The Hyperliquid Policy Center (HPC) has formally submitted a comprehensive set of recommendations to the United States Securities and Exchange Commission (SEC), advocating for significant modifications to the proposed "Regulation Crypto Assets" framework. In a detailed comment letter filed on October 19, the advocacy group expressed qualified support for the SEC’s initiative but warned that the current language lacks the necessary precision to protect developers and foster a competitive domestic digital asset ecosystem. The group’s proposal centers on five critical areas: the classification of token airdrops, the mechanics of secondary market trading, the regulation of token buybacks, expanded safe harbor protections for developers, and the preemption of state-level securities mandates.
This push for clarity comes as the SEC seeks to finalize a framework that would fundamentally reshape how crypto projects raise capital and interact with federal oversight. The SEC’s original proposal, introduced in August, aims to provide exemptions for qualifying crypto projects, allowing them to raise up to $5 million over a four-year period under a "startup" classification or up to $75 million annually under a broader fundraising exemption. While the industry has generally welcomed the move away from pure "regulation by enforcement," the HPC argues that without the specific revisions they have outlined, the framework may still leave many projects in a state of legal limbo, potentially driving innovation away from American shores.
A Detailed Look at the Five Proposed Revisions
The Hyperliquid Policy Center’s submission is structured around providing "bright-line rules" that would allow developers to operate with a clear understanding of their legal obligations. The group contends that the current ambiguity in the SEC’s proposal could lead to unintended litigation and stifle the decentralized nature of blockchain technology.
1. Defining the Status of Token Airdrops
Perhaps the most contentious issue addressed in the HPC letter is the treatment of token airdrops. Historically, the SEC has viewed various forms of token distributions as potential securities offerings, often arguing that the "investment of money" prong of the Howey Test can be satisfied by non-monetary consideration.
HPC has urged the SEC to formally establish that token airdrops do not constitute securities transactions, provided that the recipients do not provide tangible consideration in exchange for the assets. The group specifically argued that "administrative requirements"—such as connecting a digital wallet to a platform, completing basic Know Your Customer (KYC) or sanctions screening, or simply being an active user of a protocol—should not be legally interpreted as "payment" or "consideration." By exempting these distributions, the HPC believes the SEC would allow projects to decentralize their governance more effectively without the fear of triggering retroactive securities violations.
2. Clarity for Secondary Market Trading
The second pillar of the HPC’s recommendation focuses on the secondary market. Under the current SEC proposal, there is a lack of clarity regarding how tokens distributed under the $5 million or $75 million exemptions can be traded once they reach the hands of the public.
The HPC is calling for explicit rules that would allow decentralized protocols and other market intermediaries to facilitate transactions involving these tokens. Without such clarity, the group warns that even if a token is legally issued, it may remain illiquid if exchanges and decentralized finance (DeFi) platforms are too risk-averse to list them. The HPC argues that for a fundraising exemption to be meaningful, there must be a viable path for the secondary trading of those assets under a recognized regulatory perimeter.
3. Protecting Developers During the Transition to Decentralization
The SEC’s proposed framework includes a "safe harbor" provision for tokens that are no longer associated with investment contracts—essentially acknowledging that a project can evolve from a centralized entity into a decentralized protocol. However, the HPC believes the current safe harbor is too restrictive.
The group’s third recommendation seeks to expand this protection to cover projects that are still in the active stages of development. Crucially, the HPC argues that developers should not be forced to acknowledge or "confess" that their tokens previously constituted investment contracts in order to qualify for the safe harbor. This "no-admission" clause is designed to protect developers from private class-action lawsuits and other legal liabilities that could arise from admitting their past activities fell under securities laws.
4. Distinguishing Automated vs. Discretionary Buybacks
Token buybacks—where a project uses its revenue or treasury to purchase tokens from the open market—are a common mechanism in the crypto industry used to manage supply and demand. The HPC has urged the SEC to distinguish between automated buybacks governed by immutable smart contracts and discretionary purchases controlled by a centralized team.
According to the HPC, automated buybacks that follow predefined, transparent rules do not carry the same risks of market manipulation or "insider" advantage as discretionary buybacks. By providing a clear regulatory distinction, the HPC hopes to allow projects to implement programmatic economic models without being labeled as manipulative entities under federal securities laws.
5. Federal Preemption of State Securities Rules
The final recommendation addresses the "patchwork" of state-level regulations, often referred to as "Blue Sky laws." The HPC has called for permanent federal preemption of certain state registration requirements for projects that qualify for the SEC’s safe harbor.
