Bitwise and Hyperliquid Push SEC to Rewrite Crypto Asset Rules

The Securities and Exchange Commission's public comment period on its proposed Regulation Crypto Assets closed this week, and the submissions from Bitwise Asset Management and the Hyperliquid Policy Center underline just how much operational uncertainty firms are still carrying. Both organisations filed formal comment letters asking the SEC to sharpen key provisions before any final rule takes effect, and their requests map almost exactly onto the gaps that keep compliance teams and auditors guessing: how to classify a token, whether an airdrop is a taxable securities event, and what rules govern secondary trading on decentralised venues. The outcome of this rulemaking will reshape how digital asset accounting software must track and report positions across the industry.

What Regulation Crypto Assets Actually Proposes

The SEC's proposed Regulation Crypto Assets is designed to create a structured pathway for digital asset projects to raise capital without triggering the full weight of traditional securities registration. At its core, the framework offers two mechanisms:

The fundraising exemption

Projects that meet certain conditions would be able to raise funds through token sales without registering those tokens as securities. The exemption is intended to give early-stage networks room to build out genuine utility before being subjected to the same disclosure regime that applies to public equities.

The conditional safe harbor

Tokens originally issued under an investment contract would eventually be able to exit securities classification, but only if the issuer certifies via a proposed Form TR filing that the investment contract has ceased to exist. The safe harbor is time-limited and conditional, meaning the token's legal status could shift during the life of a project.

For accounting teams, both mechanisms create classification timing problems. A token that starts life as a security and later migrates to commodity or utility status must be reclassified on the balance sheet, and any related impairment charges, fair-value adjustments, or tax positions would need revisiting. Firms using crypto bookkeeping software need workflows that can accommodate mid-life reclassification, not just static asset categorisation at acquisition.

Bitwise: The Need for a Workable Classification Standard

Bitwise Asset Management's comment letter focuses on a practical problem that investment managers face every day: how to determine, using information that is actually available to them, whether a given crypto asset falls under securities law.

The "publicly available information" standard

Bitwise argues that managers need a clear, objective test they can run using public data, without having to rely on issuer representations or legal opinions that may not be forthcoming. The firm's point is not merely theoretical. An investment manager holding a basket of tokens across multiple funds must be able to document its classification rationale in a way that stands up to audit. If the standard is opaque, the audit trail is also opaque.

Reliance on Form TR filings

The letter also addresses a practical gap in the safe-harbor design. Bitwise wants the SEC to specify when a manager can rely on an issuer's Form TR certification that an investment contract has ended, and, critically, how managers should assess the status of a token when no such filing exists. The second scenario is likely to be the norm rather than the exception, at least in the early years of the framework. Without guidance on the no-filing scenario, firms are left to make their own judgements, which creates inconsistent reporting across the market and potential regulatory exposure.

For CFOs and audit partners running digital asset funds or corporate treasury positions, this gap is material. If the token was acquired when it was arguably a security, and the issuer has not filed a Form TR, the asset may still need to be treated as a security for financial reporting and tax purposes. That affects everything from custody arrangements to whether the position triggers broker-dealer registration considerations.

Hyperliquid: Broader Safe Harbor, Clearer Airdrop Rules

The Hyperliquid Policy Center's submission takes a different angle, pressing the SEC on three specific problem areas: the timing of safe-harbor eligibility, the treatment of airdrops, and the regulatory status of secondary-market trading.

Safe-harbor timing

Hyperliquid argues that the current safe-harbor design could arrive too late in a project's development to be useful. If a network has already achieved meaningful decentralisation before the formal safe-harbor criteria are met, the window for protection may have already passed. The group is pushing for protections to attach earlier in the development cycle, which would have significant knock-on effects for how firms recognise and report token positions acquired during early-stage distributions.

Airdrops and network participation rewards

The comment letter specifically calls for clearer protections for airdrops that reward genuine network participation. This is a live accounting and tax issue right now, without waiting for new rules. Under current IRS guidance, airdropped tokens are generally treated as ordinary income at fair market value on the date of receipt. If the SEC subsequently classifies a participation-reward airdrop as a securities distribution, that could layer securities-law obligations on top of an already complex income-recognition event. The Hyperliquid submission is essentially asking the SEC to confirm that these airdrops sit outside the securities perimeter, which would simplify the compliance picture considerably.

Hyperliquid also raised token buybacks as an area needing explicit guidance. A protocol buying back its own tokens on the open market could be characterised as the issuer conducting unregistered securities transactions if those tokens are still classified as investment contracts. Without a clear rule, protocols and the intermediaries facilitating those buybacks face real uncertainty. This is also an area where crypto bookkeeping software needs to handle a distinct transaction type, a buyback by the issuer that reduces circulating supply, differently from a standard peer-to-peer trade.

Secondary-market trading and decentralised venues

Perhaps the most practically urgent point in the Hyperliquid submission is its warning that the proposal "fails to provide clarity" on whether unregistered intermediaries can facilitate token trading, or whether tokens can trade freely through on-chain protocols. The letter urges the SEC to address secondary-market transactions directly rather than leaving exchanges and decentralised trading venues in a state of regulatory limbo.

For compliance teams, this ambiguity has immediate implications. If an on-chain protocol through which a client executes trades is later deemed to be an unregistered broker-dealer or exchange, transactions routed through it could be considered in violation of securities law. That is an audit and legal-exposure risk that sits in firm portfolios right now. You can read more about Hyperliquid's earlier policy arguments for Hyperliquid's earlier argument for regulating deployers rather than chains, which provides useful context for the policy centre's current position.

