The Hyperliquid Policy Center (HPC) has officially submitted a detailed comment letter to the United States Securities and Exchange Commission (SEC), urging the regulatory body to refine its proposed "Regulation Crypto Assets" framework. In a communication dated October 19, the advocacy group expressed broad support for the SEC’s initiative to provide a structured pathway for digital asset projects but identified five critical areas where revisions are necessary to protect developers, token holders, and the broader American technological ecosystem. The HPC’s recommendations focus on clarifying the legal status of airdrops, defining the boundaries of secondary market trading, expanding safe harbor protections, distinguishing between automated and discretionary token buybacks, and ensuring federal preemption of state-level securities registration requirements.
The SEC’s proposed framework, which was first introduced in August, represents one of the most significant attempts by the commission to formalize the rules governing the issuance and trading of crypto assets. Under the current proposal, qualifying crypto projects would be permitted to raise up to $5 million over a four-year period under a specific startup exemption. For larger-scale operations, a separate fundraising exemption would allow for the collection of up to $75 million annually. These provisions are designed to mimic existing securities exemptions for traditional small businesses and startups, such as Regulation A+ and Regulation D, but tailored for the unique technical requirements of blockchain-based assets.
Background and the Regulatory Timeline
The dialogue between the crypto industry and the SEC has reached a fever pitch in 2024, following years of what many industry participants have labeled "regulation by enforcement." The SEC’s August proposal was seen as a potential olive branch, or at least a recognition that the existing "Howey Test"—a legal standard established in 1946 to determine what constitutes an investment contract—requires modernized interpretation for digital assets.
The timeline of the current proceeding is tight. The SEC published the "Regulation Crypto Assets" proposal in late summer, opening a window for public feedback that was scheduled to close on October 20. The HPC’s letter, filed just one day before the deadline, serves as a comprehensive industry response, representing the interests of decentralized finance (DeFi) protocols and the developers who build them. The urgency of these recommendations is underscored by the shifting global landscape, where jurisdictions like the European Union (under the MiCA framework), Hong Kong, and the United Arab Emirates have already established clearer legal pathways for digital asset firms.
Redefining Token Airdrops and the Concept of Consideration
One of the most pivotal recommendations in the HPC’s letter concerns the legal classification of token airdrops. Historically, the SEC has viewed certain token distributions as securities transactions if they are deemed to involve an "investment of money" or "consideration." The HPC argues that the SEC must formally establish that airdrops do not constitute securities transactions when recipients provide no tangible consideration in exchange for the tokens.
The advocacy group specifically targeted the SEC’s tendency to view administrative actions as forms of payment. In many modern crypto distributions, users are required to connect a digital wallet, complete "Know Your Customer" (KYC) or sanctions screening, or follow a project on social media to qualify for an airdrop. The HPC contends that these actions should not be treated as an "investment of money" or a "tangible consideration" under the Howey Test. By clarifying this distinction, the SEC would provide a safe path for projects to decentralize their governance without the fear that distributing tokens to their community would trigger immediate and retroactive securities violations.
Clarifying Secondary Market Trading and Intermediary Roles
The second major revision sought by the HPC involves the secondary market—the trading of tokens after their initial distribution. The current SEC proposal is criticized for being ambiguous regarding how decentralized protocols and other intermediaries should operate when tokens distributed under the new exemptions are traded.
The HPC has called for explicit rules governing whether decentralized exchanges (DEXs) and other automated market makers (AMMs) can facilitate transactions involving these tokens without being required to register as national securities exchanges or broker-dealers. The group argued that the unique, self-executing nature of smart contracts makes them fundamentally different from traditional centralized intermediaries. Without clear guidance, the HPC warns that liquidity for new projects will remain stifled, as domestic platforms may refuse to list tokens for fear of regulatory blowback.
Expanding the Safe Harbor and Protecting Developing Projects
A central pillar of the SEC’s proposal is the "safe harbor" provision, which would offer legal protection for tokens that are no longer associated with a traditional investment contract—usually because the underlying project has become sufficiently decentralized. However, the HPC identified a significant hurdle in the current language: the requirement for projects to essentially acknowledge that their tokens previously constituted securities.
