
regulatory
risks
that
may
prevent
it
from
accessing
or
selling
its
holdings.
But
more
interesting
are
the
ways
regulations
are
already
shaping
the
company’s
approach
to
crypto.

Two
rules
in
particular
are
worth
noting:
First,
the
SEC’s

controversial
Staff
Accounting
Bulletin
No.
121
from
March
2022,
which
provides
“guidance”
on
safeguarding
crypto
on
behalf
of
users.
SAB
121,
as
it’s
commonly
called,
requires
companies
to
track
holding
on
their
balance
sheet,
and
keep
an
equal
amount
of
assets
in
reserve
as
customers
hold
on
the
platform
—
which
has
been
described
as
an
onerous,
overly-cautious
request.

The
rule
itself
doesn’t
affect
Reddit
in
a
material
sense,
because
Reddit’s
crypto
experiments
were
fully
non-custodial.
“We
do
not
provide
custody
or
safeguarding
services,
do
not
maintain
the
private
keys
or
have
the
ability
to
recover
the
private
keys,
do
not
perform
recordkeeping
…
and
do
not
protect
from
risk
of
theft
or
loss,”
the
company
notes.

But
it
is
possible,
as
one
of
the
world’s
largest
websites,
it
would
have
liked
to.
After
less
than
a
year,
Reddit
decided
to
sunset
its
“Community
Points”
crypto
rewards
token
pilot,
which
was
hailed
as
a
success
at
launch.
While
decentralization
maxis
live
by
the
maxim
that
“not
your
keys,
not
your
coins,”
the
simple
reality
is
that
key
management
is
hard
and
that
true
self-custody
likey
can
never
scale
for
a
platform
as
big
as
Reddit.

It’s
possible
Community
Points
would
still
be
around
if
Reddit
had
the
ability
to
help
users
recover
keys
in
the
same
way
they
can
help
recover
passwords.
At
the
very
least,
the
existence
of
SAB
121
will
determine
the
type
of
crypto
projects
any
company
in
the
U.S.
will
attempt.

Second,
there’s
the
generally
accepted
accounting
principles
(GAAP)
that
impact
how
Reddit
recognizes
crypto
on
its
balance
sheet.
According
to
the
ruleset
today,
companies
that
hold
crypto
can
only
recognize
changes
in
price
when
it
decreases
(aka
an
“impairment”
cost),
but
not
when
it
rises.
This
is
why
during
the
bear
market
MicroStrategy
and
Telsa
made
headlines
for
recording
losses
totaling
hundreds
of
millions
as
bitcoin
decreased.

See
also:



Why
Crypto’s
Most
Altruistic
Project
Is
Going
(Kinda)
Corporate


|
Opinion

“This
accounting
treatment
may
adversely
affect
our
operating
results
in
periods
where
we
have
recognized
an
impairment,”
Reddit
noted.
Impairment
costs
are
treated
as
a
“general
and
administrative”
expense,
even
if
the
losses
are
just
on
paper,
perhaps
another
reason
why
more
firms
haven’t
bought
bitcoin.

Thankfully,
the
Financial
Accounting
Standards
Board
issued
new
crypto
accounting
guidance
in
December
2023
that
will
allow
companies
to
recognize
the
fair
value
of
digital
assets
rather
than
their
cost
basis.

Either
way,
it’s
clear
enough
that
Reddit
sees
“significant
potential”
in
crypto,
even
in
as
conservatively
worded
a
document
as
an
S-1.
Indeed,
the
legalese
itself
is
useful
insight
into
what
even
tech-forward
corporations
think
(or
are
forced
to
think)
about
blockchain:
“a
relatively
recent
trend,”
increasingly
synonymous
with
“improper,
illegal,
or
fraudulent
activities”
with
an
unstable
legal
footing
and
uncertain
consumer
demand.

Funnily
enough,
after
noting
it
holds
ETH
and
MATIC
for
payments,
it
noted
most
of
those
procurements
are
from
Reddit’s
product
and
engineering
teams.
Who
knows
if
crypto
will
ever
be
widespread
on
Reddit.
But,
for
the
time
being,
it’s
safe
to
bet
that
R&D
teams
are
having
fun
with
it.