The Dissenting View: Withdraw the Proposal Entirely

Not everyone submitting comments wanted the SEC to refine the proposal. Former SEC enforcement official John Reed Stark and Duke University finance scholar Lee Reiners filed a joint comment letter on 16 October urging the commission to withdraw the framework completely.

Statutory authority and the Howey test

Stark and Reiners argue that existing securities laws, anchored by the Supreme Court's Howey test for identifying investment contracts, already give the SEC the tools it needs to regulate crypto offerings. Their view is that the proposed regulation does not clarify the law so much as rewrite it in ways that may exceed the agency's statutory authority.

Investor protection concerns

The pair argue that the fundraising exemptions would weaken protections that retail investors currently enjoy, and that the self-certification mechanism embedded in Form TR would effectively allow issuers to remove their tokens from securities oversight without meaningful independent verification. They also warned that adopting the rules in substantially their current form would expose the entire framework to an immediate legal challenge, with a real risk that a court could strike it down, which would leave the market in a worse position than before the rulemaking began.

This dissenting position matters for compliance planning. Firms cannot safely build internal classification frameworks around rules that may be litigated out of existence. The legal durability question is not academic. For a deeper look at how courts and administrative law interact with the SEC's current crypto agenda, see our analysis of how durable the SEC's and CFTC's pro-crypto rules really are.

What Comes Next and Why It Matters for Firms

With the comment period now closed, the SEC will review all submissions before deciding whether to revise, adopt, or withdraw the proposed rules. No timetable for a final decision has been announced, and any final rule requires a commission vote before taking effect. That means the current state of uncertainty is likely to persist for months, possibly longer.

Immediate actions for accounting firms and CFOs

The absence of final rules does not mean firms can defer action. There are concrete steps that compliance teams and finance departments should be taking now:

• Audit existing token holdings against the Howey test and document the classification rationale for each position, using only publicly available information. This aligns with Bitwise's standard and creates a defensible audit trail regardless of what the final rule says.
• Map all airdrop receipts in the past 12 months and confirm they have been recognised as ordinary income at fair market value on the date of receipt, consistent with current IRS guidance. If the SEC later rules these outside the securities perimeter, no adjustment is needed on the tax side. If it rules the opposite, you will need to reassess.
• Review any token buyback transactions in client portfolios or on corporate balance sheets and flag them for legal review if the issuer has not yet filed, or cannot file, a Form TR equivalent.
• Ensure your digital asset accounting software can handle mid-life reclassification events. A token that starts as a security and later loses that status must trigger a reclassification entry, a potential reversal of any mark-to-market adjustments made under securities accounting treatment, and a review of associated tax positions.
• Monitor secondary-market trading routes. If client trades are being executed through on-chain protocols, assess whether those protocols could be characterised as unregistered intermediaries under current or proposed rules.

Longer-term compliance architecture

The broader lesson from these comment letters is that the SEC's rulemaking, whatever its final form, will require firms to maintain living classification records for every token they touch. Static labelling at acquisition is not sufficient. Firms need processes that flag reclassification triggers, such as a Form TR filing, a change in network decentralisation, or a shift in the SEC's published guidance, and that feed those flags automatically into the relevant accounting and tax workflows. That is precisely where well-configured crypto accounting software earns its place in the compliance stack.

Frequently Asked Questions

What is the SEC's proposed Regulation Crypto Assets?

It is a proposed SEC rulemaking that would create a fundraising exemption for qualifying token sales and a conditional safe harbor allowing tokens originally issued as investment contracts to exit securities classification, subject to a formal Form TR certification by the issuer. It is not yet final and requires a commission vote before taking effect.

How does the Howey test apply to crypto tokens?

The Howey test, established by the US Supreme Court, defines an investment contract as a scheme where people invest money in a common enterprise and expect profits primarily from the efforts of others. The SEC applies this test to determine whether a particular token is a security. If a token meets all four prongs, it is subject to securities registration and disclosure requirements. Former SEC officials argue the test already covers crypto adequately without new rules.

How should firms account for an airdropped token that may be a security?

Under current IRS guidance, airdropped tokens are recognised as ordinary income at fair market value on the date of receipt, regardless of their securities status. If the SEC subsequently classifies a specific airdrop as a securities distribution, additional compliance obligations, such as registration or disclosure requirements, could apply. Firms should document the receipt, the fair-market-value basis used, and the legal analysis supporting their classification at the time of receipt.

What does Form TR do and why does it matter for auditors?

Form TR is a proposed certification mechanism under the draft rules. An issuer would file it to certify that the investment contract associated with its token has ceased to exist, effectively seeking to remove the token from securities classification. For auditors, it matters because it would trigger a reclassification event on the balance sheet, potentially reversing securities-accounting treatment and requiring a reassessment of related tax positions. The absence of a filed Form TR leaves classification in a grey area that auditors must document carefully.

Could the proposed rules be struck down by a court?

That risk is real and has been explicitly flagged in a comment letter by former SEC enforcement official John Reed Stark and finance scholar Lee Reiners, who argue the proposal may exceed the SEC's statutory authority. If a final rule is adopted and subsequently litigated successfully, firms that built compliance frameworks around the new rules would need to revert to the prior regime. This makes it prudent to maintain parallel documentation under both the existing Howey-test framework and any future rule structure.

Source: Cointelegraph