Reddit's holdings of Bitcoin (BTC), Ether (ETH), and Polygon (MATIC) may only be “insignificant,” but how it handles cryptocurrencies is important.
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On Thursday, the idiosyncratic bulletin board platform disclosed in its preliminary filing for a U.S. listing that it holds crypto assets as part of its Treasury holdings and as a means of payment. It was one of the few social media giants to start experimenting with crypto tokens, NFTs, and blockchain tools during the pandemic-era bull market, and it's arguably the Web2-era giant that took cryptocurrencies most seriously.
What's surprising are some of the assumptions Reddit makes about the world of cryptocurrencies in its filings with the U.S. Securities and Exchange Commission. First, Reddit announced that it has joined a select club of companies that hold both BTC and ETH in their treasury. While many native crypto companies hold both major cryptocurrencies in reserve, most are likely to follow MicroStrategy's “Bitcoin-only” approach.
Now that Reddit has joined KPMG Canada and Meitu, what happens? The company's reasoning, outlined in its S-1 filing (a long, thorough, and vetted legal document), speaks for itself. Based on public statements from the SEC, the Commodity Futures Trading Commission, and other “superior” regulatory bodies, we have determined that Ethereum's native token is “unlikely” to be a security.
Reddit's compliance team must have added this line: “However, such decisions are our own based on risk.” [and] “does not constitute a legal standard” is an important opinion given the SEC's recent outcry over ETH's legal status following Ethereum's transition to proof-of-stake.
This is even more important considering that most discussions about cryptocurrencies on Reddit take place in the risk disclosure section. The company notes that human error or computer malfunctions can result in the private keys needed to access funds being lost or destroyed, which is likely due to the explosion of crypto assets as financial assets. This will give you a little insight into why it didn't catch on.
Reddit also points to regulatory risks that could prevent it from accessing or selling its holdings. But what's more interesting is how regulation is already shaping the company's approach to cryptocurrencies.
Two rules in particular are worth noting. First, there are SEC rules. controversial March 2022 Staff Accounting Bulletin No. 121. It provides “guidance” to protect cryptocurrencies on behalf of users. The law, commonly referred to as SAB 121, requires companies to keep track of their holdings on their balance sheets and set aside an amount equal to the assets their customers have on their platforms, which can be cumbersome and sensitive. It is said that this is too much of a request.
This rule itself has no material impact on Reddit, as its crypto experiment was completely non-custodial. “We do not provide storage or protection services, do not maintain private keys or have the ability to recover private keys, do not provide recordkeeping, and do not protect against the risk of theft or loss,” the company said. .
But as one of the world's largest websites, it's possible they wanted to. Less than a year later, Reddit has decided to cancel its “Community Points” crypto reward token pilot, which was hailed as a success at launch. Decentralization maximalists live by the adage “not the keys, not the coins,” but the simple reality is that managing keys is difficult, and anything like true self-management scales to a platform as large as Reddit. You can't.
Community points might still exist if Reddit had the ability to help users recover their keys in the same way they recover passwords. At the very least, the existence of SAB 121 will determine the types of crypto projects that U.S. companies attempt.
Second, there are generally accepted accounting principles (GAAP) that impact how Reddit recognizes cryptocurrencies on its balance sheet. Under the current ruleset, companies that hold cryptocurrencies can only recognize price changes when prices fall (aka “impairment” costs), but not when prices rise. This is why MicroStrategy and Telsa made headlines for posting combined losses of hundreds of millions as Bitcoin fell during the bear market.
“This accounting treatment may adversely affect our results of operations in the period in which we recognize the impairment,” Reddit noted. Impairment charges are treated as “general and administrative expenses” even if the loss is only on paper. This is probably another reason why more companies aren't buying Bitcoin.
Thankfully, the Financial Accounting Standards Board issued new crypto accounting guidance in December 2023 that allows companies to recognize the fair value of digital assets rather than their cost basis.
Either way, even in a modestly worded document like the S-1, it's clear that Reddit sees “huge potential” in cryptocurrencies. In fact, the legal terminology itself provides useful insight into how even technology-advanced companies are thinking (or being made to think) about blockchain: it's a “relatively recent trend” and legal Increasingly synonymous with “inappropriate, illegal, or fraudulent activity” on shaky grounds and uncertain consumer demand.
Interestingly, after pointing out that the company holds ETH and MATIC for payments, it also pointed out that most of those procurements come from Reddit's product and engineering teams. No one knows whether cryptocurrencies will become popular on Reddit. But for now, the R&D team is definitely having fun with it.