The group warned that the SEC’s current proposal could inadvertently expose mature, decentralized crypto projects to a new wave of state-level regulations once they transition out of federal oversight. Without federal preemption, a project could find itself compliant at the national level but in violation of the laws of 50 different states, creating a massive administrative and legal burden that the HPC describes as "unsustainable for decentralized innovation."
Chronology of the SEC’s Crypto Regulatory Shift
The submission of the HPC’s letter marks a critical juncture in the timeline of US crypto regulation. The journey toward "Regulation Crypto Assets" has been marked by years of tension between the industry and the Commission.
- February 2020: SEC Commissioner Hester Peirce introduces the "Token Safe Harbor Proposal 2.0," which suggested a three-year grace period for developers to achieve decentralization.
- 2021–2023: Under Chair Gary Gensler, the SEC ramps up enforcement actions against major players, including Coinbase, Binance, and Ripple, maintaining that most tokens are securities.
- August 2024: The SEC introduces the initial draft of the "Regulation Crypto Assets" framework, signaling a potential shift toward a formal registration and exemption process rather than purely relying on enforcement.
- October 19, 2024: The Hyperliquid Policy Center submits its formal comment letter detailing the five necessary revisions.
- October 20, 2024: The public comment period for the SEC proposal officially closes.
- Late 2024 / Early 2025: The SEC is expected to review the thousands of comments received and move toward a final rule-making phase.
Supporting Data and the Regulatory Landscape
The urgency behind the HPC’s recommendations is underscored by data suggesting a "brain drain" of crypto talent from the United States. According to a 2023 report by Electric Capital, the US share of the global blockchain developer population has fallen for five consecutive years, dropping from 40% in 2017 to approximately 26% in 2023.
Furthermore, the SEC’s enforcement-first approach has been costly. A report from the Blockchain Association estimated that its member companies have spent over $400 million on legal defense costs in SEC-related matters since 2021. The HPC argues that by adopting the $5 million and $75 million exemptions—with their proposed revisions—the SEC could lower the barrier to entry for startups that currently lack the capital to engage in multi-year legal battles.
The proposed $75 million annual limit mirrors the existing Regulation A+ framework, which has been used by traditional small businesses to raise capital from non-accredited investors. However, the crypto industry has historically struggled to utilize Reg A+ due to the specific disclosure requirements that do not align with the technical realities of decentralized networks.
Potential Market Implications and Industry Reactions
While the SEC has not yet officially responded to the HPC’s specific recommendations, the broader crypto community has echoed many of the group’s sentiments. Major industry players like Coinbase and venture capital firm Andreessen Horowitz (a16z) have long argued that the lack of "bright-line rules" is the single greatest obstacle to US crypto leadership.
If the SEC adopts the HPC’s recommendations, analysts suggest it could lead to a "renaissance" of US-based token launches. The clarity regarding airdrops, in particular, would allow projects to distribute governance power to their users without the administrative burden of treating every user as a securities holder. This would likely increase the total value locked (TVL) in US-based DeFi protocols, as users would feel more secure participating in ecosystem incentives.
Conversely, if the SEC rejects these revisions and maintains a more restrictive stance, the "offshoring" trend is expected to accelerate. Jurisdictions like the European Union, which recently implemented the Markets in Crypto-Assets (MiCA) regulation, and Dubai’s Virtual Assets Regulatory Authority (VARA), have already established clear frameworks that provide the legal certainty the HPC is seeking from the SEC.
The Path Forward for Regulation Crypto Assets
The closing of the comment period on October 20 marks the beginning of a deliberation phase for the SEC. The Commission must now weigh the concerns of advocacy groups like the Hyperliquid Policy Center against its mandate to protect investors and maintain orderly markets.
The HPC’s letter emphasizes that the goal is not to avoid regulation, but to ensure that regulation is "fit for purpose." By distinguishing between centralized investment schemes and decentralized technological protocols, the HPC believes the SEC can fulfill its mission without inadvertently banning a transformative new technology.
"Greater legal certainty could encourage crypto developers to launch projects in the US rather than relocate overseas or exclude American users," the HPC stated in its concluding remarks. As the SEC moves toward a final decision, the global crypto industry remains watchful, as the outcome will likely determine whether the United States remains a hub for the next generation of financial technology or cedes its position to more regulatory-friendly international competitors.
