What Reddit’s IPO Filing Says About Crypto Regulation

Reddit may only hold an “insignificant” amount of bitcoin (BTC), ether (ETH) and Polygon’s (MATIC), but the way it handles crypto is significant.

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The quirky message board platform disclosed on Thursday that it holds crypto assets as part of its treasury holdings and as a means of payment, in a filing that prepares it to go public in the US. This shouldn’t come as a surprise, as Reddit is one of the few social media giants that began experimenting with crypto tokens, NFTs, and blockchain tools in the pandemic-era bull run—and is arguably the Web2-era giant that took crypto the most seriously.

What is surprising are some of the assumptions Reddit makes about the world of crypto in its US Securities and Exchange Commission filing. First, Reddit announced that it has joined a select club of companies that hold 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, laid out 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 “senior” regulatory bodies, it has determined that Ethereum’s native token is not “probably” a security.

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

This is all the more relevant since most of Reddit’s discussion of crypto takes place in a section that discloses risks. The company notes that human and computer errors can lead to the loss or destruction of the private keys needed to access their funds, some insight into why crypto may not have exploded in popularity as a treasury asset.

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

Two lines in particular are worth noting: First, the SEC’s controversial Staff Accounting Bulletin No. 121 of March 2022, which provides “guidance” on securing crypto on behalf of users. SAB 121, as it is commonly called, requires companies to track their holdings on their balance sheet, and hold an equal amount of assets in reserve as customers hold on the platform – which has been described as a cumbersome, overly cautious request.

The rule itself does not materially affect Reddit, as Reddit’s crypto experiments have been fully non-supervisory. “We do not provide custody or security services, do not maintain the private keys or have the ability to recover the private keys, do not perform record keeping … and do not protect against the risk of theft or loss,” notes the company up.

But it is possible, as one of the world’s largest websites, would like to. After less than a year, Reddit has decided to drop its “Community Points” crypto reward token pilot, which was considered a success upon launch. While decentralization maxis lives by the maxim that “not your keys, not your coins,” the simple reality is that key management is difficult and true self-preservation will likely never scale for a platform the size of Reddit.

It’s possible that community points would still be available if Reddit had the ability to help users recover keys the same way they can help recover passwords. The existence of SAB 121 will at least determine the type of crypto projects that any company in the US will undertake.

Second, there’s generally accepted accounting principles (GAAP) that impact how Reddit recognizes crypto on its balance sheet. Under the rules today, companies that hold crypto can only recognize changes in price when it falls (also known as an “impairment charge”), but not when it rises. That’s why MicroStrategy and Telsa made headlines during the bear market for posting losses totaling hundreds of millions as bitcoin declined.

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

Fortunately, the Financial Accounting Standards Board issued new crypto-accounting guidelines 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 a document as conservatively worded as an S-1. Indeed, the legal itself is useful insight into what even tech-forward corporations think (or are forced to think) about blockchain: “a relatively recent trend,” which is increasingly synonymous with “improper, illegal, or fraudulent activities” with a an unstable legal basis and uncertain consumer demand.

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