Insights from Reddit’s IPO Filing on Cryptocurrency 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.

“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.

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