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The Unveiling of Reddit’s Crypto Engagement Amidst Regulatory Clarity

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Reddit’s self-named “immaterial” collection of bitcoin (BTC), ether (ETH), and Polygon’s (MATIC) may not cause significant financial ripples, yet the platform’s approach to cryptocurrency bears notable weight.

Excerpted from The Node newsletter, a comprehensive daily digest of the most impactful crypto stories across CoinDesk and beyond. Subscribe to the full newsletter here.

Disclosed in its U.S. public offering preparation filing on Thursday, Reddit confirmed its crypto asset holdings as part of its treasury and payment mechanisms. Reddit’s proactive foray into cryptocurrencies, NFTs, and blockchain tools during the pandemic-induced bullish sentiment remains a standout amongst mainstream social media platforms, taking crypto matters more earnestly than most Web2 titans.

What truly catches the eye is Reddit’s stance on the cryptocurrency landscape within its U.S. Securities and Exchange Commission filing. Notably, Reddit stands alongside the likes of KPMG Canada and Meitu in holding both BTC and ETH as part of its corporate treasury, a rare move among companies that tend to align more closely with MicroStrategy’s “bitcoin-only” philosophy.

However, it’s Reddit’s rationale, outlined in its meticulous S-1 filing, that deserves attention. With reference to public statements from the SEC, Commodities Futures Trading Commission, and other top-tier regulatory bodies, Reddit proclaims Ethereum’s native token to be unlikely deemed a security.

While Reddit’s acknowledgment cautions that such determinations are internal risk assessments and not legal standards, it carries weight, especially amidst the SEC’s recent scrutiny of ETH’s legal status post-Ethereum’s shift to proof-of-stake.

Furthermore, Reddit delves into the risks associated with crypto, including potential private key loss due to human error or technical glitches, shedding light on why cryptocurrencies haven’t surged as popular treasury assets.

Reddit also highlights regulatory roadblocks that could hinder its access to or sale of crypto holdings. Yet, more intriguing are the ways in which regulations have already molded the company’s crypto strategy.

The Influence of Two Regulatory Tenets

Two regulations stand out: foremost, the SEC’s contentious Staff Accounting Bulletin No. 121 from March 2022, guiding secure crypto keeping for users. Termed SAB 121, the rule necessitates companies to track holdings in their records and reserve assets equal to customers’ on-platform holdings – a termed by some as a demanding and excessively cautious stipulation.

Reddit, having maintained non-custodial crypto practices throughout its experiments, remains unaffected by SAB 121’s particulars. However, as one of the major websites globally, there’s a chance they would have entertained custodial services. The closure of Reddit’s “Community Points” crypto token pilot within a year, despite a promising start, highlights the arduous nature of true self-custody, limiting scalability for a platform of Reddit’s magnitude.

Secondly, Reddit confronts the Generally Accepted Accounting Principles (GAAP) influence on its crypto accounting methodology. Under the current rules, firms can only declare price changes in crypto when they decrease, incurring an “impairment” cost, a factor behind substantial losses by companies like MicroStrategy and Tesla during bear markets.

Fortunately, the Financial Accounting Standards Board initiated new crypto accounting guidance in December 2023, permitting companies to acknowledge digital asset fair values rather than the cost basis.

Despite the conservative tone of its S-1 filing, Reddit notably acknowledges the “significant potential” of crypto. Even in the intricate legal jargon, there’s telling insight into how even tech-savvy corporations regard blockchain: a nascent trend with connotations of impropriety, illegality, and fluctuating legal grounds propelling uncertain consumer demand.

Interestingly, Reddit discloses that while it uses ETH and MATIC for transactions, most procurements derive from Reddit’s product and engineering teams. Whether or not crypto will witness wider Reddit integration remains uncertain. Nevertheless, it’s a safe bet that Reddit’s R&D teams are enjoying the ride for now.

The opinions expressed herein are solely the author’s and do not necessarily mirror those of Nasdaq, Inc.

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