The HPC’s third recommendation seeks to expand this safe harbor to protect projects that are still in the development phase. Crucially, the group argues that projects should be able to transition into the safe harbor without being forced to admit that their previous activities fell under the definition of an investment contract. This "no-admission" clause is vital for developers who believe their tokens were never securities but wish to comply with the new regulatory framework to avoid future litigation. By removing the requirement for a "confession" of past securities status, the SEC could encourage a much higher rate of compliance among existing US-based projects.
Distinguishing Between Automated and Discretionary Token Buybacks
The fourth area of concern involves tokenomics, specifically the practice of token buybacks. Many blockchain protocols use a portion of their revenue to buy back tokens from the open market, often to burn them (reduce supply) or to fund a community treasury. The SEC has historically viewed buybacks with suspicion, often equating them to corporate stock buybacks intended to manipulate prices.
The HPC urged the SEC to distinguish between automated token buybacks, which are governed by immutable code and predefined rules, and discretionary purchases controlled by a centralized team. Automated buybacks, the HPC argues, are transparent and predictable, providing a functional utility to the protocol rather than acting as a tool for market manipulation. Regulating these two activities differently would allow DeFi protocols to maintain their economic models while providing the SEC with the oversight necessary to prevent centralized entities from engaging in predatory market practices.
The Necessity of Federal Preemption over State Laws
The final recommendation in the HPC letter addresses a logistical nightmare for many crypto startups: the "Blue Sky" laws of individual US states. Currently, even if a project complies with federal SEC regulations, it may still face a patchwork of registration requirements and enforcement actions from 50 different state regulators.
The HPC called for permanent federal preemption of certain state securities registration requirements for projects that qualify for the SEC’s proposed safe harbor. The group warned that the current proposal, as written, could expose mature, decentralized projects to additional state-level regulations once they transition out of federal oversight. Without federal preemption, the cost of legal compliance could remain prohibitively high for all but the largest crypto firms, effectively nullifying the benefits of the SEC’s proposed exemptions for small-to-mid-sized developers.
Economic Implications and Global Competitiveness
The HPC’s letter concludes with an analysis of the broader economic stakes. The advocacy group noted that the lack of legal certainty in the United States has led to a documented "brain drain" of blockchain talent. According to recent industry data, the US share of the global crypto developer workforce has declined significantly over the last five years as teams seek jurisdictions with more predictable regulatory environments.
By adopting these five revisions, the HPC argues the SEC could reverse this trend. Greater legal certainty would encourage developers to launch their projects in the US, hire American employees, and include American users in their ecosystems. Conversely, if the framework remains overly restrictive or ambiguous, the group warns that the most innovative projects will continue to exclude US participants or relocate their operations entirely to offshore hubs.
Stakeholder Reactions and Potential SEC Response
While the SEC has not yet officially responded to the HPC’s comment letter, the industry’s reaction has been largely supportive. Legal experts have noted that the HPC’s focus on "tangible consideration" in airdrops and "automated vs. discretionary" buybacks addresses specific technical nuances that previous regulatory proposals often overlooked.
The SEC now faces the task of reviewing the HPC’s letter alongside thousands of other public comments as it moves toward a final rule. The commission’s decision will be a watershed moment for the US digital asset industry. If the SEC incorporates the HPC’s recommendations, it could signal a shift toward a more collaborative and technologically informed approach to regulation. If it maintains its current stance, the legal battles between the commission and the crypto industry are likely to intensify, potentially moving toward a resolution in the Supreme Court.
As the October 20 deadline passes, the focus of the crypto community will shift to the SEC’s internal deliberations. The final version of "Regulation Crypto Assets" will determine the trajectory of blockchain innovation in the United States for the next decade, deciding whether the country remains a global leader in the digital economy or a cautious observer of a revolution happening elsewhere.
